Choosing Between the Composition and Regular Schemes under GST: A Comprehensive Guide

Introduction

Goods and Services Tax (GST) is a pivotal tax reform in India, streamlining indirect taxation for businesses across sectors. One of the fundamental decisions every registered taxpayer must make is choosing between the Composition Scheme and the Regular Scheme. This decision significantly impacts tax liability, compliance obligations, and overall business efficiency.

The Composition Scheme simplifies GST compliance for small businesses by offering lower tax rates and reduced filing requirements. Conversely, the Regular Scheme provides businesses with the advantage of claiming Input Tax Credit (ITC) and conducting inter-state transactions, albeit with higher compliance obligations. Importantly, under Rule 3(3) of the CGST Rules, 2017, businesses wishing to opt for the Composition Scheme must file Form GST CMP-02 before the end of the financial year, specifically before 31st March 2025, to ensure smooth compliance and transition.

Businesses must carefully evaluate profit margins, transaction values, transaction types (B2B/B2C), and GST rates while deciding on the GST scheme. The following matrix clearly indicates the preferred scheme:

For instance, consider fertilizers with a margin of ₹5 and a GST rate of 5% on an MRP of ₹300. Under the Regular Scheme, GST payable is ₹0.25 (5% of ₹5 margin). However, under the Composition Scheme, GST payable would be ₹3 (1% of ₹300), making the Regular Scheme more beneficial.

Another example is gold worth ₹80,000 with a margin of ₹1,000 and a GST rate of 3%. GST payable under the Regular Scheme would be ₹30 (3% of ₹1,000 margin). Under the Composition Scheme, GST payable would be ₹800 (1% of ₹80,000), a significantly increasing tax burden, making the Regular Scheme preferable.

Here, we have tried to identify the best option between the Regular and Composition schemes based on our knowledge and professional experience, explaining clearly through 15 key considerations.

1. Aggregate Turnover - Eligibility Criteria

• Composition Scheme: Suitable for businesses with an annual aggregate turnover of up to ₹1.5 crores (₹75 lakhs for special category states).
• Regular Scheme: Mandatory for businesses exceeding the prescribed turnover limit but also available for businesses opting for Input Tax Credit (ITC) benefits.

2. Nature of Transactions

• Regular Scheme: This permits both intra-state and inter-state transactions, making it suitable for inter-state trade.
• Composition Scheme: Restricted to intra-state transactions only, ideal for single-state operations.

3. GST Rates - Taxation Structure

Regular Scheme: Standard GST rates of 5%, 12%, 18%, and 28%, based on goods/services.

Composition Scheme: Fixed concessional tax rates:

• 1% traders/manufacturers (0.5% CGST + 0.5% SGST)
• 5% restaurant services (2.5% CGST + 2.5% SGST)
• 6% service providers (3% CGST + 3% SGST)

4. Input Tax Credit (ITC)

• Regular Scheme: Allows Input Tax Credit (ITC), reducing tax liabilities.
• Composition Scheme: No ITC available, resulting in tax on entire turnover.

5. Compliance Requirements - Filing of Returns

• Regular Scheme: Monthly filings: GSTR-1 Monthly, GSTR1-IFF, GSTR-3B, Annual GSTR-9.
• Composition Scheme: Simpler filings Quarterly CMP-08, Annual GSTR4

6. Type of Goods - Exclusions

Composition Scheme Certain goods excluded from Composition Scheme. As per Section 10(2) of the CGST Act, 2017, read along with relevant rules, the following goods manufacturers are specifically not eligible:

• Ice Cream and Other Edible Ice, whether or not containing cocoa.
• Pan Masala.
• All goods of Tobacco and Manufactured Tobacco Substitutes.
• Aerated Water (Beverages).

Thus, any Registered Person manufacturing any of these products cannot opt for the Composition Scheme under Section 10 of the CGST Act, 2017.

Regular Scheme applies without exclusions.

7. Service Providers

• Regular Scheme is broadly applicable to all service providers, allowing inter-state operations and ITC claims.
• Composition Scheme restricts eligibility to service providers with turnover ≤ ₹50 lakhs.

8. Service Portion Limitation

Composition Scheme limits service provision to 10% of turnover or ₹5 lakhs, whichever is higher. Regular Scheme has no such limits.

9. Reverse Charge Mechanism (RCM)

• Regular Scheme: Allows ITC on RCM. For instance, a cotton trader buying cotton from farmers under RCM and selling to cotton mills can claim ITC, making transactions efficient and cost-effective.
• Composition Scheme: No ITC on RCM. For example, a cotton trader purchasing from farmers under RCM but unable to claim ITC will incur higher costs.

10. Stock Management & Scheme Transition

When shifting from Regular to Composition, businesses must reverse previously claimed ITC on closing stock, adding a financial burden. Moving from Composition to Regular allows claiming ITC on existing stock, improving cash flow.

11. Compliance Simplicity

Composition Scheme significantly reduces compliance complexity, ideal for small businesses. Regular Scheme demands detailed documentation and frequent filings.

12. Late Fees and Penalties

Late payment and penalties are higher under the Regular Scheme. Composition Scheme typically has lower penalties for non-compliance.

13. Profitability - GST Implications

Regular Scheme aligns GST payable closely with actual profit margins, advantageous for low-margin businesses. Composition Scheme charges GST on the entire turnover regardless of profits or losses, increasing liability during losses.

14. Seamless Credit Availability to Purchasers

Regular Scheme offers Input Tax Credit availability to purchasers, crucial for B2B businesses. Composition Scheme restricts this credit, discouraging B2B transactions.

15. High-Value Transactions - GST Impact

Regular Scheme is beneficial for high-value transactions with low margins (e.g., gold), significantly reducing GST liabilities. Composition Scheme imposes tax on the entire value, increasing the burden.

Conclusion

Choosing between GST schemes requires careful assessment of turnover, transaction types, profitability, GST rates, and compliance capacities. Consulting a Chartered Accountant ensures the best strategic choice for business growth and regulatory compliance.

Disclaimer: The views expressed in this article are personal to the authors and are an attempt to interpret the GST law. We recommend professional assistance where required.

The author can also be reached at ynaren47@gmail.com