Limited Territory for Business: A taxpayer registered under the composition scheme is barred from carrying out inter-state sales and cannot offer import-export of goods and services. Thus, he is compelled to carry out only intra-state transactions and this limits the territory of his business. Furthermore, this section limits the benefit only to the boundary of the state.

No Credit of Input Tax: There has been no provision of input credit on B2B transactions. Thus, if any taxable person is carrying out business on B2B model, such person will not be allowed the credit of input tax paid from the output liability. Also, the buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading.

This will further result in a loss of business as a buyer registered as a normal taxpayer will not get any credit when buying from a person registered under the composition scheme. Eventually, such buyers might avoid purchases from a taxpayer under a composition scheme.

No Collection of Tax: Though the rate of composition tax is kept very nominal at  1% or 5%, a taxpayer under composition scheme is not allowed to recover such tax from his buyer, as he is not allowed to raise a tax invoice

As per notification 01/2018 dated 01.01.2018, turnover for traders has been defined as ‘ Turnover of taxable supplies of goods

Consequently, the burden of such tax is kept on the taxpayer himself and this has to be paid out of his own pocket. Thus the fundamental principle of limited compliance and tax burden on the small taxpayers is defeated here.

Penal Provision: Another provision that is heavily debated is the penal provision for a taxpayer under a composition scheme. As per the GST Law, if the taxpayer who has previously been given registration under the composition scheme is found to be not eligible for the composition scheme or if the permission granted earlier was incorrectly granted, then such taxpayer will be liable to pay the differential tax along with a penalty which can extend up to the amount of total tax liability i.e 100%.

On analysis of this provision, it can be fairly said that if a small taxpayer who has limited knowledge of tax laws and compliance makes any mistake under composition scheme, he shall be liable to pay tax at the standard rate on his total turnover along with a penalty which will be equal to the total tax liability.

Electronic Commerce out of scope: One of the major industries which have flourished in recent times, is e-commerce in India. There have been numerous companies who are into e-commerce, some of them have turnover into crores,  however many of them are still at nascent stage and have not achieved breakeven as well. Such units carry out their business online through the internet and supply across states.

Since they are into inter-state supplies they are not eligible for composition scheme and thus the benefit of this section has been kept away from them. This is further in contradiction with the government vision of “Digital India” and “Startup India”  which are aimed to promote the startup ecosystem and digital experience for Indian citizens.

Not applicable to the supplier supplying goods through E-commerce

The composition scheme is considered instrumental in enabling small taxpayers to reduce the burden of compliance. However, under the current scenario, a small taxpayer has to act very consciously if he chooses to get registered under the composition scheme.