Most of the B2C businesses or retail businesses operates in a very price sensitive market and if they choose regular GST scheme then they have to collect GST over and above the sale price and this price rise might affect their sale. So, to compete in the market they have to consider the amount received is inclusive of GST and GST is to be paid out of their profit margin.
Here is a small calculation which might help you to decide which option is better for such business. This decision is mainly dependent on the gross margin of your business and the GST rate levied on goods/services.
Few Assumptions for both the cases below:
GST Rate is 12%
Cost is Exclusive of GST
Gross Sales Value is Inclusive of GST
Case 1: Your gross margin is 40% on cost:
Profitability under Composition scheme:
Cost: 100
GST: 12 (ITC not available in composition scheme so it will become part of your cost)
Total: 112
Sales: 140
Less GST(1%): 1.4
Purchase cost: 112
Profit: 26.6
Profitability under Regular scheme:
Cost: 100
GST: 12 (ITC is available to regular scheme so it won't become part of your cost)
Total: 100
Sales: 140
Less GST: 15 [140- (140/112×100)]
Net Sales: 125
Cost: 100
Profit: 25
In this case, Composition scheme is better as compared to the regular scheme.
Case 2: Your gross margin is 20% on cost:
Profitability under Composition scheme:
Cost: 100
GST: 12 (ITC not available in composition scheme so it will become part of your cost)
Total: 112
Sales: 120
Less GST(1%): 1.2
Purchase cost: 112
Profit: 6.8
Profitability under Regular scheme:
Cost: 100
GST: 12 (ITC is available to regular scheme so it won't become part of your cost)
Total: 100
Sales: 120
Less GST: 12.86 [120-(120/112×100)]
Net Sales: 107.14
Cost: 100
Profit: 7.14
In this case, the regular scheme is better as compared to the Composition scheme.
So, it is now understood that profit margins and GST rate levied on goods/services will affect the decision for choosing the regular scheme or Composition scheme.
Here is my analysis which might help you:
GST Rate | Recommendation for Composition Scheme | Recommendation for Regular Scheme |
5% | Gross margin > 32.91% - Go for Composition scheme | Gross margin < 32.91% - Go for regular scheme |
12% | Gross margin > 23.58% - Go for Composition scheme | Gross margin < 23.58% - Go for regular scheme |
18% | Gross margin > 26.28% - Go for Composition scheme | Gross margin < 26.28% - Go for regular scheme |
28% | Gross margin > 34.13% - Go for Composition scheme | Gross margin < 34.13% - Go for regular scheme |
This table provides a clear comparison between the recommendations for the Composition scheme and the Regular scheme based on different GST rates and gross margin thresholds.
In conclusion, the decision between opting for the Composition scheme or the Regular scheme under GST depends significantly on the gross margin of a business and the applicable GST rate. For businesses operating in a price-sensitive B2C market, understanding these thresholds is crucial. Generally, if the gross margin surpasses the specified thresholds—32.91% for 5% GST, 23.58% for 12% GST, 26.28% for 18% GST, and 34.13% for 28% GST—choosing the Composition scheme is advisable. Conversely, if the gross margin falls below these thresholds, the Regular scheme is a more suitable option. This analysis aids businesses in making informed decisions to optimize their profitability while remaining competitive in the market.
Very well and precisely explained .