Composition scheme under GST is a beneficial scheme that has been introduced jus to help small businesses to grow more and contribute to the Indian economy. Registering under the composition scheme is beneficial for small businesses as they have to pay taxes at a nominal rate. This not only helps them to grow in the competitive market but also build healthy customer-relationship by selling products at lower rates. Composition scheme protects the interest of small traders and businesses whose annual turnover is less than or equal to seventy five lakh. Let’s discuss the GST registration rules, pros and cons of the composition scheme under the GST.
Benefits of Composition Scheme
Composition scheme has a lot of benefits to small traders and businesses:
Reduced Tax Burden: One of the biggest benefits of getting registered under the GST is the reduced tax burden. The tax rate under the composition scheme that the small businesses need to pay if their annual turnover is up to seventy five lakhs is one to three percent. The GST rates for the composition scheme are lower than the standard GST tax rates.
Limited Documentation: Another advantage of the composition scheme under the GST is that the limited documentation and processes are required for the registration. A normal taxpayer is required to provide a lot of documentation for registration process and tax has to be filed a minimum of three return in a month whereas under the composition scheme, tax has to be filed quarterly every year.
Help Business Growth: The reduced tax burden and the compliance will help in the growth of businesses. Reduced tax liability will help traders to work in ease with great profitability and the limited compliance requirements as specified under latest GST registration rules will provide them a hassle free way to work and allow them to maintain focus on their business rather than on the processes of filing returns.
Limitations of Composition Scheme
Although composition scheme has several benefits for small businesses and traders, there are some disadvantages that businesses might have to face.
Only Intra-State Businesses are Eligible: Composition scheme tax benefit will be given only to those businesses which supply goods and services within the state boundaries rather than supplying them in different states. Therefore, a businessman registered under the composition scheme is not eligible to carry out his business in different states and import export of goods and services. Thus, he or she can only carry out intra-state transactions.
Not Eligible for Input Tax Credit: Any business owner registered under the composition scheme who is dealing with business to business transactions is not eligible for input tax credit. Therefore, such sellers as well as the buyers will not be benefited of any sort of tax credit which in turn will result in price distortion and cascading effect.
Tax has to be paid from your Own Pocket: though the tax rates under the composition scheme are kept low, a taxpayer has to pay the taxes from his own pocket and is not allowed to recover such taxes from the consumer or buyer. Also, the taxpayer is not allowed to raise the tax invoice. Therefore, at the end, it’s the seller who has to pay all the taxes.
Penalty provision: When registering for composition scheme, taxpayer must go through the penal provisions as well. If the taxpayer is found to be a defaulter or registered incorrectly under this scheme without fulfilling the eligibility, the penalty is severe in such cases. The penalty will be 100% of the taxes that he has to pay as a penalty.
Despite of some drawbacks, composition scheme is a great initiate by the Indian Government for the small businesses and traders. By removing the tax burden, businesses will be able to focus more on their business growth and development. They can build a competitive image in the market by selling products at lower rates to the consumers due to low tax liability. This is how, they will build healthy relations with the customers and make huge number of clients. Another reason is that they do not have to focus on the documentation of the entire registration process as well as the payment of the taxes. It is because they have to pay the taxes quarterly at a nominal rates as compared to regular taxpayers.