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59. Case Study 15: Composition or Regular Scheme for Small Businesses
59.1 Facts
Two clients of a small practice in Ahmedabad want advice for FY 2027-28.
Shree Mahalaxmi Sweets makes sweets and namkeen in its own kitchen and sells them at a separate retail counter, and also runs a restaurant in the same building. Customer receipts last year: restaurant Rs. 63,00,000, sweet counter Rs. 84,00,000, total Rs. 1,47,00,000. Prices are inclusive of any tax. GST on inputs used for the sweets (ghee, packing, gas) was Rs. 1,50,000. All sales are within Gujarat.
Neha Joshi is an HR consultant in Ahmedabad with receipts of Rs. 45,00,000. Her GST on laptop, phone and co-working was Rs. 60,000. The question is asked for two client mixes: all business clients, or all individual clients.
59.2 Issues
- Eligibility and rate under section 10(1) and section 10(2A).
- Annual tax cost under each scheme.
- Effect on customers and on future growth.
59.3 Analysis and computation
Composition under section 10(1) is open where aggregate turnover in the preceding year did not exceed Rs. 1.5 crore. Rates: 1% for manufacturers and traders, 5% for restaurant service. Section 10(2A) is for service providers and mixed suppliers not eligible under section 10(1), with turnover up to Rs. 50 lakh, at 6%. A composition person cannot take credit, cannot collect tax from customers, cannot make inter-State outward supplies, issues a bill of supply and displays "composition taxable person" at the place of business.
Mahalaxmi's turnover of Rs. 1,47,00,000 is within Rs. 1.5 crore. Sweets sold from a separate retail counter as goods are manufactured goods at 1%. Where sweets are sold as part of the restaurant's service, including takeaway from the restaurant, they fall within restaurant service. Advance rulings have differed on mixed outlets, so the counter should be physically and commercially separate, with separate billing.
Mahalaxmi Sweets | Regular scheme | Composition |
|---|---|---|
Customer receipts | 1,47,00,000 | 1,47,00,000 |
Output tax: restaurant | 3,00,000 (5% on 60,00,000) | 3,15,000 (5% on 63,00,000) |
Output tax: sweets | 4,00,000 (5% on 80,00,000) | 84,000 (1% on 84,00,000) |
Input GST on sweets | Recovered as credit | 1,50,000 becomes cost |
Cash tax to Government | 5,50,000 | 3,99,000 |
Amount kept after all GST | 1,40,00,000 | 1,41,51,000 |
Composition saves Rs. 1,51,000 a year. The restaurant pays 5% under either scheme, so the gain comes from the 1% rate on sweets. The customers are consumers, so the loss of a tax invoice does not matter; even corporate Diwali gift orders carry no credit for the buyer because gifts are blocked under section 17(5)(h).
Illustration 229: Consultant under section 10(2A) Step 1: Business clients, regular scheme. Neha charges 18% on 45,00,000; clients take credit, so their cost is unchanged. She recovers her own input GST. Amount kept: Rs. 45,00,000. Step 2: Business clients, composition at 6%. She cannot charge GST, so she pays Rs. 2,70,000 from her fee and bears Rs. 60,000 input GST. Amount kept: Rs. 41,70,000. Composition costs her Rs. 3,30,000, and clients lose nothing only because she absorbs it. Step 3: Individual clients, fees inclusive of any tax. Regular: value = 45,00,000 / 1.18 = Rs. 38,13,559; input GST recovered. Amount kept: Rs. 38,13,559. Step 4: Individual clients, composition: 45,00,000 less 6% (2,70,000) less input GST 60,000 = Rs. 41,70,000. Composition gains Rs. 3,56,441. |
For business clients the regular scheme is better; clients also prefer a tax invoice. For individual clients composition is better, provided Neha has no clients in other States: one inter-State client makes her ineligible.
59.4 Compliance and documentation
- Option for composition in CMP-02 before the start of the financial year.
- CMP-08 quarterly by the 18th of the month after the quarter; GSTR-4 annual return by 30 June.
- Stock held on the date of opting in: credit on it is reversed (ITC-03).
- If turnover crosses the limit during the year, the option lapses from that day; file the intimation within seven days and move to the regular scheme with ITC-01 for credit on stock.
Key point Lessons Composition suits consumer-facing businesses with low input credit. It rarely suits suppliers to businesses. Mahalaxmi is close to Rs. 1.5 crore; growth of a few per cent will end the option mid-year. Plan the switch. No inter-State outward supply is allowed, which also rules out online orders to customers in other States. |
Chapter summary • Composition saves Mahalaxmi Sweets Rs. 1,51,000 a year, mainly through the 1% rate on sweets. • The restaurant pays 5% under both schemes. • A consultant with business clients loses Rs. 3,30,000 under section 10(2A); with individual clients she gains Rs. 3,56,441. • Turnover limits, inter-State bans and customer credit needs decide the choice. |
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