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Ever since GST was launched on 1st July, the implementation of the law has undergone a multitude of changes. On various fronts, the government has softened its stand and has brought in significant changes to the original law – for instance, GST composition scheme changes, rate changes etc. – to make life easier for the small business, thus allowing for better adaption of GST across the country. The 22nd and 23rd GST Council meetings on the 6th of October and 10th of November, 2017 are testimony to this fact.

One of the major aspects of GST which seems to be under the state of constant change is the composition scheme. We have now seen the threshold limit for composition change from INR 50 Lakhs to INR 75 Lakhs, then from INR 75 Lakhs to INR 1 Crore, and as one reads this, the Council is already deliberating the possibility of increasing this limit to INR 1.5 Crore, and is looking to alter the GST Law accordingly.

On paper, this surely does come across as a huge relief. According to the Finance Minister Mr. Arun Jaitley, this change will bring about 15.5 lakh companies with a turnover of less than INR 1 Crore, into the composition fold. The reduced tax rates and reduced periodicity of filing returns indeed is tempting, but how beneficial are the GST composition scheme changes, really? Let’s explore.

Major GST Composition Scheme Changes

Before we get into the pros and cons, let us summarise the major GST Composition Scheme changes:

  • Increase in Threshold Limit – Currently INR 1 Crore, proposed to be increased to INR 1.5 Crore
  • Service Providers allowed to avail the scheme – Now, not just restaurants, but all types of service providers can avail composition scheme. They can supply services up to INR 5 Lakhs per annum, which will be exempted from tax.
  • Suppliers of exempt supplies allowed to avail the scheme – Earlier, a supplier of exempt supplies was considered ineligible to avail the composition scheme, but now, a taxable person who is engaged in supply of exempt supplies, and meets all other eligibility conditions, will be allowed to opt for the composition scheme.
  • Rate of Tax – While the 5% specified for small restaurants continue, the rate for all traders and manufacturers has now been unified at 1%.
  • Only taxable supplies to be considered to calculate turnover – For traders, the rate of tax under composition scheme will be levied on the aggregate turnover, which only includes taxable supplies, and not exempt supplies.
  • Option to avail the scheme open till this Financial Year – Both migrated and new tax payers, will have the option to avail composition scheme till the 31st of March, 2018.

Four Major Concerns of Composition Scheme

  • Negative Impact on Profitability and Competitiveness – Under the composition scheme, a dealer does not have to collect GST on his outwards supplies, and conversely, he is not eligible to claim ITC on all his inward supplies. This basically means, that while he is liable to pay tax at a flat rate to the government, there is no way he can collect the tax from his customers. As a result, the tax amount gets added to his cost – which he can manage, either by absorbing it, or by passing on the cost to his customers. If he absorbs it, his profitability takes a hit; if he passes it on, his competitiveness takes a hit in comparison to regular dealers.
  • No Reduction in Compliance Efforts – A quarterly return instead of a monthly return may sound like a boon, but the reality is starkly different. The return, whether monthly or quarterly, is an invoice-based return and not a turnover based return. This basically means that on the date of return filing, a regular dealer, with an annual turnover of more than INR 1.5 Crores, will typically deal with the transactions of a month, while a composition dealer (along with a regular dealer with an annual turnover of less than INR 1.5 Crores) will typically deal with the transactions of 3 months – and the latter scenario is definitely more cumbersome. In short, this doesn’t really mean reduction in compliance efforts, but rather an increase. SMEs should be careful, not to interpret this as “no need to maintain proper accounts for three months”, but should be cognizant of the fact that even a quarterly return will require them to maintain compliant books of accounts.
  • Restrictions on Trade Mode remain – While a slew of initiatives have been declared for the composition scheme, it continues to remain out of reach for e-commerce players and inter-state suppliers. The increase in the limit, is bound to see more traders opting for the composition scheme, but it would also result in their wings being clipped, if they ever want to expand the scope of their business. This is counter-productive towards the original intention of GST to encourage “one nation, one tax, one market”.
  • Dilemma for Restaurants – It will be interesting to observe the behaviour of those restaurants, who have now become eligible to avail the composition scheme. While a regular dealer operating a restaurant, will be collecting GST at 5% and passing on the same to the government, a composition dealer operating a restaurant will also be paying 5% tax to the Government, and recovering the same from the customers. Either case, if the public ignores the tax invoice, the effective expenditure from the restaurant goer’s pocket will be the same. Over a period of time, the public would obviously prefer to go to an AC restaurant, which is serving food at almost the same price as a small eatery next door; and this is only bound to hit the businesses of small eateries across the country. The only way out of this dilemma is that small restaurants will need to scale up their infrastructure to have a level playing ground with AC restaurants, which of course will have an impact on their working capital and cash flows.

In short, the composition scheme has more than what meets the eye. SMEs across the nation, will need to think thoroughly before opting for the composition scheme, and take an informed decision.

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Pramit Pratim Ghosh

Author: Pramit Pratim Ghosh

Pramit, who has been with Tally since May 2012, is an integral part of the digital content team. As a member of Tally’s GST centre of excellence, he has written blogs on GST law, impact and opinions - for customer, tax practitioner and student audiences, as well as on generic themes such as - automation, accounting, inventory, business efficiency - for business owners.