Disadvantages of Registering under GST Composition Scheme

Ashish M. Shaji

08 Jul, 2021

The Composition Scheme is simple scheme for taxpayers under GST. Small taxpayers can avoid complex GST formalities and pay GST at a fixed rate of the turnover. This scheme can be chosen by any taxpayer whose turnover is less than 1.5 crore rupees. CBIC has notified the increase in the threshold limit from 1.0 Crore to 1.5 Crores rupees. In this article, we shall discuss the disadvantages of registering under GST Composition Scheme.

Who cannot opt for the Composition Scheme under GST?

The following cannot opt for the scheme-

• Manufacturers of the ice cream, pan masala, or tobacco;
• A person making inter-state supplies;
• A casual taxable person or non-resident taxable person;
• Businesses supplying goods through an e-commerce operator.

Conditions for availing Composition Scheme under GST

The following conditions should be satisfied to opt for the composition scheme:

• No Input Tax Credit (ITC) can be claimed by the dealer opting for the composition scheme;
• The dealer is not permitted to supply goods not taxable under GST like alcohol;
• The taxpayer is required to pay tax at normal rates for transactions under Reverse Charge Mechanism;
• The taxpayer must mention words- ‘composition taxable person’ on every notice or signboard displayed at their place of business.
• In case a taxable person has various segments of businesses (like groceries, textile, electronic accessories, etc.) under the same PAN, they are required to register all such businesses under the scheme collectively or opt out of the scheme.
• The taxpayer must mention words- ‘composition taxable person’ on every bill of supply issued by him.
• According to the CGST (Amendment) Act, 2018^[1], a manufacturer or the trader can now supply services to the extent of 10 per cent of turnover, or 5 lakhs rupees, whichever is higher. This amendment shall be applicable from 1st Feb 2019.

Registering under GST Composition Scheme: Disadvantages

There are certain disadvantages of registering under GST Composition scheme, and they are as follows:

• A taxpayer who is registered under composition scheme is restricted from carrying out inter-state sales and can’t offer import-export of goods and services. Hence, he has to carry out only intra-state transactions, and this limits the territory of his business. Moreover, it limits the benefit only to the boundary of the state.
• There is no provision of input credit on B-2-B transactions. Therefore, if any taxable person carries out business on B-2-B model, such person shall not be permitted the credit of input tax paid from the output liability. Moreover, the buyer of the goods will not get any credit on tax paid, thus resulting in price distortion and cascading.

It will result in a loss of business as a buyer registered as normal taxpayer will not get any credit when buying from the person registered under the composition scheme. Such buyers may avoid buying from a taxpayer under composition scheme.

• Although the composition tax rate is kept very nominal at 1% or 5%, a taxpayer under the composition scheme is not permitted to recover such tax from his buyer, as he is not permitted to raise tax invoice.

Therefore, the burden of the tax is kept on the taxpayer himself, and this should be paid out of his own pocket. Hence, the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.

• Another disadvantage of this scheme is the penal provision for a taxpayer under composition scheme. According to the GST Law, if the taxpayer who was previously been given registration under the composition scheme is found not eligible for the composition scheme or in case the permission granted earlier was granted incorrectly, then such taxpayer shall be liable to pay differential tax along with penalty which can extend to the amount of total tax liability (100%).
• One of the industries that have flourished in the recent times is the e-commerce industry in India. There have been various companies who are into e-commerce business. Some of them have turnover into crores, but many of them are still at primary stage and have not yet achieved breakeven also. Such units carry out their business online via internet and supply across states. As they are into inter-state supplies, they don’t qualify for composition scheme, and the benefit of this section is kept away from them. 

Conclusion

The Composition Scheme is simple scheme for taxpayers under GST. Small taxpayers can avoid complex GST formalities and pay GST at a fixed rate of the turnover. However, the disadvantages of registering under GST composition scheme mentioned above can’t be ignored. Hence, it needs to be reviewed at the earliest.

Read our article:Interest on Net GST Liability- Brief Note