GST composition scheme: Limits, benefits and rules

Reducing tax liability can help businesses strengthen their financial fundamentals and meet their revenue and profit targets
 

The GST (Goods and Service Tax) composition scheme offers small businesses two additional benefits compared to regular GST filing – less paperwork and lower tax liability. Any individual or entity eligible to register themself under the GST composition scheme must submit one quarterly return (GSTR 4) and one annual return (GSTR 9) as opposed to the quarterly GST returns that any other taxpayer files. Let us understand this scheme in more detail.

What are the rules of the GST composition scheme?
 

According to the GST Act, manufacturing businesses, service businesses, and traders can register under the GST composition scheme. However, the following individuals cannot register under the GST composition scheme.

• Any individual or business supplying goods through an e-commerce portal operator that collects tax at the source.
• Non-resident taxable persons or casual taxable persons.
• Ice cream manufacturers or manufacturers of other edible ice with or without cocoa as an additive.
• Manufacturers of pan masala and tobacco products and substitutes.
• Individuals or businesses who have purchased goods from unregistered suppliers.
• Suppliers involved in the supply of goods that are exempt under the GST Act.
• Suppliers, who supply goods and services.

Which features does the GST composition scheme have?
 

The GST composition scheme's features make it a preferable option for the following.

• Business owners registered under the GST composition scheme pay a relatively lower tax percentage than those registered under the regular GST scheme.
• The rates of the GST composition scheme differ based on the type of business. For example, a restaurant pays 5%, whereas manufacturers pay 1%.
• If a business owner has multiple businesses registered under a single PAN (Permanent Account Number), they must get all of them registered under the GST composition scheme. If the business owner does not wish to register all businesses under the GST composition scheme, they must opt out of the scheme.
• Any business owner registered under the GST composition scheme must file a single quarterly return by the 18th of the month following that quarter.
• While making a transaction under the reverse charge mechanism, a dealer must pay tax according to the general GST rate.

What is the composition limit under GST?
 

The GST composition limit differs for various businesses.

For manufacturers and traders
 

If you own a newly registered business, its turnover should not be more than ₹1.5 crores in the current financial year. If you have already registered, your business's turnover should not exceed ₹1.5 crores in the previous financial year.

Restaurants that do not serve alcohol
 

Restaurants that do not serve alcohol, too, can only register themselves under the GST composition scheme if their annual turnover exceeds ₹1.5 crores.

Service providers
 

For any newly registered business to be eligible for the GST composition scheme, its annual turnover should not exceed ₹50 lakh in the current financial year.

If a business has already been registered, its turnover should not exceed ₹50 crores in the previous financial year.

Who is eligible to opt for the GST composition scheme?
 

The following individuals are eligible to opt for the GST composition scheme, provided their annual turnover falls within the specified limit of ₹1.5 crores.

• Shopkeepers
• Small manufacturing units
• Foodservice units
• Service sector units
• Truck operators
• Repair store owners
• Machine operators
• Artisans
• Fruit and vegetable vendors

What are the limits of the GST composition scheme?
 

Here are all the disadvantages of registering for the GST composition scheme.

No input tax credit
 

B2B businesses are not allowed the credit of input tax paid from the output liability. The buyer of such goods will not get any credit on tax paid, which would lead to price distortion and cascading. A buyer registered as a regular taxpayer will not get any credit while buying from a person registered under a composition scheme, resulting in a loss of business.

No tax collection
 

Under the composition scheme, taxpayers cannot recover composition tax from their buyers as they cannot raise a tax invoice.

Limited business reach
 

The GST composition scheme does not cover inter-state transactions. They also cannot leverage the potential of the internet as a supply of goods via e-commerce portals.

What are the benefits of the GST composition scheme?
 

Here are the benefits that eligible business owners can get from the GST composition scheme.

• Small business owners can benefit from a reduced tax liability after implementing the new tax structure.
• Taxpayers must adhere to lesser compliance in keeping records to pay their taxes and can sidestep the need to provide tax invoices.
• Reduced tax liability via the fixed rate exposes the business to higher liquidity. Higher liquidity, in turn, helps the business maintain its cash flow, which allows it to sustain operations smoothly.

You can use IDFC FIRST Bank's GST Compliance Manual to know more about the Goods and Service Tax and how to pay it.

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The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.