pri Major Drawbacks of opting for Composition Scheme under GST Major Drawbacks of opting for Composition Scheme under GST

The Composition Scheme under GST is extremely important for those traders who have a turnover upto Rs. 1.5 crores* annually. While it has its many advantages, there are also several drawbacks of registering under the GST Composition Scheme which have been addressed in following article:

Drawbacks of Registering under the GST Composition Scheme

  • Restricted Territory for Business Operations:A taxpayer registered under the composition scheme is barred from carrying out inter-state transactions and cannot offer import-export of goods and services. Thus, he is restricted to carry out only intra-state transactions and this limits the territory of his business. This not only nullifies the expansion plans for small businesses, but also discourages export from India.
  • Recovery of Tax not allowed: Though the rate of composition tax is kept very nominal at  0.5% or 2.5% (in lieu of Central tax rate), a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice. Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket. Thus the fundamental principle of limited compliance and tax burden on small taxpayer is defeated here.
  • No Credit of Input Tax in B2B: There has not been any provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. This will further result in a loss of business as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under composition scheme. Eventually, such buyers might restrict purchases from a taxpayer under composition scheme.

Composition Scheme - Applicable GST Rate

  • Electronic Commerce out of scope: One of the major industries which has flourished in recent times, is the e-commerce in India. There have been numerous companies who are into e-commerce, many of them are still at beginner stage and have not achieved breakeven level yet opposed to e commerce giants. Such units carry out their business online through internet and supply across states. Since they are into inter-state supplies they are not eligible for composition scheme and thus the benefit of this section has been kept away from them. This is further in contradiction with the government vision of “Digital India” and “Startup India” which are aimed to promote the startup ecosystem and a digital experience for Indian citizens.
  • Penalty Provisions under law:  As per the GST Law, if the taxpayer who has previously been given registration under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability. On analysis of this provision, it can be fairly said that if a small taxpayer who has limited knowledge of tax laws and compliance makes any mistake under composition scheme, he shall be liable to pay tax at the standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Composition scheme is considered instrumental in enabling small taxpayers to reduce the burden of numerous tax compliances. However, before choosing to get registered under the composition scheme

*As per notification 01/2018 dated 01.01.2018, turnover for traders has been defined as ‘Turnover of taxable supplies of goods’.

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July 2021