GST Composition Scheme vs. Regular GST: Which One is Better for Your Business?

Table of Contents

1. Introduction
2. What is the GST Composition Scheme?
3. What is the Regular GST Scheme?
4. Key Differences Between Composition & Regular GST
5. Pros & Cons of Each Scheme
6. Example: Comparing Composition vs. Regular GST for a Business
7. Which Businesses Should Opt for Composition GST?
8. FAQ Section

1. Introduction

Choosing between the GST Composition Scheme and the Regular GST Scheme is crucial for businesses to optimize tax compliance and costs. While the Composition Scheme offers lower tax rates and simplified compliance, the Regular GST Scheme allows input tax credit (ITC) benefits and inter-state trade. This guide will help you decide which scheme is the best fit for your business.

2. What is the GST Composition Scheme?

The Composition Scheme is a simplified GST scheme for small businesses with turnover up to ₹1.5 crore (₹75 lakh for certain states). It allows businesses to pay GST at a fixed percentage of turnover instead of regular tax rates.

Features of the Composition Scheme:

• Lower tax rates:
  • Manufacturers & Traders: 1% GST (0.5% CGST + 0.5% SGST)
  • Restaurants (not serving alcohol): 5% GST (2.5% CGST + 2.5% SGST)
  • Service providers (specific cases): 6% GST (3% CGST + 3% SGST)
• Quarterly tax payments instead of monthly filings
• No Input Tax Credit (ITC) claims allowed
• Cannot make inter-state sales or supply through e-commerce platforms

3. What is the Regular GST Scheme?

The Regular GST Scheme applies to all businesses exceeding the composition threshold or those wanting to avail ITC benefits. Businesses under this scheme must comply with standard GST laws and file monthly returns.

Features of the Regular GST Scheme:

• GST is charged at standard rates (5%, 12%, 18%, 28%) depending on the goods/services.
• Eligible for Input Tax Credit (ITC) on purchases.
• Can make inter-state sales and sell via e-commerce platforms.
• Mandatory monthly GST returns filing (GSTR-1 & GSTR-3B).
• Higher compliance requirements compared to Composition Scheme.

4. Key Differences Between Composition & Regular GST

5. Pros & Cons of Each Scheme

Pros of the Composition Scheme:

 Lower tax burden for small businesses.  Simplified compliance with fewer returns.  Better for businesses with local sales.

Cons of the Composition Scheme:

 No ITC claims, increasing procurement costs.  Cannot sell outside the state or through e-commerce.  Limited to small businesses below ₹1.5 crore turnover.

Pros of the Regular GST Scheme:

 Allows ITC claims, reducing tax liability.  No turnover restriction for eligibility.  Can sell inter-state and via online platforms.

Cons of the Regular GST Scheme:

 Higher compliance and frequent return filing.  Higher tax rates compared to Composition Scheme.

6. Example: Comparing Composition vs. Regular GST for a Business

Let’s consider an example of ABC Traders, a small business dealing in electronic accessories.

Case 1: ABC Traders Opts for Composition Scheme

• Annual Turnover: ₹1.2 crore
• GST Rate (Composition): 1% (0.5% CGST + 0.5% SGST)
• GST Payable: ₹1,20,000 (1% of ₹1.2 crore)
• ITC Available:  No ITC
• Total Tax Cost: ₹1,20,000

Case 2: ABC Traders Opts for Regular GST

• Annual Turnover: ₹1.2 crore
• GST Rate (Regular): 12%
• GST Collected from Customers: ₹14,40,000 (12% of ₹1.2 crore)
• ITC on Purchases: ₹4,00,000
• GST Payable After ITC: ₹10,40,000

Comparison

• Composition Scheme: Lower tax payment (₹1,20,000), but no ITC.
• Regular GST: Higher tax collection (₹14,40,000), but ITC reduces net liability to ₹10,40,000.

 Which one is better?

• If ABC Traders has low purchase costs and operates locally, the Composition Scheme is ideal due to reduced compliance.
• If ABC Traders deals in bulk purchases and needs ITC to offset taxes, the Regular GST Scheme is more beneficial.

7. Which Businesses Should Opt for Composition GST?

The Composition Scheme is suitable for businesses that:

• Have an annual turnover below ₹1.5 crore.
• Primarily sell locally without inter-state trade.
• Do not need input tax credit (e.g., small traders, restaurants).
• Want to reduce compliance burden by filing quarterly instead of monthly returns.

The Regular GST Scheme is better for businesses that:

• Need to claim ITC to lower tax liability.
• Sell outside their home state or on e-commerce platforms.
• Have a turnover exceeding ₹1.5 crore.
• Want to charge GST separately on invoices.

8. FAQ Section

1. Can I switch from the Regular GST Scheme to the Composition Scheme?

Yes, eligible businesses can opt for the Composition Scheme at the beginning of a financial year.

2. Can I switch from the Composition Scheme to the Regular GST Scheme?

Yes, you can switch anytime, but you must start filing monthly GST returns after opting out.

3. Is ITC available under the Composition Scheme?

No, businesses under the Composition Scheme cannot claim Input Tax Credit (ITC).

4. Can a Composition Dealer sell online through Flipkart, Amazon, or Zomato?

No, businesses under the Composition Scheme cannot sell through e-commerce platforms.

5. Can service providers opt for the Composition Scheme?

Only certain service providers can opt for Composition GST at a 6% GST rate (3% CGST + 3% SGST).

6. How do I apply for the Composition Scheme?

Businesses can opt for the Composition Scheme through the GST portal before the start of the financial year.

By understanding these differences, you can choose the best GST scheme for your business to maximize benefits and compliance!