Drawbacks of Registering Under The GST Composition Scheme
Quick Summary
- The GST Composition Scheme is designed to simplify tax compliance for small businesses by allowing them to pay a fixed percentage of their turnover as tax.
- Businesses under this scheme cannot conduct interstate sales, which limits their geographical reach.
- Participants in the scheme cannot claim input tax credits, reducing their competitiveness.
- Small businesses using this scheme cannot collect tax from customers, affecting their cash flow.
- Ecommerce businesses are not eligible for the scheme, limiting their participation in digital growth initiatives.
The Indian government introduced the GST Composition Scheme as a simpler and more affordable way for small businesses to comply with GST regulations. The scheme allows eligible taxpayers to pay a fixed percentage of their turnover as a tax instead of the regular GST rates. While this scheme has several advantages, such as reduced compliance burden and cash flow benefits, it also has certain drawbacks that taxpayers should be aware of.
In this context, the drawbacks of registering under the GST Composition Scheme refer to the disadvantages businesses may face by opting for this scheme.
These drawbacks include restrictions on inter-state sales, limitations on the input tax credits, and reduced competitiveness in the market, among others. In this article, we will discuss these drawbacks in more detail and help taxpayers decide whether to opt for the GST Composition Scheme.
The GST Composition Scheme is essential for traders with annual sales below Rs. 1 Crore*. While registering under the GST composition scheme provides advantages, there are also a number of disadvantages, some of which will be discussed below.
**CBIC has increased the threshold limit from Rs. 1 crore to Rs. 1.5 crore as of February 1st, 2019.
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Drawbacks Of Registering Under The GST Composition Scheme
Given below are some of the drawbacks of registering under the GST composition scheme:
- Limited Territory For Business – An individual who has registered as a taxpayer under the composition scheme is not permitted to conduct interstate transactions or provide import-export of goods and services. He is thus forced to conduct solely intra-state transactions, which restricts the business’s geographic scope. Additionally, this clause only extends the advantages to the state’s border.
- No Credit Of Input Tax – On B2B transitions, no input credit has been offered. As a result, any taxable person that conducts business using a B2B model will not be eligible to claim an input tax credit against their output liability. Additionally, when purchasing such products from a person registered under the composition system, the buyer will not be eligible for any credit.
- No Collection Of Tax – A taxpayer under the composition scheme is not permitted to collect the composition tax from his customer since he is not allowed to raise a tax invoice, even when the rate of composition tax is fixed at a very minimal 1% or 5%.
Composition Scheme – Applicable GST Rates
Given below are the applicable GST rates in the composition scheme:
| Type Of Business | CGST | SGST | Total |
|---|---|---|---|
| Manufacturer And Trader (Goods) | 0.5% | 0.5% | 1% |
| Restaurants Not Serving Alcohol | 2.5% | 2.5% | 5% |
| Other Service Providers | 3.0% | 3.0% | 6% |
Turnover for traders is defined as “Turnover of taxable supplies of goods” according to notification 01/2018.As a result, the responsibility for paying the tax remains with the taxpayer, who must do it out of pocket. As a result, this case disproves the core idea of restricted compliance and the tax burden on small taxpayers.
Penal Provision – The penalties for taxpayers under the composition scheme are another clause that has been fiercely debated. According to the GST Law, if a taxpayer who has previously received registration under the composition scheme is later determined to be ineligible for the composition scheme or if the permission previously granted was incorrectly granted, the taxpayer will be responsible for paying the differential tax as well as a penalty that may reach 100% of the total tax liability.
It is reasonable to conclude from an analysis of this clause that a small taxpayer with limited knowledge of tax laws and compliance who commits any error under the composition scheme will be required to pay tax at the standard rate on his total turnover in addition to a penalty that will be equal to the full amount of tax owed.
Electronic Commerce Out Of Scope – E-commerce in India is one of the key sectors that has recently experienced growth. Numerous businesses have entered the e-commerce space; some of them have revenues in the millions; nevertheless, many are still in the beginning stages and have not yet broken even. These organisations operate their company online and supply many states.
They are not eligible for the composition scheme because they deal in interstate supply; hence, they cannot take advantage of this section’s provisions. This runs counter to the government’s “Digital India” and “Startup India” initiatives, which seek to advance the startup environment and the digital experience for Indian residents.
Not Applicable To Supplier Supplying Goods Through E-Commerce – Small taxpayers might lessen their compliance burden thanks to the composition system. However, given the current situation, a small taxpayer registering under the composition system must make a very deliberate decision.
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Summary
The GST Composition Scheme is a simplified way for small businesses in India to comply with GST regulations by paying a fixed percentage of their turnover as tax instead of the regular GST rates. However, there are drawbacks to registering under this scheme. One major drawback is the restriction on inter-state sales, which limits the geographic scope of the business.
Additionally, there are limitations on input tax credit, no collection of tax, and penalties for incorrect registration. E-commerce businesses are also not eligible for this scheme, which goes against the government’s initiatives to advance the digital experience for Indian residents. Ultimately, small taxpayers must weigh the benefits and drawbacks of the GST Composition Scheme before deciding whether or not to register.
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