GST, introduced on 1 July 2017, is a form of indirect tax that is charged on sales and collected by businesses from a customer buying the service or goods. Income tax (or corporate tax), on the other hand, is paid by businesses on the net income or profit they make on the sales of such goods or services.

To be sure, any business that exceeds a certain annual turnover has to mandatorily register for GST apart from paying income tax. As per law, GST registration is mandatory after the turnover of a services business crosses ₹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.

The composition 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. Turnover is the total amount in the invoices raised in a month. “This is irrespective of whether you have received the payment or not,” said Hanish.

In a services business, any advance received in a month, even if the service is not provided, is added to the turnover and GST is to be paid on it in the same month. This is not the case in a goods business.

Input tax credit refers to the GST you pay on expenses related to your business. You can offset the input tax credit with your own total GST liability. For instance, consider that you are a digital marketing professional (services business). In a month, you pay broadband and phone bills of ₹2,000 used at your office and pay ₹360 GST (at 18%) on it. You take multiple flights for business trips and pay GST of ₹5,000 on the air tickets. Now, say, your turnover in the same month is ₹2 lakh and, at 18%, your GST liability will be ₹36,000. You can deduct input tax credit of ₹5,360 ( ₹360 on phone bills and ₹5,000 on airfare) from the total GST payable and pay the remaining ₹30,640.

When you opt for the composition scheme, you pay tax at a flat rate. The flat tax rate for services businesses, goods vendors and restaurants is 6%, 1% and 5%, respectively. Hanish said flat rate for goods businesses is lower compared to services as the former has relatively lean margins. “It’s not a case of preferential treatment,” he said.

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For freelancers and micro businesses in the services industry with fewer business expenses, opting for the composition scheme is beneficial. “It’s a trade-off between 18% with input credit or 6% without input credit. An individual business or a freelancer typically won’t have any input credit, so the math always works out in favour of the composition scheme,” said Hanish.

For instance, in the above example where input tax credit of ₹5,360 is claimed, the effective GST rate for you comes down to about 15.25% from 18%. However, under the composition scheme, you pay only 6% or ₹12,000 GST. A lower tax liability can free up cash flow for businesses.

Only goods businesses with high input credit should stay under regular GST rates. Another case is of business-to-business or B2B vendors. “The 1% tax that a vendor charges can’t be claimed by the business client as input credit. So, corporates don’t like to work with vendors under the composite scheme,” said Hanish.

The composition scheme can be opted by services businesses with turnover of up to ₹50 lakh. For goods businesses, the threshold is ₹1.5 crore, beyond which regular GST rate becomes mandatory. One can opt for the composition scheme at the time of registering for GST. If you are a regular GST taxpayer and wish to switch to it, you should fill Form (GST-CMP-02) in the GST portal in March before the next financial year starts.

Apart from lower tax rate, opting for this scheme also eases compliance as you pay taxes quarterly and file the tax return annually. Otherwise, GST needs to be paid and filed every month. Regular GST filers with turnover up to ₹1.5 crore get an option to opt for quarterly filing option, wherein you pay taxes every month but file every quarter. “For a small business with turnover of ₹50 lakh-1 crore, it’s difficult to do input and output offset and other compliances each month. This is a simpler compliance mechanism,” said Deepak Rao, Partner – Indirect Taxation, Acer Tax & Corporate Services.

It’s important to pay GST accurately and on time as the penalty and interest on defaulting are steep. “If the department finds out any shortfall in tax paid, the business will be asked to pay the entire pending liability of all the previous years, if that is the case, 18% annual simple interest on the outstanding tax and maybe even up to 100% of the outstanding amount as penalty. The penalty is over and above the outstanding tax which the defaulter will anyway pay,” said Rao.