H M R R & Associates

18. GST Composition vs. Regular Scheme: Choosing the Right Option for Your Business

When registering under GST, businesses can choose between the Composition Scheme and the Regular Scheme based on their size, nature of transactions, and compliance preferences. Both have their pros and cons, and selecting the right one can impact your tax liability and business operations. Let’s dive into a detailed comparison.

COMPOSITION SCHEME

The Composition Scheme is designed for small businesses to simplify their tax compliance and reduce their tax burden. It allows businesses to pay GST at a lower fixed rate on their turnover without claiming Input Tax Credit (ITC).

Turnover Limit under Composition Scheme:

For small businesses, traders, manufacturers, and restaurants with limited turnover, and for service providers under a special scheme.

₹1.5 crore per year (for most states).

₹75 lakh per year (for North-Eastern & hilly states).

₹50 lakh per year for service providers opting for the special composition scheme.

Pros of the Composition Scheme

Lower tax rates under the Composition Scheme compared to the Regular Scheme.
1. Manufacturers & Traders: 1% (0.5% CGST + 0.5% SGST)
2. Restaurants: 5% (2.5% CGST + 2.5% SGST)
3. Service Providers: 6% (3% CGST + 3% SGST) (Special composition scheme)
File returns quarterly instead of monthly
No need to maintain detailed tax invoices (only Bill of Supply is required), so fewer bookkeeping and reporting requirements.
Ideal for businesses that sell to end consumers (B2C) and do not need ITC.
Reverse Charge (RCM) on rent is not applicable for composition dealers, while regular taxpayers need to comply with the same. (Read more about RCM on rent in our blog no. 11)

Cons of the Composition Scheme

Under composition scheme, you cannot claim ITC (Input Tax Credit) for GST paid on purchases, leading to higher costs.
Not suitable for inter-state or e-commerce transactions like sale via Amazon, Flipkart, etc.
As the business grows and exceeds the turnover limit, it must switch to the Regular Scheme, which could complicate compliance.
Businesses dealing in ice cream, pan masala, and tobacco products are ineligible for registration under Composition Scheme.

REGULAR SCHEME

The Regular Scheme is the standard GST registration option, allowing businesses to charge and claim Input Tax Credit (ITC) while having higher compliance requirements. There is no upper limit for turnover. All businesses, regardless of size, can opt for the Regular Scheme.

Turnover Limit for Mandatory GST Registration:

Goods: Turnover exceeding ₹40 lakh (₹20 lakh for special category states).
Services: Receipts exceeding ₹20 lakh (₹10 lakh for special category states).
Inter-state businesses: No turnover limit—mandatory registration required.
E-commerce sellers: Must register under Regular Scheme, regardless of turnover.

Pros of the Regular Scheme

Businesses can claim ITC for GST paid on purchases which will reduce their overall tax burden.
Businesses can engage in inter-state sales, exports and e-commerce sales which will lead to dynamic growth of the business.
Ideal for B2B businesses that sell to GST-registered buyers who claim ITC.
No turnover restrictions, making it suitable for medium and large businesses.

Cons of the Regular Scheme

Monthly returns (GSTR-1, GSTR-3B) and annual returns are mandatory, increasing the compliance burden.
Need to issue proper tax invoices and maintain detailed records.
Tax liability must be calculated on each transaction, which can be complex and time-consuming, especially for businesses dealing with a high volume of transactions or intricate tax rules.
Tax rates are usually high (5%, 12%, 18%, or 28%) while compared to composition scheme, which may increase costs for small businesses.

Choosing between the GST Composition Scheme and the Regular Scheme depends on several factors, including the nature of your business, turnover, and operational requirements. Small businesses with limited turnover and no intra-state operations may find the Composition Scheme beneficial due to its lower tax rates and simplified compliance. On the other hand, larger businesses, service providers, and those engaged in interstate trade are better suited for the Regular Scheme, which allows for input tax credit and has no turnover restrictions.

Got questions about GST registration? Reach out to us via phone or email.

~ Compiled by Venkadachalamurugan, Audit Assistant, H M R R & Associates.