CA S G Karwa

CA S G KarwaGST law has made provision for composition scheme for small businesses in order to spare them from cumbersome compliances imposed on businesses falling under the purview of GST. Although on the face of it, the option may seem attractive, but on deeper examination, it may not be advisable for many small businesses also. Since Composition is an optional scheme and the choice will have direct impact on the profitability/ growth of the business, the decision whether to go for it or not should be looked at as a business decision considering all pros and cons and not merely as a method of bye-passing the compliance requirements.

Let us start with main features of composition scheme which are summarised below:

  • A person is eligible for composition option if his Aggregate Turnover (taxable + exempt) is less than Rs. 75 lakhs in last financial year for all businesses covered under same PAN.
  • Benefit of composition scheme can be taken for turnover up to 75 lakhs in current year.
  • A person doing only intra-state supplies can opt for composition. Moreover, he cannot supply through ecommerce operators like Flipkart. Also he should not be supplying goods not liable to tax under GST.
  • Some manufacturers are not eligible to opt for composition (like ice-cream, pan masala, tobacco products)
  • Service providers (except for restaurant/ catering) are not eligible for composition scheme.
  • Tax rate for traders is 1% and for manufactures 2%. In case of restaurants it is 5%.

Now let us look at major advantages and disadvantages of composition scheme for a business.

Advantages

  • Less compliances- regarding billing, record keeping, returns, voluminous data uploading, etc.
  • As there is single rate in case of a composition dealer, he need not worry about taxability/ tax rates for each product.

Disadvantages

  • Composition dealer cannot make inter-state sales (limited area for sales)
  • He cannot take Input Tax Credit on his purchases.
  • He cannot collect GST in his invoices. He cannot issue tax invoice. Consequently, his customers also cannot take input tax credit on their purchases from him.

Suitability

Now even if a person satisfies all the criteria as provided under law for registration as composition dealer, the question arises regarding desirability of opting for such registration. As already mentioned above, it has to be a business decision. No doubt composition involves simplified compliances, but it may not necessarily be suitable for all persons below 75 lakhs turnover. We can summarise the main factors to be considered in this decision as under:

♣ Nature of business: Composition dealer cannot claim input tax credit even if he makes taxable purchases from a regular registered dealer. Moreover, if a composition dealer is working on B2B model, his buyers will also not get any credit of tax paid which will increase their cost. Hence such buyers will naturally avoid purchases from a composition dealer.

♣ Tax impact study: If a dealer also supplies goods which are exempt and the proportion of exempt goods is more (examples- milk, curd, salt, bread, printed books, etc.) it may be better for him not to go for composition as composition dealer has to pay fixed % on his total sales including exempt goods. If he goes for regular registration, he will pay tax as per rates applicable to each of the goods and hence he will not have to pay tax on exempt supplies. The best way to arrive at proper decision will be to compare the tax impact under the two options (Regular Vs Composition). A small exercise may be very useful here. The following inputs are required for this exercise:

A) Average tax rate on turnover of outward supplies of the dealer as per applicable regular rates. (This may be calculated on the basis of actual data if available or may be estimated.)

B) Average margin of the dealer on his outward supplies. This is based on the difference between the dealer’s purchase and sale prices of different goods. It may also be called as percentage of value addition. (This may be calculated on the basis of actual data if available or may be estimated.)

C) Multiplication of above factors (i.e., A x B), will give the average tax impact on the dealer’s outward turnover if he chooses for regular registration.

Once the above computation is made, the tax impact arrived under C can be compared with the rate of 1% or 2% or 5% as may be applicable to the dealer under composition option. Let us take a practical example.

  • Suppose a trader supplies several goods attracting different GST rates. Average tax rate on his aggregate turnover under regular scheme is estimated to be around 8%.
  • Average margin (value addition) on his sales is around 20%.
  • In this case, the average tax impact on his sales under regular registration comes to 1.6%.
  • As against this, the rate of tax payable by him on his total turnover under composition option is only 1%. Obviously, he is better placed if he chooses composition.

For another trader with average tax rate of say 5% and margin of 12%, composition option may not be advisable as it will adversely impact his profit.

♣ Restrictive conditions: A person opting for composition becomes subject to restriction regarding total ban on inter-state supply and supply through e-commerce operators. Thus a dealer opting for composition will face obstruction in growth of his business. This will be much more relevant in case of businesses located near inter-state borders and catering to customers from both the states.

Based on the above discussion, it can be concluded that composition is suitable mainly for small retailers doing B to C supplies within the state provided their tax liability is not increasing substantially due to choice of composition.

Here it may be noted that a Composition dealer can come out of the scheme at any time by making an application. Hence 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.

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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6 responses to “GST: Regular Vs Composition- good or bad- a business decision & not merely a compliance bye-pass”

  1. James Antony says:

    When doing the TAX IMPCAT STUDY, the effect of RCM should also considered, since it will become his cost. A composition dealer is also required to pay tax u/s 9(3) and 9(4) of the GST Act and since he is not eligible for input tax credit, he can not claim it back. So it will add up to his cost. In that circumstance, the tax impact due to this option will be high, depending on the quantum of purchases from unregistered persons

  2. Anwar khan says:

    Stock as on 30-06-20017 of Rs 10 Lacs which was purchases from Registered Dealer, than ITC Reversal or RCM Applicability

  3. Tushar says:

    After opting composition Scheme –
    can trader purchase its goods out of state(interstate) for reselling it only within state??
    OR
    A trader cannot do any interstate transaction(sales and purchase of Goods)
    Please advices.

  4. CA Mayur Arora says:

    Nice article , especially the practical aspect of making comparison between the two options.

    Thanks for sharing…

  5. MUNISH PURI says:

    If one person wants to opt from composite dealer to regular GST dealer he has to fill cmp-4 but till time there is not any cmp-4 available .
    In this condition is gst3B should be filed or not

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