February 23, 2023

GST Impact on SME Sector and Composition Scheme

The Goods and Services tax (GST) has had a far-reaching impact on all sectors of the Indian economy, especially the Small and Medium Enterprises (SME) sector. GST is a unified tax system that has replaced all the indirect taxes that were levied by the central and state governments. This new system has made taxation simpler and more transparent. However, the implementation of GST has had both positive and negative impacts on the SME sector. In this article, we will be discussing the GST impact on SME sector and Composition Scheme, which is a scheme introduced under GST for small businesses.

Overview of GST

GST is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. It is a destination-based tax system, which means that tax is collected by the state where the goods or services are consumed. GST has replaced a host of indirect taxes such as excise duty, VAT, service tax, and entry tax. GST has made taxation easier and more transparent, as it has simplified the tax compliance process.

GST Impact on SME Sector

The implementation of GST has had a profound impact on the SME sector. The new tax system has created a level playing field for all businesses, irrespective of their size. SMEs can now compete with larger enterprises, as they are no longer burdened with multiple taxes. GST has simplified the tax compliance process for SMEs, as they only need to file a single tax return for all their business activities. This has reduced the compliance cost for SMEs, as they no longer have to maintain separate accounts for different taxes.

However, the implementation of GST has also posed some challenges for the SME sector. The initial introduction of GST resulted in some disruption to the business activities of SMEs. This was due to the complexity of the new tax system and the lack of awareness among SMEs about the new tax regime. SMEs faced issues such as lack of clarity on GST rates, confusion over input tax credit, and a shortage of trained professionals to handle GST compliance.

Composition Scheme under GST

To ease the burden of GST compliance on small businesses, the government has introduced a Composition Scheme under GST. The Composition Scheme is a simplified tax scheme for small businesses with an annual turnover of up to Rs. 1.5 crores. Under the Composition Scheme, businesses are required to pay a fixed percentage of their turnover as tax, instead of the regular GST rates. The Composition Scheme has made GST compliance easier and more affordable for small businesses.

However, there are certain restrictions and limitations to the Composition Scheme. Businesses registered under the Composition Scheme are not eligible for input tax credit, and they are not allowed to issue tax invoices. They are also not allowed to make inter-state supplies. The Composition Scheme is only applicable for businesses that deal exclusively in goods, and not for businesses that provide services.


In conclusion, the implementation of GST has had a mixed impact on the SME sector. While it has simplified the tax compliance process for small businesses, it has also created some challenges. However, the introduction of the Composition Scheme under GST has made GST compliance easier and more affordable for small businesses. SMEs that are eligible for the Composition Scheme should consider registering under it, as it will help them save costs and simplify their tax compliance process.


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