Benefits of Registering under GST Composition Scheme

Reasons why you should choose to be in composition scheme of upcoming GST

Section 9 of Model GST law contains the provision with respect to the registration of a taxpayer  under composition scheme. The basic principle underlying the composition scheme is, to minimize the burden of compliance for small taxpayers. There are around 8 million taxpayers that are expected to be migrated from the current laws into the GST regime, however many of these taxpayers will have limited turnover and may not have requisite resources and expertise to comply with all the procedures envisaged under the GST.

Accordingly, the government has come up with composition scheme wherein any taxpayer whose turnover is below Rs 50 lakhs can choose not to register as a normal taxpayer, instead he may choose to get registered as a taxpayer under composition scheme and pay taxes on his supplies at a nominal rate. However, he shall not be eligible to issue a tax invoice and can not utilize the credit of input tax paid as a result thereof.

Below are some of the prominent reasons why you should choose to get registered as a supplier under the composition scheme:

  • Limited Compliance : A normal taxpayer is required to submit a minimum of three returns on monthly basis and one yearly consolidated return. Thus in a complete year he is required to furnish 37 returns to the government, non compliance of which will attract penalty. Further to furnish these returns, a small supplier is bound to maintain detailed books of accounts and keep records of all transactions along with supporting documents. However, under the composition scheme, taxpayer is required to furnish quarterly return only, thus he need not worry on record keeping and can focus on his business more rather than being occupied in compliance procedures.
  • Limited Tax Liability : Another benefit of getting registered under the composition scheme is that the tax rate for such taxpayer is nominal under the Model GST Law. The rate will not be more than 1% for manufacturer, 2.5% for restaurant sector and 0.5% for other suppliers of turnover. Refer the table below to understand the benefit for small taxpayers.
Particulars Description Registered as a Normal Taxpayer Description Registered as a Taxpayer under Composition Scheme
A Total Sale Value 118000 Total Sale Value 118000
B Sales Value exclusive of taxes 100000 Sales Value exclusive of taxes 115686
C GST @ 18% on sales value 18000 GST @ 2% on sales value 2314*
D Input Purchases 70000 Input Purchases 70000
E GST @ 18% 12600 GST @ 18% 12600
F Total Purchase Value (D+E) 82600 Total Purchase Value (D+E) 82600
G Net GST Liability (C-E) 5400 Net GST Liability (only C) 2314
H Net Profit {A-(F+G)} 30000 Net Profit {A-(F+G)} 33086

*Under composition scheme, a supplier can not collect tax separately in invoice, here breakup is given only for reference and understanding purpose.

Thus if you see in above example, a supplier registered under the composition scheme and supplying such goods to the consumer at similar rates is earning more profit and his tax liability is also lower.

  • High Liquidity : One of the major benefits to get registered as a composition supplier is high fund availability in the business. A normal taxpayer will be required to pay output tax on his supplies at standard rate and any credit of input is available only when his own supplier files a return online which shall reconcile with his own return. Thus a large chunk of his working capital will always keep blocked in form of input credit. However for a supplier registered under the composition scheme, output liability will be nominal and he does not need to bother for return filing by his supplier. Thus if we refer the above mentioned case, for a normal taxpayer, apart from a higher tax liability of Rs. 3085 (5400-2315), a sum of Rs. 12,600 will remain blocked as input credit until his supplier file the required return. On the other hand, a supplier under the composition scheme is required to pay only Rs. 2315.
  • Level Playing Field : Just because a taxpayer has chosen to get registered under the composition scheme, doesn’t necessarily mean losing the competitiveness. Since the profit margin of a supplier in composition scheme is more than a large taxpayer, such supplier can outplay the economies of scale of large enterprises by offering competitive prices and key hold the local market of supply. Thus composition scheme ensures the interest of small suppliers carrying out intrastate transactions and provides with a sustainable and competitive supply market.

Hence, it can be said that composition scheme will be a growth driver for small taxpayers who are carrying out intrastate transaction and does not involve into import-export of goods. If any taxpayer carry out interstate transactions or get into import-export transaction then the benefit of composition scheme is not available to such taxpayer and such suppliers are required to get registered as a normal taxpayer.

Further reading: Drawbacks of the GST Composition Scheme.