In this article, we’re going to take a closer look at the advantages and disadvantages of opting for the composition scheme.

What are the advantages or merits of opting for the composition scheme?

There are various advantages for the persons opting to pay tax under the composition scheme. However, they can vary from business to business depending on the situation. So, the company has to carefully analyze whether to opt in or not for a composition tax. Below are the merits of the composition scheme:

Limited records and bookkeeping:
The scheme relieve the small taxpayers from the maintenance of detailed records and accounts, which eases them to manage their business effectively as they need not worry about books of accounts.

Simplified Compliances:
The composition taxpayers need to pay tax every quarter in CMP-08 form and need to file annual return GSTR-4 for a financial year, thus simplifying the compliance procedures.

Pay Tax at Composite Rate:
The composition taxpayers have to pay tax at the rate of 1%, 5%, 6% as applicable from case-to-case basis, unlike regular taxpayers paying tax at higher rates, for example, 5%, 12%, 18% & 28%.

High Liquidity:
Since the payment of tax is to be made to the Government every quarter at composite rates. Therefore, a business has good liquidity and money flow.

Reduced Compliance Cost:
Unlike regular taxpayers, the compliance cost is less as the GST returns need to be file quarterly. And the books of accounts & records are not required to be maintained.

No Need for Goods / Services Classification and GST Rates:
Under the composition scheme, the suppliers do not need to worry about the classification of goods or services or both and the rates that apply to them as they will have to pay the tax on the composite value and at the composite rate.

Competitive Advantage:
The suppliers under the composition scheme cannot charge GST on the bill. Hence, they sell their goods or services at a lower rate than the competitors who charge GST from the customers.

What are the disadvantages or demerits of opting for the composition scheme?

Following are the limitations/demerits/disadvantages of opting for composition scheme:

  • Such a person cannot carry business out of the state. Hence, there is limited territory for carrying the business
  • Such person cannot carry on its business through electronic commerce operator collecting TCS u/s 52
  • No Input Tax Credit can be availed by such persons
  • Such persons cannot supply non-taxable goods
  • Such persons cannot manufacture the notified goods