According to the existing Goods and Services Tax (GST) system in India, an individual or company has the option to choose between the different modes of payment of taxes and compliance out of the two available, namely, the regular scheme and the composition scheme. An entity is required to understand the major differences between the above-named tax schemes, keeping in mind the best suitability of the schemes for their operations and compliance capabilities.
Difference Between Regular GST and Composite GST Schemes
The Regular GST Scheme
This scheme has been designed by the government to cater the needs of the entities who are engaged in the business which handle the turnover which are large in nature and can manage the tax compliance which are more detailed. Under this regular GST scheme, businesses must maintain a detailed records for the transactions which take place, regularly file monthly returns and pay GST on the value of goods and services supplied.
Advantages of the Regular Scheme
- Input Tax Credit: Businesses has the option claim ITC on their purchases, which results in reducing their overall tax liability.
- No Operational Restrictions: This is very much suitable for businesses which are involved in interstate trade and service providers.
- Growth Potential: Businesses can grow without needing to worry about switching schemes every time their turnover increases.
Disadvantages of the Regular Scheme
- Higher Compliance: This scheme involves a lot of compliances such as monthly returns and annual returns are mandatory in nature which in turn increases the compliance burden.
- Complex Tax Calculation: Tax liability must be calculated on each transaction, which can be complex and time-consuming, especially for businesses dealing with a high volume of transactions or intricate tax rules.
- Higher Tax Rates: The tax rates are relatively on a higher side as compared to the Composition Scheme which results in impacting the cash flow.
The Composition GST Scheme
The composition GST scheme is best suited for small business entities that have a turnover of up to 1.5 crores. It aims to simplify tax compliance by allowing these business entities to pay a fixed rate of tax on their annual turnover and file quarterly returns. This scheme, though, aims at reducing the compliance burden, but it also comes with certain types of restrictions, such as the disability to claim input tax credits and the limitations on interstate transactions.
Advantages of the Composition Scheme
- Lower Tax Rates: The tax rates under the Composition Scheme are relatively on a lower side as compared to the Regular Scheme. For example, manufacturers and traders are taxed at 1%, restaurants at 5%, and other service providers at 6%.
- Simplified Compliance: The Composition Scheme requires the filing of quarterly returns and annual returns which in turn aims at reducing the compliance burden.
- Ease of Calculation: Tax liability the Composition Scheme is solely calculated on the basis of the annual turnover which makes it easier to compute and pay taxes.
Cons of the Composition Scheme
- No Input Tax Credit (ITC): As per the Composition Scheme the businesses are not entitled to claim ITC on their purchases as a result it increases their overall tax liability.
- Limited Operations: The Composition Scheme not suitable for the businesses which are involved in interstate transactions or businesses those provide services (except restaurants).
- Restricted Growth: As the business grows and exceeds, the turnover of such businesses also increases, so it must switch to the Regular Scheme, which could complicate compliance.
- Limited to Domestic Sales: Businesses under this scheme are restricted to carrying out transactions within the state or intra-state sales only. They are not allowed to undertake inter-state sales or exports.
- No Tax Collection: Another restriction is that businesses cannot collect tax from their customers. This means the tax paid under the Composite Scheme is a cost to the business.
Major Points of Difference Between the Regular and Composition GST Schemes
Below is a detailed comparison highlighting the differences between the regular and composition GST schemes:-
| Particulars | Regular GST Scheme | Composition GST Scheme |
| Meaning | Tax mechanism where registered taxpayers collect and pay GST on the value of goods and services supplied. | Designed for small taxpayers with a turnover of up to? 1.5 crores, paying tax at a lower rate with simplified compliance. |
| Filing of Returns | Monthly/quarterly returns: GSTR-1, GSTR-3B, and annual return GSTR-9. | Quarterly returns: CMP-08 and annual return GSTR-4. |
| Supply | It can be made interstate and intrastate. | Restricted to intrastate supply only. |
| Tax Collection | GST is collected at various rates depending on the type of goods/services. | Lower tax rate, paid on turnover. |
| Supply Services | Can supply all types of services. | Limited to specific services. |
| Not Eligible To Opt | No exceptions. | Excludes interstate suppliers, non-taxable goods suppliers, e-commerce operators, and specific product manufacturers like ice cream, tobacco. |
| Specified Conditions | No restrictions for PAN-based registration under regular GST. | You cannot claim the input tax credit, but you must display your registration status prominently. A reverse charge mechanism applies. |
| Document Issued | Tax Invoice | Bill of Supply |
| GST Payment | GST payable as Output GST – Input GST + Tax on Reverse Charge. | GST is payable from the pocket on supplies and reverse charge. |
| Merits | Unlimited business territory, input tax credit available, can sell via e-commerce. | Less compliance, lower tax rates, no ledger maintenance. |
| Demerits | More compliance and detailed accounting are required. | Limited business territory, no input tax credit, restricted from certain goods supply. |
| Restriction on SEZ | No restriction on export or SEZ supplies. | Cannot supply to SEZ or SEZ developers. |
| Opt-Out Conditions | You can opt-out anytime. | Must stay until financial year-end. |
Various Scenarios to understand the Regular and Composition Scheme
To better understand the practical implications of the Regular and Composition Scheme, we can consider the following examples:-
Example 1: Small Retail Shop
Turnover: ₹50 lakhs per annum.
Nature of Business: Selling goods within the state.
Best Scheme: Composition Scheme. The lower tax rate and simplified compliance are beneficial for a small retail shop.
Example 2: Mid-Sized Manufacturing Unit
Turnover: ₹2 crores per annum.
Nature of Business: Manufacturing goods and selling both within and outside the state.
Best Scheme: Regular Scheme. The ability to claim ITC on inputs and the need for interstate transactions make the Regular Scheme more suitable.
Example 3: Service Provider
Turnover: ₹30 lakhs per annum.
Nature of Business: Providing consultancy services across multiple states.
Best Scheme: Regular Scheme. Service providers are generally not eligible for the Composition Scheme (except for specific cases like restaurants), and the ability to claim ITC is crucial for reducing tax liability.
Selection of the Right Scheme by a business entity
The decision of selection between the Regular and Composition GST schemes should align with the business model, operational needs, and long-term objectives of an organization. It’s also important to periodically review the choice from time to time with the growth of the business. The GST framework of India allows businesses to transition between schemes under certain conditions, so a business has the option to switch between different schemes if their situation changes by making sure that they always operate under the most beneficial arrangement. The selection of the scheme which is best suited for the business may depend upon the following factors:-
-
Annual Turnover
Regular GST Scheme: If your business has a high annual turnover that exceeds the threshold limit for the Composition Scheme (typically Rs. 1.5 crores in India), you must opt for the Regular GST Scheme.
Composition Scheme: Ideal for small businesses with a turnover below the specified limit seeking to simplify their GST compliance and reduce the frequency of tax filings.
-
Input Tax Credit
Regular GST Scheme: Choose this if your business frequently purchases taxable goods and services for production or resale. The ability to claim an Input Tax Credit (ITC) can significantly reduce your net GST liability.
Composition Scheme: If ITC is not a significant factor for your business—either because you have minimal GST on purchases or because your operations are mostly service-oriented with less input tax—this scheme could be more advantageous.
-
Interstate Sales and E-commerce Operations
Regular GST Scheme: Required if your business involves interstate sales, exports, or supplies through e-commerce platforms. The Composition Scheme restricts these activities.
Composition Scheme: Suitable for businesses operating within their home state, with local sales only.
-
Compliance Burden
Regular GST Scheme: If your business can manage compliance requirements, including monthly filings and maintaining detailed transaction records, this scheme offers more flexibility and benefits.
Composition Scheme: opt for this scheme if simplifying compliance, reducing paperwork, and minimizing filing obligations are priorities for your business.
-
Business Growth and Expansion Plans
Regular GST Scheme: Ideal for businesses planning to expand beyond their state or explore e-commerce channels. It offers the flexibility needed for growth and diversification.
Composition Scheme: Best for businesses content with operating at a smaller scale or those aiming for steady-state operations without immediate expansion plans.
Conclusion
The two schemes offer some advantages and disadvantages depending upon the model and style of a business entity. The regular scheme majorly focuses on flexibility and ITC, but it requires the business to follow strict compliance. However, the composition schemes aim to reduce the compliances and taxes that are most required for small businesses, but they have their own limitations, as discussed above. The business entity must identify its own tailored needs and select the right scheme.
Related Services
