GST Composition Scheme — Who Qualifies and How It Works
India's GST system includes a simplified option specifically designed for small businesses — the Composition Scheme. Moreover, it offers a dramatically lower tax rate, reduced compliance, and quarterly instead of monthly filing. Furthermore, for small traders, manufacturers, and restaurants with mostly local customers, it can significantly reduce the administrative burden of GST.
- The Composition Scheme lets eligible small businesses pay a flat 1%, 5%, or 6% of turnover instead of regular GST rates.
- Eligibility requires turnover below ₹1.5 crore (₹75 lakh in special category states), or ₹50 lakh for the service-provider variant.
- Composition dealers cannot collect GST from customers, issue tax invoices, or claim Input Tax Credit.
- The scheme is restricted to intra-state supplies only — and is completely barred for e-commerce sellers.
- Compliance drops from roughly 25 annual filings to just 5 — GSTR-4 annually plus quarterly CMP-08.
- It works best when most customers are B2C and don't need ITC — businesses with B2B buyers often do better on regular GST.
However, the scheme comes with important restrictions that make it unsuitable for many businesses. Specifically, composition dealers cannot collect GST from customers, cannot issue tax invoices, and cannot claim input tax credit. Consequently, choosing between the Composition Scheme and regular GST requires careful analysis of your business model.
What Is the GST Composition Scheme?
The Composition Scheme is an alternative to regular GST registration. Specifically, instead of calculating GST on every transaction and filing detailed returns monthly, a composition dealer pays a fixed percentage of their annual turnover as GST. Moreover, this rate is substantially lower than regular GST rates. Furthermore, the scheme is administered under Section 10 of the CGST Act.
Composition scheme GST rates by business type
Who Can Opt for the Composition Scheme?
Eligibility depends on both turnover thresholds and the nature of your business. Moreover, all conditions must be met simultaneously. Specifically, the key eligibility criteria are:
Turnover below ₹1.5 crore: Annual aggregate turnover must not exceed ₹1.5 crore. Furthermore, for businesses in special category states (including northeastern states, Himachal Pradesh, and Uttarakhand), the limit is ₹75 lakhs.
Goods-based or restaurant business: Primarily available for traders, manufacturers, and restaurants. Moreover, a separate scheme under CGST Rule 7 extends a similar option to service providers with turnover below ₹50 lakhs.
Intra-state supplies only: Composition dealers can only supply within their home state. Consequently, businesses with regular interstate customers are ineligible.
No e-commerce sales: If you sell through Amazon, Flipkart, Meesho, or any other e-commerce operator, you cannot opt for the Composition Scheme. Specifically, e-commerce platforms are required to collect TCS, which is incompatible with the composition mechanism.
Who Is Excluded From the Composition Scheme?
Certain businesses are explicitly barred from the scheme regardless of turnover. Specifically, these include ice cream and pan masala manufacturers, producers of tobacco products, suppliers of goods not leviable to GST, suppliers who provide services other than restaurant services (in the standard scheme), and any business making inter-state supplies. Moreover, if any one business in a PAN has opted out of the scheme, all businesses under that PAN must also opt out. Consequently, composition dealers with multiple business verticals must plan carefully.
What Can Composition Dealers Not Do?
The simplicity of the Composition Scheme comes with significant trade-offs. Furthermore, these restrictions are deal-breakers for many business models. Consequently, understanding them before opting in is essential.
Cannot collect GST from customers: The tax you pay is entirely from your own pocket — at 1% or 5% of turnover. Specifically, you cannot add GST to your invoice and collect it from buyers.
Cannot issue a tax invoice: Instead, composition dealers issue a bill of supply which bears the words "Composition taxable person, not eligible to collect tax on supplies." As a result, your B2B customers cannot claim ITC on purchases from you.
Cannot claim input tax credit: Composition dealers are ineligible for ITC on their purchases. Therefore, GST paid on inputs is simply a cost — it cannot be offset against any liability.
Cannot make inter-state supplies: All sales must be within the state of registration. Moreover, even occasional inter-state orders disqualify you from the scheme retroactively.
How to Register for the Composition Scheme
Existing GST registrants can opt into the Composition Scheme at the beginning of a financial year by filing Form CMP-02 on the GST portal. Specifically, the option must be exercised before the start of the financial year for which it is to apply. Furthermore, new registrants can choose the scheme at the time of initial GST registration.
Importantly, opting into the scheme means filing GSTR-4 — an annual return — instead of monthly GSTR-1 and GSTR-3B. Moreover, a quarterly challan (CMP-08) is filed to pay the tax. Consequently, total annual compliance filings reduce from approximately 25 returns to just 5 — a significant administrative simplification.
Composition Scheme vs Regular GST — Which Is Better for You?
The Composition Scheme is advantageous if your customers are primarily end consumers (B2C) who do not need ITC. Moreover, it suits businesses with high turnover but low input costs — since ITC is unavailable, the scheme works best when your input GST is minimal. Conversely, businesses with significant B2B customers who claim ITC will find that composition registration makes them unattractive as suppliers — losing customers who need tax invoices.
Rule of thumb: If more than 50% of your revenue comes from B2B customers who claim ITC, regular GST registration almost always serves you better than the Composition Scheme.
For calculating how much tax you would pay under regular GST versus the composition rate, use our GST calculator. Additionally, if you are a service provider wondering about the ₹50 lakh service composition scheme, see our guide on GST for freelancers and service providers. Furthermore, for understanding what ITC you give up by opting in, read our full article on Input Tax Credit under GST.
GST Portal — Composition Scheme (Form CMP-02)
CBIC — Section 10, CGST Act (Composition Levy)
GST Composition Scheme — Frequently Asked Questions
What is the turnover limit for the GST Composition Scheme?
₹1.5 crore annual turnover for traders and manufacturers (₹75 lakhs in special category states), or ₹50 lakhs for the service-provider variant under CGST Rule 7.
Can a composition dealer claim Input Tax Credit?
No. Composition dealers cannot claim ITC on their purchases — GST paid on inputs is simply a cost that cannot be offset against any liability.
Can e-commerce sellers opt for the Composition Scheme?
No. Any business selling through an e-commerce operator like Amazon, Flipkart, or Meesho is barred from the Composition Scheme regardless of turnover.
What returns does a composition dealer file?
Composition dealers file an annual GSTR-4 return and a quarterly CMP-08 challan to pay tax — far fewer filings than the roughly 25 a regular GST dealer files annually.
Compare your regular vs composition GST liability
Enter your sale amount to see the regular GST figure — then compare it to 1% or 5% of your turnover under composition.
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