What are the Limitations of Composition Scheme Under GST?

Ashish M. Shaji

03 Dec, 2020

Though GST registration under composition scheme has been appreciated by the startups and SME, there are many limitations of Composition Scheme under GST. If you have opted for composition Scheme, at the time of online GST Registration you will face numerous restrictions. Let’s discuss that briefly.

What is Composition Scheme under GST?

With a view to help the small players in the market, the government introduced the concept of composition scheme. Under the scheme, firms under a threshold limit of turnover pay a fixed % of turnover as tax.

Limitations of Composition Scheme

There are certain limitations with this scheme which may be noted.

• Interstate Sale

The composition scheme under the new GST^[1] regime is available only to those registrants which are carrying on their business intra- state .i.e. within the state.

For e.g: A person carrying on the business with the state opted for composition scheme is now willing to sell the goods to another state, will not be able to do as he has applied for composition scheme which has specifically excluded interstate sale.

• Without seeking permission

For availing the Composition Scheme under GST a person has to apply for the same. Once applied it will be valid for the entire financial year.  So, make your choices wisely since you can only do so at the start of the year and deal with the same for the entire financial year. Thus a taxable person cannot opt for composition without seeking permission.

• Specific Exclusion

The GST composition scheme is not applicable to the service sector. A Registered service provider is rendered ineligible for the composition scheme. A taxpayer who provides services, other than restaurant related services, can’t opt for this scheme. Therefore, the taxpayer can’t avail of the benefits of this scheme.

• Composition Limit 

The limit for GST composition scheme was Rupees Seventy Five lakhs but this limit was raised to 1.5 crore rupees. If the amount crosses the threshold limit, it is taxable at the standard rate as applicable.

• Reverse Charge Mechanism 

Reverse charge Mechanism under GST quashes the rules that existed till now wherein the recipient of goods and services paid a certain amount to the government in some cases, and brings in the new rule of the payment coming from the supplier of goods and services. This makes the person registered under composition scheme to be liable to pay taxes at the standard rate, rather than at the discounted composite rate. The standard rate would mean that it adds to the cost of the person paying it since they cannot claim the same as input tax credit.

• No Input Tax Credit

If you avail of GST composition benefits, there can be no availing of input credit on the purchases made for the supply of goods.

• Penalty-Non-Filing of returns in time

The person registered under GST and opted for composition scheme has to file the return on time. In absence of the same, the taxable person will be liable to pay Rs.100 per day as late charges, which is subject to a maximum penalty of Rs. 5,000 per return. In case you feel that your business is not a right fit for GST composition scheme, you can apply for normal GST Registration.

• Collection of tax is not allowed

It may be noted that the taxpayers choosing composition scheme are not allowed to collect tax from the buyer of his goods. In fact, the composition scheme dealer is disallowed from raising tax invoice. The tax to be paid by the taxpayer shall be borne by such taxpayer only.

• Non-eligibility to supply exempt goods

Taxpayers who supply exempted goods cannot opt for this scheme as they are outside the scope of this scheme.

• Can’t supply goods through E-commerce portal

Taxpayers who are supplying goods by way of e-commerce portal cannot opt for this scheme. It is one of the notable limitations of Composition scheme.

Conclusion

Despite these limitations of Composition Scheme, it is an appreciated step for the MSME sector as it provides relief in terms of tax burden as well as compliance. For any additional information regarding GST Composition Scheme, please contact Enterslice.

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