Understanding GST Composition vs. Regular Scheme: Ideal Business Choices

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Published Date:  19-12-2023   Author:   samradni-p
captainbiz understanding gst composition vs regular scheme ideal business choices

The Goods and Services Tax combines multiple taxes into one. And now, complying with the tax laws has become easier than ever for businesses. The big companies have enough resources and budgets to deal with the GST tax regulations. However, small businesses couldn’t easily understand the concepts of GST.

Hence, to ensure easy GST compliance, the composition scheme and the regular scheme were added to the GST framework by the GST Council. Read on to learn how the two schemes are different from each other. With the right knowledge, business owners can choose the two better.

Regular taxpayer vs. composition scheme: A comparative analysis

Here is a comparative analysis of the regular taxpayer and composition scheme. The following information will help you decide which scheme will be ideal for your business.

  Composition Scheme Regular GST Scheme
Types of customers Services or goods are supplied to Composition or unregistered dealers who pay GST. Supply of goods or services for registered dealers who aren’t ready to pay GST.
Input Tax Credit Claim The taxpayer isn’t ready for input tax credit claims as the maximum purchase is made from Composition or unregistered dealers.

 

The taxpayer is ready to input tax credit claims on the GST amount paid on purchases from dealers with GST registration.
Sales type Businesses with only intra-state sales of their goods (selling the goods within the state where the business is registered). Businesses dealing with inter-state sales of their goods or goods exports (selling the goods beyond the boundaries of the state where the business is registered).
 

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Goods or Services:

In this case, the taxpayer deals in the sale of taxable goods and services.  

In this case, the taxpayer deals in the sale of non-taxable goods and services.

 

Record and accounts maintenance Businesses that register under the composition scheme avoid accounting  and record-keeping. Businesses that register under the regular GST scheme ensure record-keeping and proper accounting. 
Online sales Composition scheme registered taxpayers have no plans of selling their goods or services through an online platform.

 

Regular GST scheme-registered taxpayers sell their goods or services through an online platform. 

 

Factors to consider when choosing between a regular taxpayer and composition scheme

When it comes to choosing between a composition scheme and a regular taxpayer, weigh your analysis based on the following factors –

Particulars

 

Regular GST Scheme Composition GST Scheme
Definition  

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A regular scheme for GST refers to a tax mechanism where a taxpayer is liable for collecting and paying GST on the value of supplied goods and services.

 

 

The Composition scheme for GST is created for small registered business owners. The annual turnover of their business is up to ₹ 1.5 crores. They file quarterly returns and pay taxes at a comparatively lower rate.

Returns filing  

The registered users need to file the following returns–

  For Tax paid annually on yearly return statement – Form GSTR-9C or GSTR-9.

  For Tax paid on yearly return statement on Quarterly Basis – GSTR-1.

  For Tax paid on yearly return statement on Monthly Basis – GSTR 3.

 

 

The registered users need to file the following returns–

  For Tax paid annually on yearly return statement – Form GSTR 4 (as per the 32nd council meeting).

  For tax paid on yearly return statements every month, Use form GST-9A.

  For Tax paid on yearly return statements every quarter – Form CMP-08.

 

Supply Businesses registered under the regular GST scheme can make intrastate and interstate goods and services supply.

 

Only intrastate goods and services can be made by businesses registered under the GST composition scheme.
Collection of tax
  • Taxpayers are liable for paying tax at different rates based on the category of goods or services supplied.

 

  • Registered taxpayers pay tax at comparatively lower rates.
Supply Services Regular taxpayers can supply all types of goods and services.
  • Composition taxpayers can only supply goods and services specified under composition scheme rules.

 

Non-eligibility for the scheme No exceptions. The following aren’t eligible for the composition scheme–

●Taxpayers conducting interstate supply of goods and services

● Suppliers of non-taxable goods

● Goods and services supplied via e-commerce websites

● Businesses dealing in production of pan masala, ice cream, or tobacco

● Businesses with turnover exceeding prescribed limits 

Specified Condition of Scheme Businesses with the same PAN can’t get registration under the composition GST scheme after registering under the regular GST scheme. The following are the major conditions of the Composition GST scheme–

  • Applicable for small businesses with up to Rs. 5 lakh or 10% of annual turnover.
  • Taxpayers pay tax at concessional fixed rates without ITC benefits.
  • Cannot supply exempted goods.
  • Required to mention on signboards/bills that registered under the composition scheme and not allowed to collect tax.
  • Businesses with the same PAN must either all register under composition or opt out altogether.
  • Reverse charge applies for supplies covered under it.

 

Document to issue

 

Tax invoice Bills of supply

 

 

Payment for GST  

  • Regular taxpayers pay GST based on Output GST (Reverse Charge Tax + Input GST)
  • Composition taxpayers pay GST amount out of pocket based on supplies made and Reverse Charge Tax

 

Merits ● No limit on business territory

● Input tax credit available

● Can sell through e-commerce portals

 

● Only intrastate supply allowed

● Lower tax obligation

● No ledger maintenance required, so higher liquidity

 

Demerits ● More compliance rules like multiple returns

● Less liquidity to include taxes in ledgers

● Proper accounting records mandatory

 

Territory limits – no interstate transactions

● No input tax credit availability

● Can’t supply via e-commerce or exempted goods

Restriction on Specific Economic Zone (SEZ)
  • No export restrictions
  • Can supply to SEZs and developers

 

  • Cannot supply goods to SEZs and developers

 

 

 

Condition for opting out:

  • Can opt-out anytime

.

 

Can only exit scheme by financial year-end.

 

 

 

Impact of business size, turnover, and input tax credit on registration choice

 Here are the key points around how business size, turnover, and input tax credit impact the choice of GST registration:

  • Smaller businesses with an annual turnover below Rs. 1.5 crore nationally or Rs. 75 lakh in special category states are eligible for the composition scheme. 
  • The composition scheme is designed for small businesses and has a lower tax rate but no input tax credit available.
  • The annual turnover limit applies to all businesses with the same PAN number. They must either register as composition or regular dealers, not a mix.
  • Larger businesses above the turnover limit must register as regular dealers to be eligible for the input tax credit. This allows them to claim tax credit on GST paid on inputs and reduce their overall tax outflows.  
  • Availability of input tax credit is an important consideration as it can significantly reduce the overall tax burden. Businesses must assess their annual turnover and input costs to determine if regular registration makes more financial sense.
  • Businesses need to carefully evaluate all factors like size, turnover, and ability to claim input tax credit to make an informed choice between composition and regular GST registration.

Suitability of regular taxpayer registration for different business types: 

If a taxpayer has multiple business segments, like groceries, electronic accessories, textiles, etc, under one PAN, they have to collectively register all businesses under one GST scheme. They do not have an option to register some businesses under the composition scheme and others under the regular scheme.

Long-term implications of regular taxpayer registration vs. composition scheme

While a buyer with a regular GST registration won’t get an input tax credit when purchasing from a composition taxpayer, the composition scheme offers valuable long-term benefits that can outweigh this. The key advantage is simplified GST compliance and reduced costs for small businesses. Taxpayers under this scheme pay a low, fixed tax rate on turnover rather than variable rates. Even though they cannot include tax in invoices or engage in interstate or e-commerce transactions, the composition scheme dramatically cuts accounting overheads for small firms. As such, it remains an attractive path for small businesses despite limitations in passing on taxes to regular-registered buyers. When weighed against the overhead reduction, the scheme can drive profitability and sustainability. Expanding firms can still switch later if wider business scope warrants the complexity and cash flow advantages of regular registration.

Making an informed decision about GST registration for your business

Regular GST Scheme:

  • Applicable for businesses with turnover above Rs. 1.5 crores/Rs. Seventy-five lakhs
  • Businesses can make inter-state and intra-state supplies
  • Required to file GSTR-1, GSTR-2, and GSTR-3 returns monthly/quarterly detailing sales, purchases, and tax payment
  • Can claim the input tax credit (ITC) on taxes paid on purchases to offset against taxes payable on sales
  • Higher compliance requirements in terms of record keeping and filing regular returns

Also Read: What Are The Requirements Of A Regular Taxpayer Under GST?

Composition GST Scheme:

  • Applicable for businesses with turnover doesn’t cross Rs. 75 lakhs
  • Businesses can make only intra-state supplies, no inter-state supplies allowed
  • Required to file only one annual return along with tax payment
  • Cannot claim ITC, but taxes paid are lower at 1%-5% against 18%-28% under regular scheme
  • Simpler compliance like no invoices or online filing required

Also Read: GST Registration – Who Can Opt For The Composition Scheme?

Key factors to consider for selection: business turnover, nature of supplies (inter/intra-state), ability to maintain compliance, availability of input credit.

A regular scheme is better if your business transactions are complex with inter-state dealings. The composition scheme offers simpler compliance for smaller intra-state businesses willing to forego ITC in return for lower tax rates. Carefully evaluate your business needs to opt for the suitable GST scheme.

Conclusion

Both the Composition and regular GST schemes come with their unique set of merits and demerits. The regular scheme is more flexible. And it allows taxpayers to apply for input tax credit claims. But it features a higher tax rate and more compliance procedures.

In contrast, the Composition scheme has lower tax rates and easy compliance requirements. The best part is it is ideal for small businesses. But it also has some limitations. Taxpayers with composition GST registration aren’t allowed to input tax credits. Moreover, they have to deal with restricted geographical boundaries for good supply. Assessing the specific circumstances and needs of businesses before choosing between the two GST schemes is recommended.

Also Read: What Are The Implications Of Different GST Registration Statuses

Frequently Asked Questions

  • Who is a regular taxpayer?

Taxpayers with yearly turnovers of up to ₹ 1.5 crores are regular taxpayers. The amount is ₹ 75 lakhs for special category states Himachal Pradesh and North Eastern states. They can reap the benefits of tax provisions for small businesses.

  • Are composition GST scheme registered dealers allowed to collect GST from buyers?

Businesses with composition scheme registration can’t issue GST or tax invoices. They are not allowed to collect Tax on the outward supply of goods or services.

  • What goods aren’t allowed for supply for a composition GST scheme registered dealer?

A Composition registered taxpayer can’t deal in ice cream, tobacco, or pan masala supplies. They have to pay normal tax rates for these goods.

  • How can I determine whether my GST is Composition or regular?

Go to the GST Portal homepage and select “Navigation Search Composition Taxpayer.” Next, click “Search” and then “Search Composition Taxpayer”. The taxpayer can check the status in this section.

  • Can a composition taxpayer make purchases from an unregistered dealer?

Yes, dealers registered under the composition GST scheme can buy goods from registered and unregistered dealers.

  • What are the penalty charges for a wrongfully enrolled composition taxpayer?

If tax officials find out the business is not eligible, it will be disqualified from the scheme. The same is applicable when the business wrongfully enrolls for the scheme. The business will be charged a penalty equivalent to the amount of Tax.

  • How often a composition dealer needs to file a return?

A taxpayer registered under the composition scheme needs to file only GSTR 4. It is to be filed once a year by April 30th of every financial year.

  • Who is not eligible for the Composition GST scheme?

Businesses dealing in the supply of goods or services that are exempt or nil rated.

Businesses whose annual turnover exceeds the prescribed threshold limit. Currently, Rs 1.5 crore for regular dealers and Rs 75 lakhs for Assam, Arunachal, Himachal, and Uttarakhand.

Businesses make inter-state supplies or supplies through e-commerce operators.

  • Can a dealer withdraw their Composition scheme application?

Yes, a dealer can withdraw their Composition scheme application within 30 days of filing form CMP-01 by filing form CMP-03.

  • Is it possible to switch from regular GST registration to a Composition scheme?

Yes, businesses registered under the regular GST scheme can switch to the Composition scheme before the start of the upcoming financial year by filing form CMP-02 before the appointed date.

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Samradni P

Meet Samradni Pradhan, a seasoned content writer with a passion for weaving narratives across diverse industries. Armed with a full-time MBA in Marketing, Samradni brings a wealth of experience garnered from elite advertising agencies such as Ogilvy and Mather and Lowe Lintas. With a dynamic career spanning 6 years, she has honed her craft by delving into various categories and niches, including technology, healthcare, fashion, lifestyle, and her speciality, BFSI.

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