Merits and Demerits of the GST Composition Scheme

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The composition scheme is a plan that falls under GST, allowing taxpayers to enjoy a certain amount of flexibility when paying their taxes.

The scheme is Ideal for businesses with a turnover of less than Rs 1.5 crore. Small taxpayers can bid tedious GST formalities adieu and only pay GST at a fixed turnover rate.

However, like most things GST, this isn’t that simple. There are quite a few taxpayers that cannot opt for the composition scheme, and this plan certainly comes with its list of merits and demerits. In this article, we will find out all there is to know about the GST Composition Scheme!

Which taxpayers cannot avail the composition scheme?

The following businesses or taxpayers cannot avail this scheme:

  • A manufacturer of tobacco, pan masala, and ice cream
  • A business that makes inter-state supplies
  • A non-resident taxable person or a casual taxable individual
  • Businesses that supply their goods through e-commerce operators

What are the merits of the composition scheme?

There are many advantages to availing the composition scheme. Some of these include the following:

  • Businesses can enjoy a much lesser tax liability when they avail this scheme. The biggest advantage of this is for startups and smaller businesses that often see cash crunches on a regular basis. Most startups that do not see a turnover of over Rs 1.5 crore are less likely to have extra cash that can go into taxes. With the composition scheme, the government has ensured that more startups can flourish in a market that has become friendlier towards their plight
  • Businesses can also enjoy much higher liquidity as their taxes are set at a lower rate
  • Businesses can gain from lesser compliance that comes with all of these exemptions (maintaining records, filing returns, issuance of invoices, and so on), making it easier for them to run their operations as they do not have to spare a resource to get these things done

What are the demerits of the composition scheme?

As is the case with most things, one must also consider the disadvantages of any plan before praising it wholeheartedly. Some of the demerits of the composition scheme are:

  • Businesses will have a limited territory in which they can perform their operations. If you have availed the composition scheme, then you cannot carry out inter-state transactions, making the scope of your business quite small
  • If you are availing the composition scheme, then you cannot supply goods that are exempt from GST, for instance, cashew nuts. You also cannot supply your goods with the help of an e-commerce portal, making it quite hard to function in today’s day and age where everything relies on the internet
  • There will be no input tax credit that will be available to your business if you avail this scheme

What GST rates apply to composition dealers?

The GST rates that apply to composition dealers are quite different from the ones that apply to non-composition dealers. Have a look at the table below to know more:

Type of business CGST SGST Total
Manufacturers and traders (goods) 0.5% 0.5% 1.0%
Restaurants not serving alcohol 2.5% 2.5% 5.0%
Other service providers 3.0% 3.0% 6.0%

What conditions must one comply with when availing the composition scheme?

In order to avail a composition scheme, your business must meet the following criteria:

  • If you are opting for this scheme, you cannot apply for any input tax credit
  • If you are opting for this scheme, you cannot supply GST exempted goods
  • If the reverse charge mechanism is being implemented, then the taxpayer must pay the tax at the normal rates and not the rates that come with the composition scheme
  • If you have different verticals of businesses registered under the same PAN, they all must be registered under this scheme, or you must opt out of it entirely
  • If you are operating under this scheme, you must declare the same to your customers. This can be achieved by prominently displaying the words ‘composition taxable person’ at your place of business
  • Similarly, if you are operating under this scheme, you must add the words ‘composition taxable person’ to each and every bill of supply issued to you
  • According to the CGST Amendment Act, a trader or manufacturer can supply the services to an extent of 10% or Rs 5 lakh, whichever is applicable first

How can you apply for this scheme?

This is quite easy. You must go online to the GST portal and then file a GST CMP 02 with the government in order to register your business under this scheme. However, this is something that you have to do at the beginning of the financial year.

How can you make your bill of supply easily without any mistakes?

Using Razorpay Invoices can help you achieve this! Razorpay Invoices works on an intuitive dashboard that helps you create GST-compliant invoices quite easily.

You must enter your HSN or SAC number into the invoice while preparing it, and the system will automatically apply the correct rate to your invoice. If you are operating under the composition scheme, then you must select the same from the drop down menu of options when you create an invoice. This will change the invoice to a bill of supply.

Once the correct document is made, you can share the same with your customers through email or through SMS. They can then make the payments as soon as they receive it, making the whole process quite quick and easy for everyone.

The link that you will share with your customers will be a unique one, generated just for your bill of supply.

Make all your transactions incredibly simple with Razorpay!