February 20, 2023

GST Impact on SME Sector and Composition Scheme

Goods and Services Tax (GST) has been one of the biggest taxation reforms in India. It has impacted all businesses in the country, and small and medium enterprises (SMEs) are no exception. In this article, we will take a look at the impact of GST on the SME sector and the composition scheme that has been introduced to ease their compliance burden.

Impact of GST on SMEs

Before GST, SMEs had to deal with multiple taxes such as excise duty, value-added tax, and service tax. This led to a lot of confusion and compliance issues. GST has simplified the tax structure by subsuming all these taxes into one. The GST regime has also brought in transparency and accountability, making it easier for SMEs to do business in India.

However, the introduction of GST has also brought in some challenges for SMEs. One of the biggest challenges is the compliance burden. SMEs have to file multiple returns and maintain detailed records of their transactions. This can be a daunting task for businesses that do not have the necessary resources to handle complex compliance requirements.

Another challenge for SMEs is the increase in the tax rate. Under the previous tax regime, SMEs enjoyed lower tax rates compared to larger businesses. However, with the introduction of GST, the tax rate has been standardized, which has led to an increase in the tax burden for SMEs.

Composition Scheme

To ease the compliance burden on SMEs, the government has introduced the composition scheme. Under this scheme, SMEs with an annual turnover of up to Rs. 1.5 crore can opt for a simpler, lower tax rate and file quarterly returns instead of monthly returns.

The composition scheme is a voluntary scheme, and SMEs can opt for it if they meet the eligibility criteria. Once an SME opts for the composition scheme, they will have to pay tax at a lower rate and file quarterly returns. The tax rate under the composition scheme is 1% for manufacturers, 2% for traders, and 5% for restaurants and service providers.

However, there are some restrictions for SMEs under the composition scheme. They cannot claim input tax credit, which means they cannot reduce their tax liability by claiming credit for the tax paid on their purchases. Additionally, they cannot supply goods or services outside their state or engage in e-commerce activities.


While GST has simplified the tax structure in India, it has also brought in some challenges for SMEs. The compliance burden and the increase in the tax rate have been major challenges for SMEs. However, the introduction of the composition scheme has provided some relief to SMEs by offering a simpler, lower tax rate and quarterly returns. SMEs should carefully evaluate their eligibility for the composition scheme and opt for it if it makes sense for their business.


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