GST Composition Scheme – Demerits of Registering under the Scheme

Registering your business under GST Composition come with few demerits and limitation in business which is not good for a growing economy where In the country like India, you can forecast correctly due to rapidly changing a Business environment.

At Below we will Discuss the Demerits of Registering under GST Composition Scheme

  • Limited Territory of Business

A Registered taxpayer opted for Composition scheme is not allowed to carry on interstate transactions, import or export of goods and services and E-commerce. This compels the tax payer to carry on the business intrastate. This contradicts the motto of “One Tax, One Nation” as it limits the boundaries to a specified territory. 

  • No Credit of Input Tax paid

There is no provision of claiming input tax credit on B2B transaction For e.g.:

B2B Transaction

Mr. A – Manufacturer who has opted for Composition scheme under GST.

Mr. B – Wholesaler who is a registered taxable person under a regular plan.

In the given situation, Mr. A seller goods to Mr. B without charging GST in his invoice as he has opted for Composition scheme.

Mr. B will not get the input tax credit paid from his output liability as Mr. A has opted for composition scheme.

This will result in loss of business as buyers might avoid purchases from a taxpayer under composition scheme.  The table registered person opted for composition cannot claim input tax credit even if he purchases the goods from a regular taxable dealer.

No Collection of Tax

  1. In spite of the rate of tax kept very low, the registered tax payers are not allowed to collect from his buyer. Thus the burden of paying tax rests with the tax payer himself. Thus the principle of limited compliance and less burden of the tax is defeated here.

Penal Provisions

  1. As per the GST Law, if the taxpayer registered under the old law under composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was granted incorrectly then, such taxpayer shall be liable to pay the tax and penalty which can extend up to the amount of total tax liability i.e. 100%. We have done enough analysis, which in a country where taxpayers have limited knowledge of tax laws but since composition scheme comes with the strict penal provision as well additional tax liability may arise due to any small violation or mistakes in the overall implementation process.