The Goods and Services Tax (GST) has transformed the Indian taxation landscape, providing a streamlined approach for businesses to meet their tax obligations. Understanding the composition and regular schemes in GST is essential for businesses to navigate the intricacies of the tax system effectively. In this article, we will explore the composition and regular schemes in GST, with detailed explanations and examples, So lets get Started.
Composition Scheme
The composition scheme is designed to simplify the tax compliance process for small businesses. Eligible taxpayers can opt for this scheme to avail of certain relaxations and lower tax rates. Let’s delve into the key aspects of the composition scheme with examples:
a. Tax Rates
Under the composition scheme, businesses are subject to lower tax rates based on their industry. For example, manufacturers pay a tax rate of 1%, traders pay 0.5%, and restaurants pay 5% GST.
Let’s consider an example to illustrate this –
Suppose Mr. A owns a small restaurant and opts for the composition scheme. His monthly revenue is INR 10 lakh. As per the composition scheme, he will pay 5% GST on his turnover, which amounts to INR 50,000. In this case, Mr. A benefits from a lower tax rate and simplified tax calculation.
b. Limited Input Tax Credit
Businesses under the composition scheme cannot claim input tax credit on their purchases. This means they are unable to offset the GST paid on their inputs against the GST liability on their outputs.
Let’s understand this with an example –
Mr. Sharma, a manufacturer, opts for the composition scheme. He purchases raw materials worth INR 2 lakh, on which he pays INR 10,000 as GST. However, since he is under the composition scheme, he cannot claim input tax credit for the GST paid on his purchases. Hence, he cannot reduce his tax liability by offsetting the input tax credit against his output GST.
c. Simplified Compliance
Simplified compliance is one of the main advantages of the composition scheme. Businesses under this scheme need to file quarterly returns instead of monthly returns, reducing the compliance burden.
Here’s an example to illustrate this –
Ms. Gupta operates a small trading business and chooses the composition scheme. She is required to file quarterly returns and pay taxes accordingly. This saves her time and resources compared to the regular scheme, where monthly returns need to be filed.
Regular Scheme
The regular scheme, also known as the normal scheme, applies to businesses that do not meet the eligibility criteria for the composition scheme or choose not to opt for it. Let’s explore the key features of the regular scheme, backed by examples:
a. Input Tax Credit
Unlike businesses under the composition scheme, those under the regular scheme can claim input tax credit on their purchases. This allows them to reduce their tax liability by offsetting the GST paid on inputs against the GST collected on outputs. Consider the following example:
Mr. B , a manufacturer, is registered under the regular scheme. He purchases raw materials worth INR 5 lakh and pays INR 25,000 as GST. He can claim input tax credit for the GST paid on his purchases and offset it against his output GST liability. This helps reduce his overall tax burden.
b. Detailed Compliance
Businesses under the regular scheme need to adhere to more extensive compliance requirements. This includes filing monthly or quarterly returns, maintaining detailed records of sales and purchases, and complying with other provisions of the GST law.
Let’s illustrate this with an example –
SEW Pvt. Ltd., a large retail chain, operates under the regular scheme. They are required to file monthly returns, maintain accurate records of their transactions, and comply with all GST provisions. Although the compliance requirements are more rigorous, SEW Pvt. Ltd. benefits from input tax credit and the flexibility to conduct business without the limitations of the composition scheme.
c. Applicable Tax Rates
The regular scheme follows the standard GST rates prescribed for specific goods and services as per the GST Council’s notifications.
Let’s consider an example –
Mr. Kumar runs a service-based business and is registered under the regular scheme. The standard GST rate for his service is 18%. When Mr. Kumar bills his customers for INR 10,000, he will charge 18% GST, amounting to INR 1,800. This is in line with the regular scheme’s tax rates.
Conclusion
Understanding the composition and regular schemes in GST is crucial for businesses in India to comply with tax regulations in 2023. The composition scheme offers simplicity, lower tax rates, and reduced compliance burdens, while the regular scheme provides the advantage of input tax credit and more detailed compliance requirements. By assessing their eligibility and business requirements, businesses can make informed decisions regarding the most suitable scheme for their operations. Consultation with tax professionals is recommended to determine the most suitable scheme based on the unique requirements and nature of your business.
