फायदा देखो यार – Avoid Confusion with Normal & Composition- Make/Modify choice with this Excel worksheet

If a businessman chooses the type of his GST registration without calculating the actual impact of his choice, there is scope for making wrong choice. This article explains what should be the real basis for selecting the right type of registration by small/ medium businesses.

We know that there are 2 options of registration under GST- Normal or Regular option and Composition option. Taxpayers (with turnover below 1.50 crores) who supply within their state have choice between Normal & Composition schemes. Different people have different criteria for deciding the type of their GST registration.

Generally speaking, people choose one of the two options for following reasons:

Option Reason of choice
A) Normal Here the dealer gets input tax credit on his purchases, which is not there under composition.
B) Composition Simple method, single tax rate and minimum compliance requirements.

But in my opinion, these are not sufficient reasons for choosing the correct option. The basic question is why a person is doing business. The obvious reason is- for earning profit. Then profit angle should be the primary factor in making the choice. We will use an Excel Worksheet specially designed for this purpose to compare profit of the business under the two options. This calculation will be very useful in selecting proper registration.

First let us understand suitability of composition for different types of dealers, i.e., Wholesalers (B2B) & Retailers (B2C)

  • A composition dealer cannot issue tax invoice. Hence his customers cannot take input tax credit on their purchases from him which will increase their cost. As a result, composition generally may not be suitable for wholesalers doing B2B sales.
  • Composition is more suitable for retailers supplying to ultimate consumers (B2C) where the customers are not bothered about ITC on their purchases.

Now the issue is whether all retailers with turnover below 1.50 crores should go for composition. The answer is no, since it may not be necessarily suitable for every retailer. The best way to arrive at proper decision will be to compare tax liability of the dealer under the two options and their impact on his profits. Note that dealer’s tax liability under the two options may vary significantly. The reason is difference in the basis of tax calculation under the two schemes. A composition dealer’s tax liability is based primarily on his turnover. But for a normal dealer, it is based on his margin and not turnover.

    Option Basis of calculating tax Rate of Tax
Composition Turnover of taxable products (irrespective of their margin) Fixed Rate (1%)
Normal Value addition margin earned by the business Rate applicable to each product

A) Tax calculation under Normal option:

Under normal registration, GST is effectively a tax on value addition margin of the trader. Tax liability of the dealer under normal registration can be worked out based on estimates of his turnover of different products or group of products and the value addition margin on each product/ group falling under different tax rates. Here value addition means difference between the dealer’s purchase prices and sale prices of different goods. For example, if purchase price (basic) is 100 and sale price (basic) is 115, it means that the margin is 15%. And his tax liability can be calculated as under-

Tax  =    Value addition Margin   x   Tax rate as per GST tariff.

B) Tax calculation under Composition option

This is quite simple calculation. Just multiply the taxable turnover by the tax rate of 1% to get the tax liability of a composition dealer.

Pricing pattern of Retailers

Here it is to be noted that prices charged by a retailer (who sells to ultimate consumers) depend upon MRP or prices charged by his competitors. Hence his gross selling price (including taxes) to the customer will be same whether he is registered as a normal dealer or a composition dealer. As the customers are not interested in input tax credit, it doesn’t matter for the customer whether the dealer is normal dealer or composition dealer.

Thus, any difference in the dealer’s tax liability under the two options will directly affect his profit. And based on this data, the dealer can decide the option best suitable for him.

For simplifying the above calculations, an Excel sheet is designed (enclosed below). Only following figures are required to be entered in the relevant columns.

a. Estimated purchase value of different products or group of products

b. Estimated value addition margin % for product/ group

c. GST rates for each product/ group

It may be noted that it is not necessary to have exact figures. It will be sufficient if the dealer can make a reasonable estimate based on his experience.

On entering these figures, the dealer’s tax liability and profit under both the options get calculated automatically and based on same appropriate option is also suggested.

Change in option is possible

Once a dealer has selected a particular type of registration, it is not necessary that he must continue with the same forever. The law gives option to the taxpayer to switch over to the other option as detailed below:

A) Normal to Composition– A normal dealer can change over to composition for any financial year by filing Form GST CMP-02 before start of the financial year. But because of COVID outbreak, the last date for changing to composition for financial year 2020-21 has been extended to 30th June, 2020.

B) Composition to Normal– A composition dealer can switch over to normal option at any time by filing Form GST CMP-04.

Keeping all above factors in mind, the dealer (who is otherwise eligible for composition option) should evaluate pros and cons of composition periodically and if the choice of composition turns out to be wrong, he can change his decision.

As far as the financial year 2020-21 is concerned, dealers have time till 30th June, 2020 for changing over to Composition.

Disclaimer: The views expressed in this article are personal and should not be considered as professional advice. The author may be contacted at sgkarwa@rediffmail.com.

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2 Comments

  1. PATELRAHUL90 says:

    Sir, there is no excel file of the same. … Please upload the excel file for our reference. Otherwise the whole article was good…..

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