The Indian Government has recently introduced GST composite scheme for filing of GST returns by small startup businesses in India. A GST return is a document through which businesses intimate the details of their activities, financial status, and financial transactions to the Government. Filing GST returns is one of the most significant and mandatory compliances for all kinds of businesses registered under the GST Act 2017. Such returns must be filed to the respective tax authorities of the Central and State Government on or before the prescribed due dates. A failure to do so may result in the company and the officer in charge landing in a pool of hefty penalties and late fee charges, which in turn might increase the cost of operation of a business exponentially.
To file the GST returns, a business must mandatorily possess a GST Registration, GST number, and PAN number as prerequisites. Business can get registered under either of the GST schemes, namely, the GST regular scheme and the GST composite scheme. The GST composite scheme is usually availed by small merchandise businesses or service providers in order to save the cost of compliances, especially those related to filing tax returns. The amount of taxes to be paid and the need for registration under either scheme depend upon a number of factors, including the turnover, profitability, nature, and the primary object of the business.
Types of GST Schemes
The government has introduced two different schemes for the purpose of filing GST returns. These include the Regular Scheme under the GST Act mandatorily applicable for all businesses having an aggregate annual turnover greater than 1.5 crores, and optional for businesses having a turnover equal to or less than Rs. 1.5 crores. The option to claim input tax credit is unconditionally available under the Regular GST scheme. On the contrary, the composite scheme has no option for businesses to claim input tax credit and is only applicable for small businesses having a turnover less than or equal to Rs.1.5 crores. The only advantage that the GST Composite Scheme has, over the Regular scheme, is that of extremely low tax rates. The table below briefly distinguishes between the two schemes over several relevant parameters.
| GST Composite Scheme | GST Regular Scheme |
|---|---|
|
Payment of taxes on a fixed prescribed rate of the aggregate annual turnover, without the adjustment of Input Tax Credit |
Payment of taxes on a fixed prescribed tax rate of the aggregate annual turnover, with the adjustment of Input Tax Credit |
|
Tax rates: 0, 1%, 2%, 5%, 6% |
Tax rates: 0, 5%, 12%, 18%, 28% |
|
Inter-state sale prohibited. Sales are restricted within the state where the business is located. |
Inter-state sales allowed. |
|
Quarterly payment of taxes and filing of returns using GSTR-4 Annual return to be filed in GSTR-9A |
Return of Outward Supply to be filed every month in GSTR 1 and GSTR 3B. Return of Inward supply to be filed in GSTR-2A every month. Annual returns are to be filed in GSTR 9. |
|
Taxpayers cannot issue a tax invoice. Instead, Bills of Supply are issued. |
Taxpayers can issue tax invoices. |
|
Total 5 returns to be filed in a year |
Total 37 returns to be filed in a year |
|
Exports and supplies to SEZ and SEZ developers prohibited |
Exports and supply to SEZ and SEZ developers allowed. |
|
Option to opt out of the scheme anytime |
Can opt out of the scheme only in the prescribed time period. |
GST Composite Scheme
The payment of taxes and filing of returns are done quarterly, that is after every 3 months or four times a year. Form GSTR-4 is used for the purpose of quarterly filings. The annual returns under the scheme are filed using GSTR-9A. You may either file the returns yourself or outsource the service to professionals. Businesses that are involved in inter-state sales, exports, or e-commerce sales, manufacturing of tobacco, sale of alcohol, and non-resident taxpayers cannot be a part of this scheme. Businesses registered under the scheme can easily opt out of it whenever they wish to do so. However, the only demerit that the scheme has is that it does not provide for ITC or input tax credit to its beneficiaries.
The GST Composite Scheme was introduced by the GST Amendment Act 2018 as a boon for small Indian businesses. It was brought into effect on 1st February 2019 and is applicable to manufacturing and trading businesses with an aggregate annual turnover upto Rs.1.5 crores, and service-based businesses with an aggregate annual turnover upto Rs. 50 lakhs. The features that make the scheme beneficial for all small businesses include its reduced need for compliances and its relatively lower tax rates when compared to the regular GST Scheme. The payment of taxes under the GST composite scheme is based on a fixed tax rate and the aggregate annual turnover of the business. The tax rates under the GST composite scheme are as low as 1%, 2%, 4%, and 6%. To avail the benefits of the scheme, you must opt-in by registering yourself under the GST composite scheme.
Opting in and out of the GST composite scheme is an extremely easy process. To opt-in the GST Composite scheme, you will have to visit the GST portal and register yourself under the scheme. Thereafter, you will have to intimate the Government about the same using form GST CMP-02 and furnish a statement of stock in Form ITC-03. To opt-out of the scheme, you will need to intimate the Government using form GST CMP-03 and furnish a statement of stock in Form ITC-01. The rates under the GST composite scheme are mentioned in the table below.
| Types of Business | CGST | SGST | TOTAL |
|---|---|---|---|
|
Traders |
0.5% |
0.5% |
1% |
|
Manufacturers |
1.0% |
1.0% |
2% |
|
Restaurants that do not sell alcohol |
2.5% |
2.5% |
5% |
|
Service Providers |
3.0% |
3.0% |
6% |
GST Regular Scheme
The regular GST scheme was introduced by the Indian Government in the year 2017 with the purpose of replacing a plethora of indirect taxes with a single tax on goods and services. The scheme was meant for relatively larger businesses and has relatively higher tax rates compared to the Composite Scheme. Taxes here are paid at prescribed tax rates of 5%, 12%, 18%, and 28%. The added advantage here is that business can avail the input tax credit on the tax payable to the government.
Moreover, all kinds of goods and service based businesses, including those involved in inter-state sale and exports, are eligible for registration under the scheme, provided their aggregate annual turnover has crossed Rs.20 lakhs and Rs 40 lakhs for goods and service-based industries respectively. Returns under the scheme that are required to be filed monthly include the returns of outward and inward supply, in forms GSTR 1 and GSTR 2A respectively. Notably, GSTR 3B is required to be filed along with the two forms. Other than the monthly returns, annual returns are also required to be filed in form GSTR 9.
Opting in the scheme is flexible but opting out of the scheme can only be done at prescribed dates, usually in the month of February and March. To opt in, you must file the GST REG-01 application form, available on the GST portal. The application form is divided into two parts. You must fill out the first part and get your TRN generated. Within 15 days of receiving the TRN, you must fill out and submit the second part of the form along with the prescribed documents. The application usually takes 10-15 days to get processed, after which a Certificate of Registration is issued. There is no application fee charged for the form.
Method of Calculation of taxes in the GST Composite Scheme and Regular Scheme
In the GST Composite scheme, the taxes are calculated as a percentage of the aggregate turnover. For instance, if the aggregate turnover of a business is Rs.50 lakhs, and the rate of GST is 10%, the tax payable shall be calculated as 1% of Rs.50 lakhs i.e. Rs. 50,000. On the contrary, the taxes in the regular GST scheme are calculated as a percentage of the average profits instead of the aggregate turnover. For instance, if out of the aggregate turnover of Rs.50 lakhs, the profit earned is Rs. 50,000 and the tax rate is 18%, the tax payable shall be calculated as 18% of Rs.50,000, i.e. Rs.9,000.
GST Composite Scheme vs Regular Scheme: Which is better?
Choosing between the GST Composite scheme and the GST Regular scheme would depend upon the aggregate turnover, average profit earned, and the tax rates. The tax rates in the composite scheme depends on the nature of the business activity, whereas that of the regular scheme depends on the nature of goods and services. Undoubtedly, the composite scheme has lower tax rates and reduced need for compliance compared to the regular scheme, and seems to promise higher availability of liquidity for businesses.
These features might make the scheme suitable for small businesses, but that is not always the case. Let us understand the exception with the help of an example. For instance, the aggregate annual turnover of a business is Rs.50 lakhs and the average rate of profit earning is 10% or Rs.50,000. For tax rates under the composite and the regular scheme as 1% and 5% respectively, the tax payable is mentioned in the table below.
| Schemes | Tax Rates | Tax Payable |
|---|---|---|
|
Composite |
1% |
Rs.50000 |
|
Regular |
18% |
Rs.9000 |
Since the tax payable is calculated on the aggregate turnover, its absolute value is relatively higher than that in the regular scheme, even though the tax rate is extremely low when compared to the regular scheme. Similarly, even though the tax rate is higher in the Regular scheme, the absolute value of tax payable is much less compared to that of the GST composite scheme, due to the fact that the tax payable is calculated on the average profit instead of the annual turnover. If this be the case, the Regular GST scheme shall be more suitable for small businesses instead. Besides, opting for the regular scheme instead of the composite scheme has other major advantages which includes the benefit of input tax credit for the suppliers of goods and services, expansion of business beyond state and national borders, and an easy way to opt out of the scheme.
GST was introduced in India with the purpose of combining almost all indirect taxes levied by the Central and State Governments on the sale of goods and services. These included VAT, sales tax, service tax, etc. At the time of its introduction, the scheme that was first brought into existence was called the Regular or Normal GST scheme. The tax rates under the scheme were categorised into various tax slabs for different goods and services, ranging from as low as 5% to as high as 28% of the aggregate turnover.
However, these tax rates were rationalized in the later years, such that mostly all goods and services were brought under the same tax slab of 18%. Although this was relieving for most large businesses, small businesses still struggled as the tax rates and the cost of compliances were extremely high for them. It was for their convenience that the government brought the GST composite scheme, with extremely low tax rates (1% to 8 %), low turnover limits, and reduced compliance requirements. With the choice of two different kinds of schemes, businesses have the option of analyzing and availing the scheme which benefits them the most.