The whole purpose of composition levy/scheme is to provide small taxpayers a level playing ground in the market against those big businesses.
As we all know that “to take some benefit, you have to sacrifice a bit also”. The same phrase applies to Dealers of Composition Scheme also.
Let’s get into it!
Demerits of Composition Scheme under GST
1. Input Tax Credit (ITC) Not Available
Under composition scheme, a dealer is required to pay a substantially lower amount of GST on total turnover and he is not eligible to take credit of tax paid on his purchases (input credit). Non-eligibility for INPUT credit may hurt your ultimate business profits particularly when your profit margin is less and the purchased goods carry high GST rates.
Refer this table to understand its impact:
| Serial no | Pariculars | Normal Taxpayer | Particulars | Composite Taxpayer |
| A | Total sales value( Include GST 18%) | 11800 | Total sales value (Include GST 2%) | 11800 |
| B | Sales before GST | 10000 | Sales before GST | 11569 |
| C | GST on sale (18%) | 1800 | GST on sale(2%) | 231 |
| D | Input Purchase | 9000 | Input Purchase | 9000 |
| E | GST on purchase @ 18% | 1620 | GST on Purchase @18% | 1620 |
| F | Total Purchase Price | 10620 | Total Purchase Price | 10620 |
| G | Net GST Liability (C-E) | 180 | Net GST Liability (C) | 231 |
| H | Net Profit (A-F-G) | 1000 | Net Profit (A-F-G) | 949 |
In the above illustration, the profit margin of the Normal taxpayer and Composite taxpayer is Rs.1000/- (10000-9000) and Rs.2569/-(11569-9000) respectively. Despite being a higher profit margin the ultimate profit of composite taxpayer (Rs.949/-) is lower than normal taxpayer (Rs.1000/-).
2. Prohibited To Charge GST from the consumer
Every dealer under the composite scheme is required to issue “Bill of supply” instead of Tax invoice. One of the major difference between the contents of the bill of supply and tax is invoice is tax amount disclosure.
Under bill of supply, a dealer is prohibited from collecting GST from their recipient/buyer.Which means that your buyer will not get any input tax credit. This may lead to loss of Business consumers.
3. Prohibited From Inter-State Supply
The eligibility criteria for getting registered as a Composite dealer under GST specifically excludes suppliers who are making inter-state supply(outside a state). To remain registered as a composite dealer he should not make the inter-state supply. Thus the potential reach of the business of a composite dealer is much lesser than a normal taxpayer under GST.
4. Transitional Provision Not Available
As per the transitional provision for CENVAT credit, a composite dealer is not eligible to take CENVAT credit of previous laws (VAT, Service tax, excise duty etc.) into GST. Thus a composite dealer has to forget about all the unclaimed and un-availed CENVAT credit of previous laws.
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About Author
Pravin Giri
(@Pravin) Twitter | FacebookPravin is a Qualified Chartered Accountant [CA]. Gives opinions on Income tax, GST, and finance.Find him on Twitter @Pravinkumargiri
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