The Goods and Services Tax (GST) in India is a broad-based indirect tax that replaced many existing indirect taxes. The idea behind this reform is to simplify tax collection. GST-registered companies in India have an option to be either under the Regular Scheme or the Composition Scheme. Determining which scheme to select is crucial for tax compliance, seamless operations, and accurate accounting references. This blog post will compare the Composition Scheme and the Regular GST Scheme.
What is the Regular GST Scheme?
Regular GST Scheme is the standard scheme of tax that applies to businesses that have surpassed the limits of the composition scheme. In this scheme, companies are required to impose tax on consumers, keep records, and submit periodic GST returns.
The important characteristics of the Regular GST Scheme are:
- It is applicable to any business, irrespective of its size, whether small or big.
- Supply of goods and services is charged tax at normal rates (5%, 12%, 18%, 28%).
- Input Tax Credit (ITC) is also offered, whereby businesses are able to claim credit on GST refund on purchases, resulting in less tax liability.
- There should be regular GST returns, which should be submitted quarterly or monthly, depending on the turnover.
- Applicable in businesses which have inter-state supplies and require to claim ITC.
The Normal GST Scheme is suitable for businesses that have a high level of variation in their business transactions or have complex operations, as tax payments can be easily credited, and the business is free to operate within the GST framework.
Which is the Scheme of Composition under GST?
The Composition Scheme is a simplified GST scheme applicable to small businesses with a turnover of less than the specified threshold. This scheme enables companies to remit a specified percentage of their turnover as tax, as opposed to the usual GST process.
Some of the major characteristics of the Composition Scheme are:
- Valid for businesses with a turnover of not more than Rs. 1.5 crore Rs. 75 lakh in states under the special category.
- The payment of tax is done in percentages, 1% on manufacturers, 5% on restaurants and 0.5% on traders on goods.
- There is no such thing as the input Tax Credit, where business entities do not receive credit on the amount of GST paid on purchases.
- Streamlined returns filing – quarterly returns rather than monthly.
- Only the intra-state supply; the inter-state supply is prohibited under this scheme.
- Suited to small merchants, restaurants and manufacturers seeking simplicity of compliance.
The Composition Scheme is particularly beneficial for small businesses seeking ease of compliance and simplicity in accounting.
Differences in Regular GST and Composition Scheme
The two schemes are closely compared in terms of key parameters and this is as follows:
1. Eligibility
- Regular Scheme: This is applicable to any business, irrespective of whether it is a turnover.
- Composition Scheme: Set to limited businesses whose turnover does not exceed Rs. 1.5 crore (Rs. 75 lakh, in case of special category states).
2. Tax Rate
- Regular Scheme: GST will be imposed at normal rates (5, 12, 18, 28) on supplies.
- Composition Scheme: Taxpaying at a reduced percentage of turnover – lower rates of GST than normal.
3. Input Tax Credit (ITC)
- Regular Scheme: Companies are allowed to claim ITC and pay less tax.
- Composition Scheme: ITC cannot be used, which makes accounting easier, but more expensive in case the purchase of GST-taxed inputs is made.
4. Adhering to and Filing Returns
- Regular Scheme: This option involves filing monthly/quarterly GST returns (GSTR-1, GSTR-3B) with comprehensive tax records.
- Composition Scheme: It involves quarterly filing of returns (GSTR-4), making it easier to comply.
5. Applicability of Supply Type
- Regular Scheme: Applicable in intra state and interstate supplies.
- Composition Scheme: It can deal with intra-state only and inter-state is not allowed.
6. Invoices
- Regular Scheme: Tax invoices have to be issued, and the GST amount must be given.
- Composition Scheme: Is able to issue a bill of supply rather than tax invoices; GST is not charged independently to the customers.
7. Business Suitability
- Regular Scheme: Ideal for medium and large business enterprises, exporters and enterprises that venture into B2B business.
- Composition Scheme: Ideal when a small business, traders, and small restaurants need simplicity.
Benefits of the Regular GST Scheme
- Input Tax Credit makes the working capital better and helps decrease the tax payment.
- Appropriate in case of B2B transactions and interstate supply.
- It is transparent and compliant with the law, particularly in the case of bigger businesses.
- Scheduling variability in the management of the various GST rates on various products.
The Merits of the Composition Scheme
- Reduced compliance costs – basic returns and accounting.
- Lower taxation rate as a fixed share of turnover.
- No hassles of record-keeping among small businesses.
- Affordable to small traders and manufacturers who have small operations.
Conclusion
The selection of GST scheme must be determined by the size of your business, turnover and your operations. The Regular GST Scheme is best suited to businesses that want to enjoy complete ITC, interstate transactions and B2B transactions. Alternatively, the Composition Scheme is appropriate for a small business that intends to have a simple level of compliance, reduced tax and less paperwork.
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Frequently Asked Questions
1. What is the difference between Regular GST Scheme and Composition Scheme?
The Normal GST Scheme is applicable to all businesses; it enables Input Tax credit (ITC), and it also involves the filing of the GST returns in detail. The Composition Scheme applies to small businesses whose turnover is not more than Rs. 1.5 crore, in which there are fixed tax rates, no ITC and returns are simplified on a quarterly basis.
2. Who qualifies to be under the Composition Scheme in GST?
It is eligible for small businesses with a turnover of up to Rs. 1.5 crore (Rs. 75 lakh in special category states) and providing intra-state goods or services. This scheme cannot be adopted by the inter-state suppliers.
3. Is a business entitled to claim Input Tax Credit under the Composition Scheme?
No, Purchases cannot be claimed as ITC by the businesses under the Composition Scheme. The Normal GST Scheme is the only scheme that permits ITC which assists in the elimination of tax liability.
4. Frequency of filing of GST returns by businesses under each scheme?
Businesses under the Normal GST Scheme submit their monthly or quarterly returns (GSTR-1, GSTR-3B). Within the Composition Scheme, it is easier to comply with the scheme since quarterly returns filing (GSTR-4) is all that is required.
5. Is there a way a business could change from the Composition Scheme to the Normal GST Scheme?
Yes, Companies that have a turnover of more than the turnover threshold or those that voluntarily adopt the ITC may switch to the Normal GST Scheme, although they are required to abide by the due registration and filing of returns.
