Impact of the GST Composition Scheme on Startups and MSMEs

What is the GST Composition Scheme, and What is its Purpose?

The composition scheme simplifies GST compliance for small taxpayers. Instead of the regular GST filing process with multiple returns, they only need to file one quarterly return (GSTR-4) and one annual return (GSTR-9A).

By opting for the scheme, businesses save time and money by maintaining detailed GST records and filing complex returns. Businesses under the composition scheme cannot claim credit for GST paid on their purchases, which can be a disadvantage if they purchase heavily taxed goods.

In the composition scheme under the GST rate, participants pay a fixed tax rate on their total turnover instead of calculating GST on purchases and sales. The rates vary depending on the nature of the business. It is,

– 1% for manufacturers and traders

– 5% for restaurants and eligible service providers

The eligibility for the scheme is as follows –

• Turnover Limit: Businesses with a turnover of up to Rs. 1.5 crore in the preceding financial year can join the composition scheme. This limit is Rs. 75 lakh for businesses in North-Eastern states and Himachal Pradesh.
• Business Type: The scheme is generally open to manufacturers, traders, and restaurants (excluding those serving liquor). Service providers can also participate, but with a lower turnover limit of Rs. 50 lakh.
• Additional Considerations: Businesses that supply through e-commerce platforms, make interstate supplies, or deal with certain exempt goods are not eligible.

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Limitations of the GST Composition Scheme for Startups

• Higher Costs: Startups can pay more for goods and services under the composition scheme.
• Growth Constraints: Startups can’t grow too big under the composition scheme.
• Limited Scope: Not all businesses can use the composition scheme.
• Eligibility Restrictions: Startups might miss out on some government help under the composition scheme.

Transitioning from the GST Composition Scheme to Regular GST

The Regular vs composition GST is not as complicated as it may sound. As a business grows, it may outgrow the GST composition scheme’s limitations and need to transition to the regular GST regime. Reasons for this transition could be-

1. Exceeding Turnover Limit: The primary reason for transitioning is exceeding the prescribed turnover limit, which is currently Rs. 1.5 crore.
2. Expanded Business Activities: If a business ventures into activities not covered by the composition scheme, it may need to transition.
3. Desire for Input Tax Credit: The regular GST regime lets businesses claim input tax credit (ITC) on purchases, which can be beneficial for larger operations.

The transition process is as follows –

1. Login to GST Portal: Access the GST portal using your registered credentials.
2. Navigate to Services: Go to the “Services” tab, then select “Registration.”
3. Choose Conversion Option: Select “Application for Conversion from Composition Levy to Regular Levy.”
4. Provide Details: Fill in the required information, including GSTIN, legal name, and reason for conversion.
5. Upload Documents: Submit necessary documents such as the GST registration certificate, PAN card, bank statements, and invoices.
6. Submit Application: Once completed, submit the application using the portal.

Documents required are –

1. GST registration certificate under the composition scheme
2. PAN card
3. Bank account details
4. Purchase and sales details
5. Invoices
6. Business details (address, constitution, ownership)
7. Income tax returns (if applicable)

The transition process typically takes around seven working days, but it can differ based on the GST authorities’ workload and the documents’ completeness.

There would be certain impacts on tax liability, such as –

• Transitioning allows businesses to claim ITC, potentially reducing tax liability.
• The regular GST regime generally has higher tax rates compared to the composition scheme.
• The regular regime requires complex compliance procedures and record-keeping.