Is It Better to Opt for Composition if You Are a Small Business Owner?

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The Goods and Service Tax (GST) brought in a good economic reform with its implementation in July 2017. With this tax system in place, the different indirect taxes and their cascading effect on the taxpayers ceased to exist. 

Amongst the GST advantages, one of the biggest ones is the ‘one nation, one tax’ system. This reform brought in uniformity in the tax administration system.

Like with any other system, there are quite a few GST advantages and disadvantages. While the advantages of GST were enjoyed by many, the small businesses following the regular GST regime were faced with a few shortfalls. These included:

  • A higher number of compliances

  • Numerous GST formalities

  • Increased costs

  • Lower liquidity

  • Higher tax liability

The composition scheme under GST is a simple option for small businesses facing these pitfalls. Taxpayers with a threshold limit between Rs 1.0 Crore to Rs. 1.5 Crores can opt for the composition scheme. This scheme relieves them of the tedious GST formalities. This scheme under GST is a good option if you are a small business owner. 

Eligibility under this scheme:

  • Restaurants

  • Manufacturers

  • Suppliers of certain goods

  • This scheme also offers special eligibility to normal taxpayers whose turnover includes 10% as a service.

To understand whether it is better to opt for this scheme one needs to take a look at the composition scheme under GST advantages and disadvantages.

Here are the benefits of the composition scheme which makes it an attractive option for certain assesses:

Compliances

The composition scheme requires a dealer to adhere to a minimum number of compliances. Under this scheme, a taxpayer needs to furnish only the quarterly return. There is no need for tedious maintenance of regular records as is necessary in the case of a regular taxpayer. 

The responsibility of monthly returns, maintenance of books of records and invoice issuance are all reduced. With the burden of compliances lifted off their shoulders, there is plenty of time to focus on other business requirements. 

A dealer registered under the composition scheme has to file GSTR-4 for quarterly returns and FORM GSTR-9A for the purpose of annual return.

Lesser Tax Liability

Composition Scheme comes with a limited tax liability for the small businesses. The rate of taxation is nominal under this scheme as per the GST Law. Tax, in this case, is calculated at a certain percentage of the turnover as a whole. 

Liquidity

Opting for this scheme is better for a small business as it offers higher liquidity. The availability of ready funds is important for a small business to grow and thrive. 

Switch over

Another important benefit of the scheme is the option to switch. In case a taxpayer feels that he is not being benefited from the scheme, a switch over to the normal form of taxation is possible.

These benefits make opting for the composition scheme definitely attractive for small business owners. This scheme is a driver of growth for especially those engaged in intrastate transactions. 

The taxpayers under this scheme, however, cannot get involved in interstate transactions or import-export transactions. So this scheme isn’t beneficial for such assesses. There is a territorial limit for expansion.

Restrictions

  • Input tax credit cannot be claimed under this scheme. Input tax credit is basically the tax that a taxpayer has to pay for purchases. This can be used to reduce tax liability while making the sale. To simply put it, a business can reduce the burden of tax liability by setting off a certain amount against the taxes paid while making the purchases.

  • GST cannot be charged to the customers on their invoices. A ‘bill of supply’ has to be issued.

  • Tax cannot be collected on sales but has to be paid from the pockets of businessmen as a percentage of the turnover.

  • The composition scheme registration becomes ineffective the moment the turnover exceeds the limit or the dealer engages in the inter-state sale. The taxpayer has to pay regular taxes from then on. The department has to be duly informed regarding the same within seven days. A GST form for such cases is available and needs to be filed online. 

  • Failure to adhere to the prescribed compliances can attract penalties. One has to be vigilant about the rules and regulations.

Although the composition scheme appears to be restrictive in nature for some businesses it is definitely attractive enough for many. For instance, in case of retailers operating from a single state, the composition scheme is definitely beneficial. The limited liability and a lesser number of compliances is reason enough to opt for this scheme.

Reduced compliances also give small business owners plenty of time to focus on the growth of the business. For retailers, since this scheme offers higher liquidity, the available funds can be used as working capital in the business which is another essential for growth. 

Registration for the composition scheme under GST is voluntary in nature. Retailers who are sure to benefit from this scheme can choose to avail the benefits of the same by registering for it. 

Existing or newly registered taxpayers who do not come under this scheme can opt for it subject to the prescribed qualifications. They become eligible for payment under the scheme at the commencement of the subsequent financial year. 

To sum it up, opting for this scheme needs to be a well-informed decision depending on the nature of your business. Thinking thoroughly and weighing all the pros and cons is absolutely essential before making the final decision in order to make the most of this scheme. 

Although the composition scheme has quite a few restrictions, there are a number of benefits for a certain class of businesses. Depending on the nature of the business a small business owner can decide to opt for this scheme. With careful consideration and studying the scheme, it might turn out to be the best option for your business.