In India’s taxation system, Goods and Services Tax (GST) is an important component. It is aimed at simplifying tax and enhancing compliance. Every GST-registered business must choose between two taxation schemes: the GST Composition Scheme and Regular GST Scheme. Both have their advantages and disadvantages. Businesses must understand their suitability due to the different tax rates, requirements, and overall effects.
Understanding the GST Composition Scheme
The GST Composition Scheme is a simple tax option for small businesses. It helps reduce compliance burden and offers an easy tax payment process. Under the GST Composition Scheme, taxpayers are required to pay tax at a fixed percentage of their turnover, with fewer GST compliance requirements compared to the regular scheme.
Eligibility Criteria for GST Composition Scheme
- Businesses with an annual turnover limit of up to Rs. 1.5 crore (Rs. 75 lakh for special category states, runachal Pradesh, Manipur, Meghalaya) in the preceding financial year can opt for the GST composition scheme.
- Only manufacturers, traders, and restaurants (excluding alcohol-serving ones) are eligible.
- Service providers with an annual turnover of up to Rs. 50 lakh can opt for the scheme.
- The scheme does not apply to inter-state suppliers, e-commerce operators, or businesses engaged in the supply of non-taxable goods.
GST Composition Scheme Tax Rates (2024)
- Manufacturers and traders: 1% (0.5% CGST + 0.5% SGST)
- Restaurants (not serving alcohol): 5% (2.5% CGST + 2.5% SGST) (They cannot claim ITC under this scheme.)
- Service providers: 6% (3% CGST + 3% SGST)
Benefits of the GST Composition Scheme
- Lower Tax Rates: Businesses pay a fixed, lower tax rate instead of the standard GST rates.
- Reduced Compliance: No need to file monthly GST returns; only quarterly GST return filing is required.
- Easier Record-Keeping: Less paperwork and documentation compared to the regular scheme.
- Better Cash Flow Management: Lower tax liability ensures businesses have more liquidity for operations.
Disadvantages of the GST Composition Scheme
- No Input Tax Credit (ITC): Businesses cannot claim ITC on purchases.
- Limited Eligibility: Inter-state businesses and e-commerce sellers are ineligible.
- Restricted Business Growth: The turnover limit (Rs. 1.5 crore) restricts scalability.
- Tax on Entire Turnover: Tax is calculated on total turnover, not just value addition.
Understanding the Regular GST Scheme
The Regular GST Scheme is available to businesses of any turnover that want to claim Input Tax Credits and do not qualify for the Composition Scheme. The Regular GST Scheme requires businesses to apply GST to their sales while taking ITC claims and maintain standard filing regulations for GST returns.
GST Tax Rates in Regular Scheme
The tax rates under the regular GST scheme vary based on goods and services, ranging from 0% to 28%, with standard slabs of 5%, 12%, and 18%.
Benefits of the Regular GST Scheme
- Claim Tax Credit: Businesses can get back the GST paid on raw materials and services.
- No Turnover Limit: Ideal for businesses earning more than ₹1.5 crore.
- Sell Across States: Sell Across States: Businesses can trade freely across India, except those registered under the Composition Scheme, which cannot engage in interstate sales.
- Better Compliance: Helps large businesses stay transparent and trustworthy.
Disadvantages of the Regular GST Scheme
- Higher Compliance Requirements: Monthly and annual GST return filing is mandatory.
- Complexity in ITC Management: Requires maintaining purchase records and tax invoices.
- Higher Tax Liability: Businesses must charge GST at applicable rates, increasing product/service costs.
GST Composition Scheme vs. Regular Scheme: A Comparison
Feature | GST Composition Scheme | Regular GST Scheme |
Eligibility | Businesses with turnover up to Rs. 1.5 crore, but for service providers, it is specifically Rs. 50 lakh. | No turnover limit |
GST Tax Rates | 1% for traders, 5% for restaurants, 6% for service providers | 5%, 12%, 18%, 28% (based on goods/services) |
GST Return Filing | Quarterly | Monthly & Annual |
Input Tax Credit (ITC) | Not available | Available |
Business Growth | Restricted due to turnover cap | No restriction on expansion |
Compliance Burden | Low | High |
Interstate Sales | Not allowed | Allowed |
Which One to Choose?
Who Should Choose the GST Composition Scheme?
- Small businesses with turnover below Rs. 1.5 crore.
- The composition scheme applies to organizations focusing on intra-state product distribution.
- GST compliance simplification and reduced tax liability seekers make up one of the potential client groups for this system.
- Business organizations which do not benefit from using ITC on their purchases.
Who Should Choose the Regular GST Scheme?
- Businesses with turnover above Rs. 1.5 crore.
- Those engaged in inter-state trade.
- Businesses needing ITC to reduce their tax burden.
- Enterprises dealing in high-value goods and services.
Can Service Providers Opt for the GST Composition Scheme?
Service providers who have annual turnovers below Rs 50 lakh can choose the 6% GST composition scheme. The service providers can choose this 6% GST composition scheme when their annual turnover is below Rs. 50 lakh but only for a specific range of services.
Here are the list of the services:
Service Providers (small businesses offering services like legal, consulting, technical, accounting, etc.).
Mixed Suppliers (businesses engaged in both goods and services but primarily dealing in services).
Intra-State Supply Only – The taxpayer must not engage in interstate supply of services or goods.
Not Supplying through E-commerce Operators – Businesses selling via e-commerce platforms liable for TCS (Tax Collected at Source) (e.g., Amazon, Flipkart, Zomato) are not eligible.
Not Supplying Non-Taxable or Exempt Services – The taxpayer should not be supplying services that are exempt from GST.
Not a Casual Taxable Person or Non-Resident Taxable Person – These categories cannot opt for the scheme.
GST Filing Requirements for Composition and Regular Taxpayers
- Composition Scheme: Businesses must file GSTR-4 (quarterly).
- Regular Scheme: Requires GSTR-1 (monthly), GSTR-3B (monthly), and GSTR-9 (annual return).
Conclusion
Businesses need to select between the GST Composition Scheme or Regular GST Scheme based on their size as well as the nature of operations and expansion expectations. Small businesses that operate locally with limited funding should consider the GST Composition Scheme yet larger enterprises need to select the Regular GST Scheme to get complete ITC benefits and interstate possibility. Businesses need to examine these two options alongside GST regulations in order to maximize their tax benefits.
Businesses should seek professional tax advice to determine the best GST scheme for them.
GST Composition Scheme vs. Regular Scheme: Which One to Choose (FAQ’s)
The GST Composition Scheme is for small businesses with turnover up to ₹1.5 crore, offering lower tax rates and simpler compliance. The Regular GST Scheme applies to all businesses, allowing Input Tax Credit (ITC) and interstate trade but requiring monthly tax filings.
No, businesses under the GST Composition Scheme cannot engage in interstate sales. They are only allowed to sell within their registered state.
The scheme simplifies taxation by charging a fixed tax rate on total turnover, reducing compliance burden and avoiding the need for detailed tax calculations on each transaction.
If a business crosses ₹1.5 crore in turnover during a financial year, it must switch to the Regular GST Scheme and comply with standard GST rules from the following month.
Yes, but only if their annual turnover is below ₹50 lakh. In this case, they will be taxed at a fixed rate of 6% (3% CGST + 3% SGST).
No, businesses under the Composition Scheme cannot claim ITC on their purchases. This means they cannot offset the tax paid on inputs against their tax liability.
- Composition Scheme: Quarterly return (GSTR-4) and annual return (GSTR-9A).
- Regular Scheme: Monthly returns (GSTR-1, GSTR-3B) and annual return (GSTR-9).
