Composition Scheme under GST — A Simpler Option for Small Businesses

For small taxpayers, the regular GST compliance cycle of monthly returns, detailed invoicing, and reconciliation can feel like a lot. The Composition Scheme, under Section 10 of the CGST Act, offers a simplified, lower-compliance alternative — at the cost of giving up Input Tax Credit. This guide covers eligibility, rates, conditions, and whether it's the right fit for your business.

Who Can Opt for the Composition Scheme

•      Businesses with aggregate turnover up to ₹1.5 crore in the preceding financial year (₹75 lakh for specified special category states)

•      Service providers, and persons supplying a mix of goods and services, can separately opt under Section 10(2A) if their aggregate turnover is up to ₹50 lakh

•      Must be a supplier making only intra-state supplies (no inter-state outward supply of goods is allowed under composition)

•      Must not be engaged in the supply of goods that are not liable to be taxed under GST (like alcohol)

Who Cannot Opt for the Composition Scheme

•      Manufacturers of notified goods such as ice cream, pan masala, aerated water, and tobacco/tobacco substitute products

•      Persons making any inter-state outward supplies of goods

•      Casual taxable persons and non-resident taxable persons

•      E-commerce sellers who are required to collect tax at source (TCS) through the platform they sell on

•      Persons supplying goods through an e-commerce operator that is required to collect TCS (though a limited relaxation for intra-state e-commerce sales of goods has been introduced separately)

Applicable Tax Rates

•      Manufacturers and traders (goods): 1% of turnover (0.5% CGST + 0.5% SGST)

•      Restaurant services (not serving alcohol): 5% of turnover (2.5% CGST + 2.5% SGST)

•      Other eligible service providers under Section 10(2A): 6% of turnover (3% CGST + 3% SGST)

Key Conditions and Restrictions

•      No Input Tax Credit can be claimed on any inward supply

•      Cannot collect GST separately from customers on the invoice — tax is paid out of the composition dealer's own margin

•      Must issue a 'Bill of Supply' instead of a tax invoice, since no tax is separately charged

•      Must mention 'composition taxable person, not eligible to collect tax on supplies' at the top of every bill of supply, and 'composition taxable person' at every place of business

•      Files a simplified quarterly statement-cum-challan (Form CMP-08) for tax payment, and an annual return (Form GSTR-4)

•      Must switch to the regular scheme immediately if turnover crosses the applicable threshold during the year, by filing Form GST CMP-04

How to Opt In or Opt Out

A person already registered under the regular scheme can opt for composition at the beginning of a financial year by filing Form GST CMP-02, before the start of that year. A person newly applying for registration can opt in directly at the time of registration.

A composition dealer can voluntarily withdraw from the scheme, or is deemed to have withdrawn if they no longer satisfy the eligibility conditions, by filing Form GST CMP-04 — after which they must follow regular scheme compliance (tax invoices, monthly returns, ITC rules) from the date of withdrawal.

💡  Illustration — Composition vs Regular Scheme

A small restaurant with an annual turnover of ₹80 lakh opts for the Composition Scheme. Instead of charging 5% GST separately and dealing with monthly returns and ITC reconciliation, it simply pays 5% of its total turnover (₹4 lakh) as tax directly to the government — but it cannot claim credit for the GST it pays on its own purchases of raw materials and equipment, unlike a similarly-placed restaurant under the regular scheme.

💡  Illustration — Losing Eligibility Mid-Year

A trader registered under composition has a turnover of ₹1.3 crore by December. In January, a large order pushes cumulative turnover past ₹1.5 crore. The moment this threshold is crossed, the trader must immediately switch to the regular scheme by filing Form GST CMP-04, start issuing tax invoices, and begin regular monthly return filing from that point onward.

⚠  Common Mistakes to Avoid

•  Continuing to collect GST from customers while under composition — this is not permitted and attracts penalty

•  Making even a single inter-state sale while under composition, which disqualifies eligibility for the scheme going forward

•  Not switching out of composition promptly when turnover crosses the threshold mid-year

•  Assuming ITC on stock held at the time of opting in (or opting out) is automatically available or automatically lost — specific transitional ITC rules apply and need careful handling

Frequently Asked Questions

Q1. Can a composition dealer charge GST on the invoice to customers?

A. No. A composition dealer cannot collect tax from the recipient; the tax is borne by the dealer out of the sale price, and is paid as a flat percentage of total turnover.

Q2. Can a composition dealer supply goods to another state?

A. No, composition dealers are restricted to intra-state supplies only; a single inter-state supply makes them ineligible for the scheme.

Q3. Can a composition dealer claim Input Tax Credit?

A. No, ITC is not available under the Composition Scheme, which is the main trade-off for its lower rate and simpler compliance.

Q4. What returns does a composition dealer need to file?

A. A quarterly statement-cum-challan in Form CMP-08 for tax payment, and an annual return in Form GSTR-4, instead of the monthly GSTR-1/GSTR-3B cycle followed by regular taxpayers.

Q5. Can a service provider opt for the Composition Scheme?

A. Yes, but only under the separate Section 10(2A) category, with a lower turnover cap of ₹50 lakh, and at a rate of 6% instead of the 1% applicable to goods traders/manufacturers.

Q6. What happens to my Input Tax Credit if I opt into composition from the regular scheme?

A. You must reverse the ITC on inputs held in stock, inputs contained in semi-finished/finished goods held in stock, and on capital goods (proportionately), as on the day immediately preceding the date of opting for composition.

✓  Key Takeaways

•  Composition is available to goods suppliers/manufacturers up to ₹1.5 crore turnover, and services up to ₹50 lakh under Section 10(2A)

•  Tax rates are 1% for goods traders/manufacturers, 5% for non-alcoholic restaurants, and 6% for other eligible services

•  No ITC can be claimed, and GST cannot be separately collected from customers

•  Only intra-state supplies are permitted; any inter-state sale disqualifies the dealer from the scheme

Note: GST rates, thresholds and procedures are revised periodically by the GST Council and CBIC. This article reflects the position understood as of the GST 2.0 rate structure (effective 22 September 2025). Please verify current figures on www.gst.gov.in or with a qualified tax professional before making compliance decisions.

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools