Demerits of Composition Scheme under GST

Ashish M. Shaji

03 Dec, 2020

There are various demerits of Composition Scheme which taxpayers have started to realize if they have opted for GST registration under this Scheme. This might unsettle the micro, small or medium-sized organizations, which is not good for a growing economy like India. We will be taking a look at its demerits/disadvantages but before that let’s have a brief understanding of this scheme. 

What is Composition scheme under GST?

Composition scheme is an optional and alternative method which is designed specifically for small taxpayers having turnover up to 1.5 crore rupees.

What was the need to introduce this scheme?

Every tax administration aims for timely recovery of taxes, filing returns etc. This is quite a task for small businesses. With a view to overcome this, the composition scheme was introduced under GST.

Demerits of Composition Scheme

Below we will discuss the Demerits of Composition Scheme under GST

To list of a few demerits of Composition Scheme under GST, it restricts the tax collection, business territory, ITC claim etc. Let’s discuss these limitations in detail.

• Limited Territory of Business

A Registered taxpayer opted for Composition scheme is not allowed to carry on interstate transactions, import or export of goods and services and E-commerce. This compels the taxpayer to carry on the business intrastate. This contradicts the motto of “One Tax, One Nation^[1]” as it limits the boundaries to a specified territory.

• No Credit of Input Tax paid

A normal taxpayer registered under GST has an option to claim Input Tax Credit of taxes paid on inward supplies. But taxpayer registered under Composition Scheme cannot claim an input tax credit under GST on B2B transaction. Vice-versa, any registered dealer purchasing from Composition dealer will not claim any ITC, as no tax is collected by the taxpayer registered under composition scheme.

For e.g:-

B2B Transaction

Mr. A – Manufacturer who has opted for Composition scheme under GST registration.

Mr. B – Wholesaler who is a registered taxable person under a regular plan.

In the given situation, Mr. A sells goods to Mr. B without charging GST in his invoice as he has opted for Composition scheme.

Mr. B will not get the input tax credit paid from his output liability as Mr. A has opted for GST composition scheme.

This will result in loss of business as buyers might avoid purchases from a taxpayer under composition scheme.  The registered person opted for composition cannot claim input tax credit even if he purchases the goods from a regular taxable dealer.

• No Collection of Tax

In spite of the rate of tax kept very low, the registered taxpayers are not allowed to collect from his buyer. Thus the burden of paying tax rests with the taxpayer himself. Thus the principle of limited compliance and less burden of the tax is defeated here. This is one of the most crucial Demerits of Composition Scheme.

• Penal Provisions

As per the GST Law, if the taxpayer registered under the old law under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was granted incorrectly then, such taxpayer shall be liable to pay the tax and penalty which can extend up to the amount of total tax liability i.e. 100%. We have done enough analysis, which in a country where taxpayers have limited knowledge of tax laws but since composition scheme comes with the strict penal provision as well additional tax liability may arise due to any small violation or mistakes in the overall implementation process.

• E-commerce out of scope

E-commerce has flourished significantly in the recent times. There are a number of companies that are into e-commerce but most of them are still at nascent stage. Such units do their business online. As they do inter-state supplies they are not eligible under composition scheme and they are not able to take benefits of this scheme.

Conclusion

Due to the demerits of composition scheme, it is now less preferred by registered person. There are some advantages as well under this scheme but its disadvantages cannot be ignored and steps must be taken into this matter.

Read our article:Section 23 of CGST Act: Persons not liable to take GST registration