Disadvantages of GST Composition Scheme

Ashish M. Shaji

12 Oct, 2020

The GST composition scheme has been introduced to promote SME in India. It has several benefits like lower tax rate and also easier compliance, India is growing very fast in e-commerce businesses as compared to offline businesses.

The GST Registration in India under Composition scheme is attractive for small traders who have an annual turnover of less than 1.5 Crore. The composition scheme is reserved for offline taxpayers, so there are several disadvantages for registering under the GST Composition Scheme.

In our previous article, we discussed the advantages of composition scheme under GST, but this scheme may not prove as attractive as it looks. There are certain legal challenges that have not been addressed by the GST law and it may affect a taxpayer registered under the composition scheme. We have tried to figure out the consequences of the composition scheme under section 9 of the GST Act.

Disadvantages of Composition Scheme

• Limited Territory for Business

A taxpayer registered under the composition scheme is restricted to carrying out inter-state transactions and shall be restricted on import-export of goods. The taxpayer will have a limitation in doing trade with other states. Further, he will have limited business opportunity within a state only. E-commerce business is not allowed under the composition scheme.

• No Credit for Input Tax

The input tax credit under GST laws on B2B transactions under composition scheme is not allowed. If you do a local purchase by making payment of taxes, then you will not be eligible for a tax credit. Also, a buyer who purchases goods from a taxpayer registered under the composition scheme, will not get any credit for taxes paid on the purchase of goods. This may cause price distortion and cascade. Due to non-availability of input tax credit on the purchase and sales, eventually, buyers may stop purchasing goods from a taxpayer registered under composition scheme.

• No Collection of Output Tax

A taxpayer who is registered under composition scheme cannot collect tax from the purchaser of goods or services. Though under GST Law^[1], the composition tax is lower, between 1% to 5%, the supplier is not allowed to raise the tax invoice, and the output tax on the supply of goods and services has to be paid by the supplier himself. The principal objective of GST is to promote ease of doing business in India.

• Higher penalty

The penalty under the composition scheme is high. In accordance with the GST Act, if a taxpayer has wrongly obtained the registration under composition scheme and later the tax authority found that he was not eligible for the composition scheme, the taxpayer will have to pay the differentiate amount of tax as per normal tax rate without the benefits of an input tax credit on purchase and also he will need to pay penalty equal to 100% of tax amount.

We can fairly say that if a small taxpayer has limited knowledge about the GST provisions and commits any mistakes or violation of law, then he will have to pay the normal tax amount along with the penalty.

• Online Electronic Commerce is out of scope

With $681 billion in online retail sales in 2016, Indian e-commerce is the fastest growing online business system in the world. China has the first position in the world e-commerce market share followed by the USA. The Indian e-commerce market is expected to reach $64 billion by 2021 and CAGR is expected to be around 32% in five years. E-commerce in India has been capturing the offline market very fast. A major supplier to the online marketplace is SME with an annual turnover around Rs. 25 Lac to 2cr in a year. A vendor who is listed on Flipkart, Amazon i.e. can supply across states.

 In the GST composition scheme, inter-state supplies are not eligible. The restriction under the composition scheme is further in contradiction with the government vision of a digital India, made in India, and with GST provisions one tax rate has been published for a uniform tax rate. Restriction on online trade will impact the start-up ecosystem in India.

Conclusion

These are some of the disadvantages that needs to be considered lest it affects a taxpayer registered under the composition scheme. Do you wish to register for GST? Or are you looking for a GST implementation advisory? Would you like to know about the GST impact on your industry? Please feel free to contact Enterslice, India’s leading online legal and tax advisory firm.

Read our article: A Complete Detail on GST on Liquidated Damages