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Difference between a Normal Dealer and a Composition Dealer under GST

Normal Dealer and a Composition Dealer Under the GST regime in India, businesses can register as either a Normal Dealer or a Composition Dealer. A Normal Dealer is suitable for businesses with annual turnovers exceeding the specified thresholds (₹40 lahks for goods, ₹20 lahks for services, ₹10 lakh for special category states). They adhere to standard GST rates and can claim Input Tax Credit (ITC), reducing their tax liability by offsetting the GST paid on purchases. However, this involves detailed record-keeping and frequent filing of returns like GSTR-1, GSTR-3B, and GSTR-9, making compliance more complex but beneficial for businesses engaged in B2B transactions.

On the other hand, Composition Dealers are small businesses with turnovers of up to ₹1.5 crore (₹75 lakh for special category states). They enjoy lower, fixed tax rates (1% for manufacturers and traders, 5% for restaurant services, and 6% for certain service providers) and simplified compliance with quarterly and annual returns. They cannot claim ITC and can only issue a bill of supply, not tax invoices. This option is ideal for businesses primarily selling directly to consumers (B2C), seeking ease of operations with less frequent filing requirements, though it limits growth and the ability to pass on ITC benefits to customers

Normal Dealer and a Composition Dealer

Normal Dealer and a Composition Dealer

Normal Dealer and a Composition Dealer under GST in a table format for easy understanding

FeatureNormal DealerComposition Dealer
EligibilityAny business, mandatory if turnover exceeds threshold limits (₹40 lakh for goods, ₹20 lakh for services, ₹10 lakh for special category states)Small businesses with turnover up to ₹1.5 crore (₹75 lakh for special category states)
Tax RatesStandard GST rates: 0%, 5%, 12%, 18%, and 28%Fixed lower rates: 1% for manufacturers and traders, 5% for restaurant services, 6% for certain service providers
Input Tax Credit (ITC)Can claim ITC on GST paid on purchases, reducing overall tax liabilityCannot claim ITC, must pay tax out of pocket
InvoicingCan issue tax invoices, allowing buyers to claim ITCCan issue only bill of supply, not tax invoices
Compliance RequirementsDetailed and frequent filing: Monthly/quarterly GSTR-1, GSTR-3B, and annual GSTR-9Simplified and less frequent filing: Quarterly CMP-08 and annual GSTR-4
Record-KeepingRequires maintaining detailed records and invoicesSimplified record-keeping
Suitable ForBusinesses dealing mainly with other businesses (B2B), those with high input costs, and those comfortable with complianceSmall businesses selling directly to consumers (B2C), those preferring ease of operations
AdvantagesCan reduce tax liability through ITC, beneficial for B2B transactions, promotes detailed financial trackingLower tax rates, simplified compliance, ease of doing business for small traders and service providers
DisadvantagesHigher compliance burden, more complex record-keeping, requires frequent filingsCannot issue tax invoices, restricted in growth due to turnover limit, must pay tax out of pocket
Turnover Threshold for SwitchingMust switch to Normal Dealer if turnover exceeds ₹1.5 crore (₹75 lakh for special category states)Can opt for Normal Dealer status anytime, beneficial if turnover increases significantly
ExamplesLarge wholesalers, manufacturers, service providers with high input costsSmall retail shops, small restaurants, local service providers

Choosing the Right Registration:

  • Choose Normal Dealer if:
    • Your turnover exceeds the specified threshold limits.
    • You have significant input costs and wish to utilize ITC to reduce tax liability.
    • Your business primarily deals with other businesses (B2B transactions).
    • You can manage detailed record-keeping and frequent return filing.
  • Choose Composition Dealer if:
    • Your turnover is within the eligible limit.
    • You prefer lower tax rates and simpler compliance procedures.
    • Your business is primarily retail (B2C transactions), and your customers do not need ITC.
    • You want to focus on ease of doing business with minimal compliance efforts.

By understanding these distinctions, you can decide whether a Normal Dealer or Composition Dealer registration aligns better with your business needs and compliance capabilities.

What is Composition Registration in GST?

Composition Registration under GST is a scheme designed for small businesses to reduce the compliance burden and simplify the taxation process. Under this scheme, eligible businesses pay a fixed percentage of their turnover as tax and file quarterly returns, instead of the regular GST filings and payment methods. This helps small businesses focus more on their operations rather than getting bogged down by the complexities of tax compliance.

The Story of Raj’s Bakery

Raj owns a small bakery in a quaint town. His bakery, “Raj’s Delight,” is popular among the locals for its fresh bread and pastries. Raj started his business with a dream to provide quality baked goods at affordable prices. Over the years, his bakery grew, and so did his sales. However, with growth came the challenge of managing taxes and compliance.

Raj was initially registered as a Normal Dealer under GST. This meant he had to maintain detailed records of all transactions, file monthly returns, and keep track of Input Tax Credit (ITC). While ITC allowed him to reduce his tax liability by claiming credit on GST paid on purchases, the process was cumbersome and time-consuming. Raj found himself spending more time on paperwork than on baking.

One day, Raj attended a workshop on GST organized by the local business association. There, he learned about the Composition Scheme. The speaker explained that the Composition Scheme is designed for small businesses with an annual turnover of up to ₹1.5 crore (₹75 lakh for special category states). Businesses under this scheme pay tax at a lower, fixed rate on their turnover and file quarterly returns, significantly reducing their compliance burden.

Raj was intrigued. The speaker also mentioned the tax rates for different types of businesses:

  • Manufacturers and traders: 1% of turnover
  • Restaurant services: 5% of turnover
  • Other eligible service providers: 6% of turnover

Numerical Example

Let’s illustrate how the Composition Scheme worked for Raj with a numerical example.

Scenario as a Normal Dealer:

  • Annual turnover: ₹1 crore
  • GST rate on bakery products: 12%
  • Total GST collected from customers: ₹12 lakh
  • GST paid on purchases (inputs): ₹4 lakh
  • Net GST payable after ITC: ₹12 lakh – ₹4 lakh = ₹8 lakh
  • Monthly compliance: Detailed records, filing GSTR-1, GSTR-3B, and annual GSTR-9

Scenario as a Composition Dealer:

  • Annual turnover: ₹1 crore
  • Composition tax rate for manufacturers and traders: 1%
  • Total GST payable: ₹1 crore x 1% = ₹1 lakh
  • No ITC claims
  • Quarterly compliance: Filing CMP-08 and annual return in GSTR-4

By opting for the Composition Scheme, Raj’s tax liability reduced from ₹8 lakh to ₹1 lakh annually. Additionally, his compliance requirements simplified significantly. He no longer needed to maintain detailed records for ITC claims or file monthly returns. Instead, he filed simpler quarterly returns and an annual return.

Benefits and Limitations

Benefits:

  1. Reduced Tax Liability: Lower tax rates lead to lower overall tax liability.
  2. Simplified Compliance: Fewer returns and less complex records make it easier to manage.
  3. Focus on Business: More time and energy can be spent on business operations rather than tax management.

Limitations:

  1. No ITC: Businesses under the Composition Scheme cannot claim Input Tax Credit.
  2. Turnover Limit: The scheme is only available to businesses with turnover up to ₹1.5 crore.
  3. Ineligibility for Some Businesses: Certain businesses like manufacturers of ice cream, pan masala, and tobacco, and service providers other than restaurant services are not eligible.

For Raj, the Composition Scheme was a game-changer. It allowed him to focus on what he loved—baking—while keeping his tax compliance simple and manageable. By understanding the nuances of Composition Registration under GST, small business owners like Raj can make informed decisions that best suit their operational needs and compliance capabilities.

What is Normal Registration in GST?

Normal Registration under the Goods and Services Tax (GST) is the standard method of GST registration applicable to most businesses. This registration is mandatory for businesses with turnover exceeding the specified threshold limits (₹40 lakh for goods, ₹20 lakh for services, ₹10 lakh for special category states). Under Normal Registration, businesses charge GST on their sales, claim Input Tax Credit (ITC) on GST paid on purchases, and file regular returns.

The Story of Aarti’s Furniture Store

Aarti runs a furniture store, “Aarti’s Furnishings,” in a bustling city. Her store offers a wide range of furniture, from elegant sofas to sturdy dining tables. Over the years, Aarti’s business flourished, and her annual turnover crossed ₹50 lakh. To comply with the GST regulations, Aarti registered her business as a Normal Dealer.

Aarti was initially apprehensive about the complexities of GST. However, she attended a seminar organized by her city’s Chamber of Commerce, where she learned about the benefits and requirements of Normal Registration under GST.

Key Features of Normal Registration

  1. Eligibility: Businesses with turnover exceeding ₹40 lakh for goods or ₹20 lakh for services.
  2. Tax Rates: Standard GST rates applicable based on the type of goods or services (0%, 5%, 12%, 18%, 28%).
  3. Input Tax Credit (ITC): Businesses can claim ITC on the GST paid on purchases, reducing their tax liability.
  4. Compliance: Regular filing of returns (monthly or quarterly) and maintenance of detailed records.

Numerical Example

To understand how Normal Registration worked for Aarti, let’s go through a numerical example.

Scenario:

  • Annual turnover: ₹50 lakh
  • GST rate on furniture: 18%
  • Total GST collected from customers: ₹50 lakh x 18% = ₹9 lakh
  • GST paid on purchases (inputs such as raw materials, furniture parts): ₹3 lakh

Calculation:

  1. Total GST Collected: ₹9 lakh
  2. GST Paid on Inputs: ₹3 lakh
  3. Net GST Payable: Total GST collected – ITC (GST paid on inputs)
    • ₹9 lakh – ₹3 lakh = ₹6 lakh

By registering as a Normal Dealer, Aarti’s tax liability was effectively ₹6 lakh after claiming ITC.

Compliance and Record-Keeping

Aarti had to ensure meticulous record-keeping to claim ITC. She maintained detailed invoices of all purchases and sales. Every month, she filed:

  • GSTR-1: Detailing outward supplies (sales).
  • GSTR-3B: Summary return for tax payment.
  • GSTR-9: Annual return summarizing the entire year’s transactions.

Benefits and Limitations

Benefits:

  1. Claim ITC: Aarti could claim ITC on the GST paid for business inputs, reducing her net tax liability.
  2. B2B Transactions: Being a Normal Dealer allowed her to issue tax invoices, enabling her business customers to claim ITC.
  3. Credibility: Normal Registration enhanced her business’s credibility with suppliers and customers.

Limitations:

  1. Compliance Burden: Regular filing of detailed returns required diligent record-keeping and compliance efforts.
  2. Complexity: The process of calculating ITC and maintaining accurate records added complexity to her business operations.

Normal Registration under GST, though requiring rigorous compliance and detailed record-keeping, offers significant advantages, especially for businesses with substantial input costs and B2B transactions. For Aarti, it meant leveraging ITC to reduce tax liability, issuing tax invoices to business clients, and enhancing her business’s credibility. Despite the compliance burden, the benefits of Normal Registration helped Aarti manage her tax obligations effectively while focusing on growing her furniture business. Understanding the ins and outs of Normal Registration under GST can help business owners make informed decisions and optimize their tax strategies.

Frequently Asked Questions for Starting a Cloud Kitchen on Swiggy or Zomato

Question 1: What is a cloud kitchen?

Answer:
A cloud kitchen, also known as a ghost kitchen or dark kitchen, is a commercial kitchen space that provides food exclusively for delivery. It operates without a physical dine-in space, focusing on fulfilling online orders placed through food delivery platforms like Swiggy or Zomato.

Question 2: What GST registration is required for a cloud kitchen?

Answer:
A cloud kitchen must register under GST. Given the nature of the business and the requirements of platforms like Swiggy and Zomato, it is advisable to opt for Normal Registration under GST. This allows the business to charge GST on sales and claim Input Tax Credit (ITC) on the GST paid for inputs and expenses.

Question 3: Why should I choose Normal Registration over Composition Registration?

Answer:
Normal Registration is preferred for cloud kitchens for several reasons:

  1. Claim ITC: It allows you to claim ITC on purchases like raw materials, packaging, and other inputs, reducing your overall tax liability.
  2. Compliance with Platforms: Platforms like Swiggy and Zomato often require their partners to be able to issue GST invoices, which is possible only under Normal Registration.
  3. Higher Turnover Potential: Cloud kitchens, especially in urban areas, may quickly exceed the turnover limit for Composition Scheme eligibility (₹1.5 crore), making Normal Registration more practical in the long run.

Question 4: What are the steps to register for GST as a cloud kitchen?

Answer:

  1. Obtain PAN: Ensure your business has a Permanent Account Number (PAN).
  2. Register on GST Portal: Visit the GST portal (www.gst.gov.in) and complete the registration form.
  3. Submit Documents: Provide necessary documents, including PAN card, proof of business registration, identity proof, address proof, and bank account details.
  4. Verification and Approval: The application is verified by the GST authorities, and upon approval, a GSTIN (Goods and Services Tax Identification Number) is issued.

Question 5: What are the compliance requirements for Normal Registration?

Answer:

  1. Monthly/Quarterly Returns: File GSTR-1 (outward supplies), GSTR-3B (summary return), and GSTR-9 (annual return).
  2. Maintain Records: Keep detailed records of all sales, purchases, and expenses.
  3. Issue GST Invoices: Ensure all invoices issued include GST details, allowing customers to claim ITC if applicable.

Question 6: Can I still register under the Composition Scheme?

Answer:
While it is technically possible to register under the Composition Scheme, it is not advisable for a cloud kitchen because:

  1. No ITC: You cannot claim ITC on purchases, increasing your overall tax burden.
  2. Limited Turnover: The scheme is only for businesses with turnover up to ₹1.5 crore, which might be restrictive as your business grows.
  3. Invoice Limitations: You cannot issue tax invoices, which might be required by Swiggy and Zomato for their financial records and transparency.

Question 7: How does GST impact pricing on Swiggy and Zomato?

Answer:
When registered under Normal Registration:

  1. Display of Prices: Prices listed on Swiggy and Zomato should be inclusive of GST.
  2. Tax Collection: The GST collected from customers should be remitted to the government.
  3. Invoice Issuance: Proper GST invoices must be issued for all sales, ensuring compliance and allowing platforms to reconcile their records.

Question 8: Are there any specific benefits for cloud kitchens under GST?

Answer:

  1. ITC on Input Costs: Claim ITC on raw materials, equipment, utilities, and other business expenses.
  2. Transparency: Enhanced transparency and credibility with customers and partners like Swiggy and Zomato.
  3. Growth Facilitation: Easier management of tax obligations as the business scales up, ensuring seamless growth.

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By csannusharma

CS Annu Sharma is a qualified and experienced professional in the field of Company Secretarial and Legal activities. With an impressive academic background and relevant certifications, she has demonstrated exceptional expertise and dedication in her career. Education: Qualified Company Secretary (CS) from the Institute of Company Secretaries of India (ICSI). Graduate in Law from Indraparasth Law College, enabling a strong legal foundation in her professional journey. Graduate in Commerce from Delhi University, providing her with a comprehensive understanding of financial and business concepts. Certifications: Certified CSR Professional from the Institute of Company Secretaries of India (ICSI), showcasing her commitment to corporate social responsibility and ethical business practices. Work Experience: She possesses an extensive and diversified work experience of more than 7 years, focusing on Secretarial and Legal activities. Throughout her career, she has consistently showcased her ability to handle complex corporate governance matters and legal compliance with utmost efficiency and precision. Current Position: Currently, Mrs. Annu holds a prominent position in an NSE Listed Entity, namely Globe International Carriers Limited, based in Jaipur. As a key member of the organization, she plays a vital role in ensuring compliance with regulatory requirements, advising the management on corporate governance best practices, and safeguarding the company's interests. Professional Attributes: Thorough knowledge of corporate laws, regulations, and guidelines in India, enabling her to provide strategic insights and support in decision-making processes. Expertise in handling secretarial matters, including board meetings, annual general meetings, and other statutory compliances. Proficiency in drafting legal documents, contracts, and agreements, ensuring accuracy and adherence to legal requirements. Strong understanding of corporate social responsibility and its impact on sustainable business practices. Excellent communication and interpersonal skills, enabling effective collaboration with various stakeholders, both internal and external. Personal Traits: Mrs. Annu Khandelwal is known for her dedication, integrity, and commitment to maintaining the highest ethical standards in her professional conduct. Her meticulous approach to work and attention to detail make her an invaluable asset to any organization she is associated with. Conclusion: Cs Annu 's profile exemplifies a highly qualified and accomplished Company Secretary, well-versed in legal matters and corporate governance. With her wealth of experience and commitment to excellence, she continues to contribute significantly to the success and growth of the organizations she serves.