Advantages and Disadvantages of GST Composition Scheme| H&R Block
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Benefits and Drawbacks of GST Composition Scheme

Composition or compounding scheme is nothing new in Indian indirect taxation system. Many taxpayers under state VAT laws already enjoy the benefits of composition. Although service taxpayers never got the benefit of compounding system. GST regime will bring the benefits of composition scheme for all the taxpayers under its net.

Composition or compounding scheme under GST

Composition/Compounding Scheme will be an important feature of GST to protect the interests of small traders and small scale industries. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compounding cut-off at Rs. 50 lakhs of the gross annual turnover and the floor rate of 0.5% across the states. The scheme would allow option for GST registration for dealers with turnover below the compounding cut-off.

Benefits of compounding / composition scheme

As mentioned earlier, the benefits of this scheme will only be available to small taxpayers. Registration for this scheme is optional and the taxpayer needs to apply for it every year. It offers several benefits:

1) Reduced tax liability

Probably the biggest benefit of registering under compounding scheme is the reduction in taxes. Tax rates under composition scheme is expected to be in the range of 1% to 3% which is considerably lower than standard tax rates under regular GST scheme.

2) Limited compliance

Another major advantage of composition scheme is that it promises to reduce the number of documents and processes required for compliance under GST law. Where a normal taxpayer will be required to file a minimum of 3 returns in a month, a compounding dealer will be asked to file only 1 return every quarter of a year.

3) Ease of doing business

Reduced tax liability and limited compliance will make it easy for small businesses to grow and flourish. On one hand reduced taxes will result in surge of profit margin while on the other limited compliance will reduce hassles allowing a party to focus more on his business.

Drawbacks or limitations of GST composition scheme

1) No inter-state business:

Tax benefits of GST compounding scheme are only given if a taxpayer carries his business within the boundaries of a state. A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot affect import-export of goods and services. Thus, he is compelled to carry only intra-state transaction and limits the territory of his business.

2) No Credit of Input Tax:

Compounding scheme has no provision of input credit on B2B transactions. Therefore, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit of tax paid, resulting in price distortion and cascading effect.

3) Pay tax from your own pocket:

Although the rate of composition/ compounding tax is expected to be very low, a taxpayer under this scheme is not allowed to recover such tax from his buyer. The taxpayer is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket.

4) Penal provisions:

While taking advantage of GST Composition scheme, one needs to take utmost care as the penalty is severe. If taxpayer is found wrongly registered under this scheme while not fulfilling eligibility criteria and therefore avoiding normal taxes. Then the person will have to pay taxes along with penalty equal to 100% of taxes levied upon him.

Despite some drawbacks, composition scheme is a very good initiative under GST regime as it promises to improve business environment in our country and help create several new jobs.

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CA Ankita Mathur
CA Ankita Mathur
Ankita, a Big 4 alumna, is a tax expert at H&R Block (India) with vast experience in managing GST-related business services. An avid traveller, Ankita is a regular contributor to the CAclubindia and loves helping people understand about GST and helping companies be GST compliant.