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February 23, 2023

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GST Composition Scheme and Presumptive Taxation Explained

One of the challenges of tax compliance is that small businesses have more time to devote to compliance than they do to customers, sales, and growth. The GST composition scheme and presumptive taxation are two provisions that can simplify taxation for eligible businesses. They both share the goal of decreasing the compliance burden, but use different tax laws, solve different problems, and operate differently.
Presumptive taxation makes the calculation of Gross Domestic Product easier for Income Tax purposes, and the composition scheme makes tax payments and compliance simpler with GST. It’s important to recognize the distinction because it will inform business owners what to do and how not to pose undue compliance challenges.

‍What is the GST Composition Scheme?

The GST composition scheme is another of the optional schemes under GST, mainly for the benefit of small taxpayers. GST, comprising a specific tax rate percentage on the taxable turnover, is payable based on turnover instead of calculating the taxable supply at the applicable tax rate.

In the case of a business engaged exclusively in goods, the general turnover limit for a micro unit of business lies between ₹1.5 crore in the last financial year. For businesses supplying services or mixed supplies under the relevant composition scheme, the limit is ₹50 lakh.

The scheme aims to lessen the paperwork burden and ease compliance for small businesses.

GST Composition Scheme Rates

Type of Taxpayer	Composition Tax Rate
Traders and other eligible suppliers	1%
Manufacturers	1%
Restaurants	5%
Eligible service or mixed suppliers under the separate scheme	6%

Who Can Opt for the Composition Scheme?

A business must satisfy the applicable eligibility conditions before choosing composition taxation. The scheme is generally relevant to small traders, manufacturers, restaurants, and eligible service providers.

However, several restrictions apply. A general outline of the distinction between a composition taxpayer and a regular taxpayer is that they cannot make outward supplies, they cannot treat the supplies as taxable GST supplies, and they cannot avail Input tax credit on receipts from the supplies. The taxpayer will have to generate a new GST liability or Bill of Supply, but not a standard tax invoice.

What is Presumptive Taxation?

Presumptive taxation is a tax regime under the income tax that permits a taxable person to determine the income from a business or professional activity on a fixed basis without keeping a running ledger of such transactions. The primary sections deal with Section 44AD, Section 44ADA, and Section 44AE.

Section 44AE applies to eligible taxpayers who are engaged in the business of plying, leasing, or hiring goods carriages subject to the following conditions and restrictions on vehicles owned.

How Does Presumptive Taxation Work?

Section 44AD provides for the declaration of taxable income on a prescribed percentage of income as turnover, for eligible businesses. The rate is typically 8% of turnover, and up to 6% of eligible digital or specified non-cash receipts can qualify for this rate.

For professionals covered by Section 44ADA, 50% of gross receipts is generally treated as taxable professional income.

The key advantage is simplicity. The taxpayer shall use the prescribed presumptive percentage in determining the amount of taxable profit, rather than making an itemized calculation of all the allowable business expenses in the business.

GST Composition Scheme vs. Presumptive Taxation

The easiest way to understand the difference is to remember that these schemes operate under different tax systems.

Basis	GST Composition Scheme	Presumptive Taxation
Tax law	GST	Income Tax
Main purpose	Simplifies GST compliance	Simplifies income calculation
Applies to	Eligible GST taxpayers	Eligible businesses and professionals
Tax is based on	Prescribed GST rate on turnover	Prescribed percentage of turnover/receipts
Input Tax Credit	Not available	Not applicable in the GST sense
Tax invoice	Bill of Supply is issued	Normal invoicing rules continue under GST
Main provisions	Section 10 of the CGST Act	Sections 44AD, 44ADA, 44AE

Benefits of These Tax Schemes.

The composition scheme can make GST payments more predictable and reduce the complexity associated with regular GST compliance. Presumptive taxation can simplify income-tax calculations and reduce the need for detailed expense-based profit computation.

However, simplicity comes with trade-offs. A composition taxpayer cannot claim ITC, while a taxpayer using presumptive taxation must still follow the applicable income-tax conditions and maintain the records required in situations where the presumptive scheme does not apply.

Which Option Should Your Business Choose?

A small retailer with local customers and limited Input tax credit requirements may find the GST composition scheme useful. A freelancer or eligible professional may benefit more from section 44ADA. An eligible small business with straightforward operations may consider section 44AD.

When selecting a scheme, check how many people visit your shop, what types of customers they are, the cost of any goods you sell, whether you need to claim and pay out GST, business structure, and your expansion plans. An expert in tax law can also aid in understanding if all of the requirements are met.

Conclusion

Earlier, the universe of one of the taxation schemes was much larger. GST composition scheme/presumptive taxation can make taxation easier for eligible small businesses, but they have different purposes. Presumptive taxation simplifies the computation of taxable income under the IT Act, and the composition scheme makes compliance with GST easier.

It might depend on the type of business you have, your sales levels, costs, clients, and how your business has to act in order to be compliant with the rules.

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FAQs

1. What is the GST composition scheme?

GST composition scheme is an optional taxation scheme, introduced for eligible small taxpayers to avail themselves of payment of GST at certain rates and simultaneously abide by the simplified compliance process.

2. Can a composition taxpayer claim Input Tax Credit?

No. A GST registered taxpayer under the GST Composition Scheme is unable to claim Input Tax Credit for any purchases made in respect of such notifications and is not able to collect any GST from the customers separately.

3. Presumptive taxation by reason of section 44AD is what?

The provision of section 44AD provides that GST-eligible taxpayers carrying on the specified businesses may be taxed under the presumptive method without a detailed expense accounting process.

4. May a company utilize both Presumptive Taxation as well as the Composition Scheme?

Yes, potentially. They operate under different tax laws. The eligibility and compliance requirements must be met by a business on its own for both schemes.

5. Why is Section 44AD important for an individual?

The maximum limit for general is ₹2 crore, and can be increased to ₹3 crore if the cash receipts condition is fulfilled.

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