The Hidden Limitations of Composition Scheme Most Businesses Ignore

The Composition Scheme under GST looks simple and attractive — lower tax rates, quarterly payments, and minimal compliance.

But here’s the truth:

Lower rate does not always mean lower tax burden.

Before opting under Section 10 of the CGST Act, every business must understand what they are giving up.

What Most Businesses Overlook

1.No Input Tax Credit (ITC)

Composition dealers cannot claim ITC on purchases and cannot pass ITC to customers.
If your inputs carry substantial GST, your real tax cost may increase despite lower rates.

2.Cannot Collect GST Separately

You cannot issue a tax invoice.
You must issue a Bill of Supply.
GST cannot be charged separately from customers.

This means tax is paid out of your own turnover — directly impacting margins.

3.No Inter-State Supply Allowed

Under current GST provisions, composition taxpayers cannot make inter-state outward supplies.

If your business plans expansion beyond your state, the scheme may restrict growth.

4.Turnover Limit Is PAN-Based

The ₹1.5 crore threshold (₹75 lakh in special category states) is calculated on aggregate turnover across all registrations under the same PAN.

Crossing the limit requires mandatory migration to the regular scheme.

5.Not Suitable for B2B Businesses

If your customers are registered dealers who want ITC, you become commercially less competitive.

Many B2B clients prefer regular GST suppliers.

6.Reverse Charge Still Applies

Composition dealers must pay tax under Reverse Charge at normal rates wherever applicable.

This is often misunderstood.

 When Composition Scheme Works Best

✔ Local B2C businesses
✔ Low input tax structure
✔ Stable turnover
✔ Limited expansion plans

When It Becomes Risky

⚠️ High ITC involvement
⚠️ B2B-focused model
⚠️ Inter-state growth plans
⚠️ Multiple GST registrations

Final Thought

The Composition Scheme is a relief mechanism — not a default choice.

It is a strategic tax decision that requires comparative calculation under both regular and composition schemes.

Many businesses opt for it based only on rate comparison and later realize the hidden cost.

In GST planning, simplicity should never replace strategy.


#GSTIndia #CompositionScheme #GSTCompliance #IndirectTax #TaxPlanning #BusinessStrategy #CAIndia #EntrepreneursIndia #FinancialLeadership

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