GST Composition Scheme for Services Provider. Is it right for your business?

As per recent amendment by GST council, they have taken some long due decisions, some most notable are

• Increasing GST Registration threshold limit to Rs/- 40 Lakhs from existing Rs/- 20 Lakhs (off-course if state Govt. agrees to it. But don’t worry being an election year all rats & cats will agree).
• Increasing Composition scheme limit for Traders and Manufacturers from the Existing limit of Rs/- 1 Cr to 1.5 Cr.
• Filing of one Annual GST returns for composition scheme while GST payment will remain quarterly.
• However the most welcome is that now they allowed service provider and Works contractors (Which is called Mixed Service providers) to opt for Composition scheme provided they are TO is below Rs/- 50 Lakhs in the previous year. Although if you are registering for the first time for GST than previous year turnover concept is not applicable and you can directly choose for composition scheme. Further, rate is also attractive i.e. just need to pay 6% GST (3% CGST & 3% SGST) instead of 18%

However, now the main contention is that how a registered GST Service provider will decide whether to move to a composition scheme or not?

Before I say yes or no let us have a cost-benefit analysis: –

Benefits of GST Composition Scheme for Service provider

• Easier Compliance: – Just one return and four-time tax payment and your GST tax compliance are done. Isn’t It amazingly simple?
• Easier record maintenance: – As you need to pay a tax of your invoices and you will not eligible to set off, you need not maintain any records to take input credit, which will reduce the document maintenance burden to half.
• Reduced cost of compliance: –Less return means less GST compliance fees payable to your CA / Tax Consultant.

Negatives of Composition scheme for service providers: –

• Easier Compliance Really? :- Yes I am contradicting my own statement as the previous one was the view of how a large part of taxpayers may view it and this is the view of CA or Tax professionals. Just read the fine prints you still need to pay taxes quarterly, that means in order to pay taxes you need to compile all the bills issues. It will be same as filing for GSTR 3B except no input column needs to be fulfilled. So it’s easier but not even that easier as it seems.
• No Input credit available: – So you will not be eligible to offset any input GST received on related services or goods.
• No issue of Tax Invoices& Charge GST Separately: – So if you are working for a business entity which can’t make a payment without a Tax Invoice then it’s better you should not shift to composition scheme for GST. Same with the GST which will be paid from your own pocket as you will not be able to charge the GST separately.
• You will be paying GST from your profit: – As you are not allowed to issue tax invoices and so you can’t charge GST separately. The 6% GST you will be paying from your net profit literally. Need to understand the 6% will be on gross invoice value and not on Net profit. So if you are doing a billing of say 40 L then ready to pay Rs 2.4 L from your own profit.
• Reduced cost of Compliance? Do the math again: – I will give an example to explain the cost of compliance because the cost of compliance means not only the fees you pay to your CA. Suppose a Service provider who provides services to the tune of 40L per year and chooses to shift to composition scheme. Earlier he was paying the GST @ 18% and taking the same from the customer. Also, suppose he was paying 30K to CA for GST compliance.

Now once he moved to composition he has to pay 2.4 L for GST from his own pocket and Rs/- 10 K to CA. total outflow Rs/- 2.5 L, So actually cost of compliance in the first case was only Rs/- 30K as the GST was completely pass through and was recovered from customer, while in second case it was Rs/- 2.5 L. The condition of his client is intact as his client earlier was taking GST input credit while paying GST for this service provider. Now he is not paying GST hence he is not taking credit, so if you move from normal to Composition it is indifferent to your client. Except a few of clients will have the policy to accept only tax invoice so you need to inform your clients before switching to composition scheme.

Now I am not trying to prove that the GST Composition Scheme for a service provider or mixed Service providers is useless. There are certain situations under which a registered GST service provider should is much better off in GST composition scheme. Such as: –

• Service provided to Unregistered business entity:- If the client is unregistered in GST and they don’t insist on tax invoice it’s better for them to pay your fees without GST
• Services provider outside India:- If service receiver doesn’t take input credit like entities outside India, It will be better to shift into the composition
• Working in a highly competitive market:- Where you are working for such industry where even with 1% increase in cost you can lose the business it’s better to shift to composition and take a hit of 6% on profit rather than losing the whole business
• Retail segment or B2C Services: – If you are working on the retail segment where clients mind costs more then GST tax invoice, better you shift to GST.
• Working in Unorganized sector: -Like Car repair, Repair & maintenance of personal houses, these are the areas where customer don’t want to pay GST hence for the service provider it will better to choose composition scheme.

Best way to deal with it: – For those who want to switch to GST composition scheme still don’t want to foot the 6% from their own net profit margin. I have a bonus Tip that is completely legal and practical as well.

Just increase your services charges to 6% and Issue an invoice. This way your client who doesn’t use GST input will get your services @ 12% cheaper while there will not be any impact on your bottom line profit. Govt. Prohibits charging GST for composition dealers but it can’t stop you increase the price of your services, provide your clients don’t mind it.

Conclusion: – So the answer is not straightforward but it depends on case to case, so its always better to consult with your CA before you decide to jump on GST Composition bandwagon, A thorough cost, and benefit analysis must prevail upon anything called easy compliance at a heavy cost.