Under the provisions of GST laws, a taxpayer can opt for Composition Scheme, if his aggregate annual turnover during a particular financial year exceeds Rs. 1.5 Crore. However, the aforesaid threshold limit is Rs. 75 Lakhs for hilly and north-eastern states of India.
The GST Composition scheme has been introduced with the purpose of easing the burden of tax compliance on smaller taxpayers. However, the scheme has a number of disadvantages that make it detrimental for taxpayers. We have discussed some of the most prominent disadvantages of the GST Composition Scheme below.
When a taxpayer gets registered under the Composition Scheme, he is forbidden from carrying out any sort of inter-state sale or supply of goods. Also, a composition taxpayer cannot conduct import and export of goods and services. Hence, it is clear that the taxpayer enrolled under the GST composition scheme can only conduct intrastate transactions and will have a limited territory of business operations. In simple words, the composition taxpayer can only supply goods in his state of origin.
A taxpayer enrolled in the GST composition scheme cannot claim Input Tax Credit for GST paid on goods they have purchased. Also, buyers of goods sold by a composition dealer will not be able to claim input tax credit as well.
This might lead to loss of business as the purchaser of goods, registered as a regular taxpayer, under GST will not be eligible to claim any input tax credit for buying goods from a composition dealer.
Although the tax rates under the GST composition scheme are marginal, ranging from 1% to 5%, a taxpayer enrolled under the scheme cannot shift the burden of such taxes on the end buyer or consumer and he has to pay the entire amount from his own pocket. Also, a composition taxpayer is not allowed to issue tax invoices. Thus, the primary cause of introducing the composition scheme i.e. reduced tax burden, stands effectively compromised.
One of the most prominent disadvantages of the GST composition scheme is the penal actions that a composition taxpayer has to face. Under the GST Act, if a taxpayer registered under the GST composition scheme, is later found to be ineligible and that the registration was undertaken by furnishing incorrect information, will have to pay hefty penalties, extendable up to the total tax liability amount.
Although the GST composition scheme is meant to benefit smaller taxpayers, problems arise when they are not well aware of the tax laws under the scheme. If they violate any of the laws under the scheme, they can potentially land into a pool of hefty penalties and can be made liable to pay GST at standard rates applicable to any other regular GST taxpayer.
In recent times, the e-commerce industry has flourished in India rapidly. There are various companies which are engaged in selling products on owned or outsourced ecommerce platforms. Goods sold on e-commerce businesses can be supplied across state borders, and since inter-state supplies are not allowed for the taxpayers under the composition scheme, composition taxpayers are not permitted to sell their goods on e-commerce platforms. Also, this limitation of composition scheme contradicts the vision of the Indian Government regarding “Startup India” and “Digital India”, the objective of which is to promote the startup ecosystem through the digital medium.
The taxpayers who are engaged in providing services (excluding restaurant services) are not eligible to register themselves under the GST composition scheme.
Owing to the disadvantage of not being able to avail the input tax credit under the composition scheme, most of the registered regular taxpayers avoid purchasing goods from composition dealers.
With the above analysis, it can be concluded that like everything has its pros and cons, the Composition scheme also has several advantages as well as disadvantages. While the scheme is beneficial to certain taxpayers, it is also detrimental to others. Thus, it depends on the taxpayers to choose the regular scheme or composition scheme under GST, based on what best suits his needs.