Composition Scheme vs. Regular Scheme under GST

The Goods and Services Tax (GST) in India offers two main options for businesses. One is using the GST Composition Scheme and other is the Regular Scheme. It’s choosing the right one that has an impact on tax, it impacts your compliance work and your business operations in general. In this blog we explain the differences so that you can help you decide which scheme would best suit your business.

What is the Composition Scheme under GST?

The GST Composition Scheme is a simplified tax system for small businesses with an annual turnover of up to ₹1.5 crore (or ₹75 lakh in some states). GST is paid as a fixed percentage of total sales under the Composition Scheme under GST. They never charge customers' GST separately or claim input tax credits when they purchase something. Instead, they only need to file quarterly returns, which reduces compliance requirements. This scheme will be suitable for small retailers, manufacturers and service providers with little or no expenses or dealing in exempt goods. However, there are some restrictions like it is not allowed to do interstate trade or sell products via e-commerce platform.

The Composition Scheme GST is optional and designed to make tax payments easier and more affordable for small businesses. Later, it expanded to also cover small service providers up to a certain size of turnover. The key idea of this scheme is to cut down on compliance expenses and simplify tax procedures so that small businesses can dedicate their effort in their growth.

In the GST Composition Scheme, businesses pay a certain percentage on their Turnover as GST. The GST rates depend on the type of business:

• Manufacturers: 1% of turnover
• Traders: 1% of turnover
• Restaurant Services: 5% of turnover
• Other Services: For some sectors 6% of turnover.

These rates, which are designed to lower small business tax liability, ensure that paying taxes is not a complicated business.

What is the Regular Scheme under GST?

For businesses whose income exceeds beyond the permitted limit there is Regular GST Scheme. Businesses under this scheme charge GST from their customers but can then obtain, at any one time, up to one half (subsequently a full half) of the GST they paid on their own purchases as credit against this GST which brings down the amount of GST they have to pay. Just like GSTR 1 or GSTR 3B businesses need to submit one in monthly or quarterly intervals. The supply chain can be clear and organized by keeping track of taxes easily with this system. Businesses selling taxable goods or services and with many expenses can get some tax back. It however needs careful record keeping and regular filings.

Key Differences Between Composition Scheme and Regular Scheme

This section will help you understand the key differences between the Composition Scheme GST and the Regular Scheme.

Advantages and Disadvantages of Composition Scheme

The small businesses are benefitted by the Composition Scheme under GST in several ways. It also makes compliance easier, since businesses file fewer returns, keep fewer books and send simpler invoices. Moreover, the tax burden is smaller, which allows businesses to increase liquidity. Businesses with limited outlays find this very useful.

Unfortunately, the scheme has its drawbacks as well. A business which is registered under the GST Composition Scheme cannot make any interstate transaction and cannot claim Input Tax Credit. In addition to this, they cannot provide non taxable goods like alcohol or sell goods through e-commerce platforms.

Advantages and Disadvantages of Regular Scheme

Under the Regular GST Scheme, you can claim Input Tax Credit, which helps not only recover a part of tax, but also lowers the actual tax burden. The transactions of businesses that can be interstate as well as intrastate open a wider field for businesses. In addition, they can supply any kind of taxable goods and services without restrictions.

On the other hand, the Regular GST Scheme involves a lot of data recording and regular filing (either on monthly or quarterly basis). However, the scheme is more complex therefore, leading to higher compliance costs, which is suitable for larger businesses with high turnover and large operations.

Factors to Consider While Choosing Between the Two

The right GST scheme depends on size, turnover, and type of business. Bigger businesses having higher expenditure and interstate trading will benefit more from the Regular Scheme since it permits Input Tax Credit (ITC) and simple tax flow. However, the GST Composition Scheme is preferred by small businesses with relatively few compliance requirements and lower tax rates. Turnover, business operations, and tax savings against compliance will help determine which option is the best. Having a tax advisor can assist you to make sure you make the right decision and that you’re as tax efficient as possible.

FAQs

1. What is the Composition Scheme under GST?
The GST Composition Scheme is a simplified tax option for small businesses with an annual turnover up to ₹1.5 crore. It has easy compliance with low tax rates; however, it has a restriction on input tax credit and interstate sales.

2. Who is eligible for the Composition Scheme GST?
This scheme is open to businesses with turnover up to ₹1.5 crore (₹75 lakh for special category states). Manufacturers, traders and restaurants (excluding those serving alcohol) are eligible. But then if their turnover is below ₹50 lakh, service providers can also opt.

3. What are the benefits of the Composition Scheme?
It offers lower tax rates (1%, 5% etc.), simplified compliance by way of quarterly filing and reduced paperwork. For small businesses that don’t transact with B2B it is ideal.

4. Can I claim Input Tax Credit (ITC) under the Composition Scheme?
The claimed input tax credit (ITC)includes ITC relating to goods which are held after paying tax under the composition scheme GST. However, this is one of the main limitations of this scheme.

Also Read :GST Composition Scheme