How small businesses can benefit from GST composition scheme

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₹20 lakh and that of a goods manufacturer or vendor exceeds ₹40 lakh. A services business is one where nothing tangible is sold. In goods business (read as goods manufacturers and vendors), a tangible good is sold permanently.

Currently, GST rates for businesses are pegged at 5%, 12%, 18% and 28%, depending on the nature of the business and other factors, but the most common rate at which the majority of businesses pay this tax is 18%, said Hanish S., chartered accountant, and partner, HSKA and Associates. However, it’s important that businesses determine the correct rate applicable to them. “It’s a one-time exercise and the business should approach a chartered accountant at the outset to determine the right tax rate applicable to them.

If you charge a rate lower than the actual rate applicable to you, the GST department can ask you to pay the shortfall, which will have to be paid out of your own pocket," said Annapurna Dubey, partner, GST Advisory, AA Dubey & Associates. GST has to be paid and filed monthly or quarterly depending on the business’s turnover and nature of business. This could mean heavy compliances for micro businesses and freelancers who may not have enough funds to hire a full-time accounting professional.

So, as an alternative, small businesses have the option to opt for a composition scheme, which simplifies GST filing for them. A few business categories are exempt from opting for this scheme. GST can be paid in two ways—pay the regular 18% (or as applicable) tax and claim inputs tax credit.

Or, pay a lower tax of flat 1-6%, but forgo inputs tax credit. The latter is done by opting for the composition scheme under GST Law. GST is calculated on the total turnover in a month or quarter.