What are disadvantages of registering under Composition Scheme in GST?

Registration under the composition scheme in GST has its own set of benefits and drawbacks. The taxpayer should analyse the advantages and disadvantages to opt for GST Composition Scheme on GST Portal.

Disadvantages of GST Composition Scheme

  • No Input Tax Credit
    Input Tax Credit cannot be availed by dealers registered under the composition scheme. Thus, GST paid on purchase cannot be used for payment of GST on sale of goods or services.
  • Cannot collect tax on sales
    Business registered under the Composition Scheme cannot collect GST from customers on the sale of goods or services. As a result, it should issue a Bill of Supply and cannot charge GST.
  • No E-Commerce Sales
    A composition business cannot sell goods or services through an e-commerce platform. Therefore, if a seller wants to sell products online on an e-commerce portal, must compulsorily register under the regular scheme. Thus, an E-Commerce Seller cannot register under Composition Scheme.
  • No Inter-State Sales
    A composite dealer cannot sell goods outside its state of registration. It also cannot carry out the export of goods. Thus, there is a limited territory for business, and expansion is difficult. However, a composite dealer can sell services outside its state of registration.
  • Cannot sell exempt goods
    Business registered under composition scheme can supply taxable goods and restaurant services. Thus, they cannot sell non-taxable goods and services other than restaurant services.
  • Heavy Penalty
    If a dealer has obtained registration under Composition Scheme without being eligible for the same, there are strict penalty provisions. The dealer is liable to pay the amount of differential tax and a penalty of up to 100% of tax liability. Thus, a business should apply for registration under the composition scheme only if it fulfills all the conditions.

FAQs

Can a person who has opted to pay tax under the composition scheme avail Input Tax Credit (ITC) on his inward supplies?

No. A taxable person opting to pay tax under the composition scheme is out of the credit chain. He cannot take credit on his input supplies. When he switches over from composition scheme to normal scheme, eligible credit on the date of transition would be allowed.

Can a registered person, who purchases goods from a taxable person paying tax under the composition scheme, avail credit of tax paid on purchases made from the composition dealer? 

No, as the composition dealer cannot collect tax paid by him on outward supplies from his customers, the registered person making purchases from a taxable person paying tax under the composition scheme cannot avail input tax credit.

Can a person paying tax under the composition scheme issue a tax invoice under GST? 

No. He can issue a bill of supply in lieu of tax invoice. As he cannot issue a tax invoice, he cannot charge and collect tax from his supplies.  

What are the consequences if a person who is not eligible opts for the composition scheme? 

If a taxable person has paid tax under the composition scheme though he was not eligible for the scheme then the person would be liable to penalty and the provisions of section 73 or 74 shall be applicable for the determination of tax and penalty.

Got Questions? Ask Away!

  1. Hey @Shweta_Saini

    You can opt out of Composition Scheme from your account on GST Portal. Once the taxpayer type is updated to Regular in your profile, you can start filing GST Returns under the regular scheme. If you are facing any issues while making the withdrawal application, you can create a grievance on the GST Portal.

    Do let us know if you have any further queries.

  2. I want to be able to claim input tax credit for GST paid. Should I opt for the GST composition scheme or regular scheme?

  3. Hey @Joe_Fernandes

    If you wish you claim Input tax credit, you should opt for GST Regular Scheme.

    Read more about the difference here.