Composition Scheme : Whether to opt or not ?

It is often said that the small and medium businesses are at the heart of Indian economies’ demand and supply market. To cater to these small businesses and to provide a simplified and hassle-free scheme for compliance requirements under GST, the concept of a composition levy scheme was introduced in the GST law. The composition scheme is almost similar to the composition schemes earlier in VAT regimes. It allows the taxpayer to pay tax at a fixed rate specified in law without allowing credit of taxes paid on inputs and input services. It reduced procedural compliances also.

For availing composition scheme (for goods and restaurant service) aggregate turnover in the preceding financial year should not exceed Rs. 1.5 Crore for states and union territories not covered below

However, in case of following states aggregate turnover (for goods and restaurant service) limit should not exceed Rs.75 Lakh

1. Arunachal Pradesh,
2. Manipur,
3. Meghalaya,
4. Mizoram,
5. Nagaland,
6. Sikkim,
7. Tripura,
8. Uttarakhand

Only manufacturers of goods, dealers, and restaurants (not serving alcohol) can opt for the composition scheme under Section 10 of CGST Act. However, service providers can opt into a similar scheme for composition dealers notified by the CGST (Rate) Notification No. 2/2019 dated 7^thMarch 2019 subject to condition that total turnover limit does not exceed Rs. 50 Lakh.

The GST Rates under composition scheme are as follows:

a. For Goods manufacturers and traders: 1% (Divided as 0.50% CGST & 0.50% SGST).

b.  For Restaurants not serving alcohol: 5% (Divided as 2.50% CGST & 2.50% SGST).

c.  For Service providers: 6% (Divided as 3% CGST & 3% SGST).

Often the question is asked whether to opt for the composition scheme or not. The Composition Scheme is more Profitable than Normal Scheme or not is a very debatable question. Let us try to check whether it is profitable or not with few examples.

Example -1

Let us consider a case of a dealer dealing in goods liable for GST @ 18% and is having a Gross Profit Margin of 5%. .

If Profit Margin =5% of Sale then total Purchase shall be of Rs. 95 on sale of Rs. 100.

It is further presumed that the dealer is purchasing the goods from the GST registered person who has not opted for composition scheme.

Description	Sale by Dealer registered as a Normal Taxpayer	Registered as a Taxpayer under Composition Scheme
Total Purchase Value	95   [Purchase amount – Rs. 80.50 + GST Rs. 14.50= Total Rs. 95.00]	95   [Purchase amount – Rs. 80.50 + GST Rs. 14.50= Total Rs. 95.00]
Total Sale Value	100   [Sale amount – Rs. 84.75 + GST Rs. 15.25= Total Rs. 50.00]	100   [Sale amount – Rs. 100 + GST Rs. 1= Total Rs. 100] **
Net GST Liability (Outgo from pocket)	0.75   [15.25-14.50]	1
Net Profit	4.25   [100-95-0.75]	4   [100-95-1]

**-(As a composition dealer is not allowed to collect composition tax from the buyer)

According to the First table GST liability in Composition scheme is more than GST liability in Normal scheme. As a result, Net profit of the dealer is less, so in this case, Composition Scheme is less profitable than Regular Scheme. Dealer should opt for Regular Scheme.

Example -2

Let us consider a case of a dealer dealing in goods liable for GST @ 18% and is having a Gross Profit Margin of 50%. .

If Profit Margin =50% of Sale then total Purchase shall be of Rs. 50 on sale of Rs. 100.

Description	Sale by Dealer registered as a Normal Taxpayer	Registered as a Taxpayer under Composition Scheme
Total Purchase Value	50   [Purchase amount – Rs. 42.37 + GST Rs. 7.63= Total Rs. 50.00]	50   [Purchase amount – Rs. 42.37 + GST Rs. 7.63= Total Rs. 50.00]
Total Sale Value	100   [Sale amount – Rs. 84.75 + GST Rs. 15.25= Total Rs. 50.00]	100   [Sale amount – Rs. 100 + GST Rs. 1= Total Rs. 100] **.
Net GST Liability (Outgo from pocket)	7.62   [15.25-7.63]	1
Net Profit	42.38   [100-50-7.62]	49   [100-50-1]

**– (As a composition dealer is not allowed to collect composition tax from the buyer)

According to the table GST liability in Composition scheme is less than GST liability in Normal scheme. So, Composition Scheme is more profitable than Regular Scheme. Dealer should opt for Composition Scheme.

Example -3

Let us consider a case of a dealer dealing in goods liable for GST @ 18% and is having a Gross Profit Margin of 85%. .

If Profit Margin =85% of Sale then total Purchase shall be of Rs. 15 on sale of Rs. 100.

Description	Sale by Dealer registered as a Normal Taxpayer	Registered as a Taxpayer under Composition Scheme
Total Purchase Value	15   [Purchase amount – Rs. 12.71 + GST Rs. 2.29= Total Rs. 15.00]	15   [Purchase amount – Rs. 12.71 + GST Rs. 2.29= Total Rs. 15.00]
Total Sale Value	100   [Sale amount – Rs. 84.75 + GST Rs. 15.25= Total Rs. 50.00]	100   [Sale amount – Rs. 100 + GST Rs. 1= Total Rs. 100] **.
Net GST Liability (Outgo from pocket)	12.96   [15.25-2.29]	1
Net Profit	72.04   [100-15-12.96	84   [100-15-1]

**-(As a composition dealer is not allowed to collect composition tax from the buyer)

According to the third table GST liability in Composition scheme is less than GST liability in Normal scheme. As a result, Net profit of dealer is more so, Composition Scheme is more profitable and beneficial than Regular Scheme. Dealer should opt for Composition Scheme.

We can observe from the above table as the profit margin increases composition scheme would be beneficial than normal Scheme.

So, from the above tables, you may understand that profit making is totally dependable upon you, specially it depends on how you set Sales value regarding Purchase value. I think there is a scope to make more profit in Composition scheme if you want. Also, Composition scheme is very simple and need to file one return per quarter. Only one thing that may makes you mind negative about this scheme is, no ITC available in Composition scheme.

From,

Krishnakant Jakhotia,

Mobile No:- 9422507911

Email Id :- taxtalknew@gmail.com