The disadvantages of GST Composition Scheme are often overlooked when businesses choose this simplified tax option. Although the scheme reduces compliance and offers lower tax rates, it also creates limitations that may affect growth. Therefore, small businesses must carefully evaluate these disadvantages before opting in.
No Input Tax Credit – Major Disadvantage of GST Composition Scheme
One of the biggest disadvantages of GST Composition Scheme is the inability to claim Input Tax Credit (ITC). Regular taxpayers can set off GST paid on purchases against their GST liability. However, composition dealers cannot do so. As a result, their overall tax burden may increase if they purchase from registered suppliers who charge GST.
Restrictions on Inter-State Sales and Exports
Another important disadvantage of GST Composition Scheme is the restriction on inter-state supplies. Composition dealers cannot sell outside their state or engage in export business. This rule limits their market expansion opportunities. Consequently, businesses looking to grow nationwide may find this scheme unsuitable.
Higher Effective Tax for Certain Businesses
The disadvantages of GST Composition Scheme also include cases where effective tax turns out higher. For example, traders purchasing from other registered dealers cannot claim ITC. They end up bearing GST on purchases and also pay composition tax on sales.
| Issue Faced | Impact on Business |
|---|---|
| No ITC claim | Higher cost of goods |
| Inter-state restriction | Limited market access |
| Mandatory bill of supply | Lower credibility with buyers |
No Collection of Tax from Customers
A further disadvantage of GST Composition Scheme is that dealers cannot issue tax invoices. They only issue a bill of supply and cannot charge GST from customers. As a result, businesses must absorb the tax cost themselves, which reduces profit margins.
Limited Credibility and Buyer Preference
Buyers often prefer to deal with regular taxpayers because they can claim ITC. Since composition dealers cannot provide tax invoices, they lose this edge. Therefore, another disadvantage of GST Composition Scheme is reduced business credibility, especially in B2B transactions.
Conclusion
The disadvantages of GST Composition Scheme include no ITC, restrictions on inter-state sales, higher effective tax in some cases, and reduced credibility. While the scheme is beneficial for micro-businesses seeking compliance relief, it may not suit businesses with growth ambitions.
👉 Want expert advice before choosing the scheme? Book a free GST consultation with HelpTax.in today.