Composition Scheme Under GST: Is It Right for Your Business?

The composition scheme is GST's simplified option for small businesses. Instead of charging GST on every invoice and claiming credit on every purchase, a composition dealer pays a small flat percentage of turnover each quarter and files one annual return.

It suits some businesses very well and others very badly. This guide explains the limits, rates, conditions and filings, with examples to help you decide.

What is the composition scheme under GST?

Section 10 of the CGST Act allows an eligible registered person to pay tax at a fixed rate on turnover, in place of the tax normally payable. The core features:

• Low flat rate on turnover, split equally between CGST and SGST.
• No GST charged to customers — you issue a bill of supply, not a tax invoice.
• No input tax credit on purchases.
• Quarterly payment through Form CMP-08 and an annual return in Form GSTR-4.

The scheme is designed for businesses that sell mainly to consumers, where GST on the invoice cannot be claimed as credit by the buyer anyway.

What are the composition scheme limits and rates?

Category	Turnover limit (previous FY)	Rate on turnover	Split
Manufacturers (other than notified goods)	₹1.5 crore	1%	0.5% CGST + 0.5% SGST
Traders (goods)	₹1.5 crore	1% of taxable turnover	0.5% + 0.5%
Restaurants not serving alcohol	₹1.5 crore	5%	2.5% + 2.5%
Certain special category states (all above)	₹75 lakh	Same rates	—
Service providers / mixed suppliers under section 10(2A)	₹50 lakh	6%	3% + 3%

Two clarifications:

• Businesses opting under the main scheme (₹1.5 crore) can also supply services, other than restaurant services, up to 10% of turnover in the state or ₹5 lakh, whichever is higher.
• The ₹50 lakh option under section 10(2A) is for those who supply mainly services, or who exceed the 10%/₹5 lakh services allowance.

The limit is tested on aggregate turnover of the previous financial year (all-India, same PAN) and must not be exceeded during the current year.

Who cannot opt for the composition scheme?

You are not eligible if you:

1. make inter-state outward supplies of goods (and, for the services option, of services),
2. supply goods through an e-commerce operator required to collect TCS (subject to any relaxations notified for specific cases),
3. are a manufacturer of notified goods — ice cream and edible ice, pan masala, and tobacco and tobacco substitutes, among others notified,
4. supply goods or services not leviable to GST (such as alcohol for human consumption),
5. are a casual taxable person or non-resident taxable person,
6. make supplies in the nature of non-taxable or exempt-only categories that the rules exclude, or
7. have another registration under the same PAN that has not opted for composition — all registrations under one PAN must opt in together.

How do you opt in to the composition scheme?

1. New registration: tick the composition option in the Business Details section of Form REG-01. See our GST registration process guide.
2. Existing regular taxpayer: file Form GST CMP-02 on the portal before the start of the financial year (that is, by 31 March) for the year you want to join.
3. Reverse stock credit: an existing taxpayer moving to composition must file Form ITC-03 to pay back input tax credit on stock, semi-finished goods and capital goods held on the day before joining.
4. Display the status: write "composition taxable person" on your signboard at the principal place of business and every additional place.
5. Update your invoicing to bills of supply with the mandatory declaration.

What returns does a composition dealer file?

Form	What it is	Frequency	Due date
CMP-08	Statement-cum-challan to pay tax	Quarterly	18th of the month after the quarter
GSTR-4	Annual return	Yearly	30 April after the financial year
CMP-04	Intimation to withdraw voluntarily	When needed	As prescribed

Interest applies on late payment of tax, and late fees apply to delayed returns. Composition dealers do not file GSTR-1 or GSTR-3B. Purchases from registered suppliers appear in their records but no credit is claimed.

Worked example: composition vs regular for a Nashik grocery

A Nashik grocery store sells only within Maharashtra, mostly to households. Last year's turnover: ₹90 lakh, of which ₹30 lakh is exempt (loose grain, fresh vegetables) and ₹60 lakh taxable. Purchases of taxable goods: ₹50 lakh, with GST of about ₹2,80,000 paid to suppliers (mostly at 5%, some at 18%).

Composition (trader, 1% on taxable turnover):

• Tax: 1% × ₹60,00,000 = ₹60,000 for the year.
• No ITC on the ₹2,80,000 paid to suppliers — it is a cost already in the purchase price.
• Customers pay no visible GST.

Regular scheme:

• Assume output GST on ₹60 lakh taxable sales averages 7% ≈ ₹4,20,000.
• Less ITC ₹2,80,000 = net ₹1,40,000 paid to the government — but the ₹4,20,000 is collected from customers, so the store must either raise prices or absorb it.

For a consumer-facing store with modest margins, composition usually means lower prices on the shelf and far less paperwork. Now consider a Nashik wholesaler with the same figures but selling to registered retailers: those retailers cannot claim ITC on a bill of supply, so they would rather buy from a regular dealer. Composition would cost the wholesaler customers.

What must a composition dealer's bill of supply contain?

Because no tax is charged, a composition taxpayer issues a bill of supply instead of a tax invoice. It should carry:

1. Name, address and GSTIN of the supplier.
2. A consecutive serial number, unique for the financial year.
3. Date of issue.
4. Name, address and GSTIN (if registered) of the recipient.
5. HSN code of goods or SAC of services, where required.
6. Description of goods or services.
7. Value of supply, after discounts.
8. Signature of the supplier or authorised representative.
9. The declaration: "composition taxable person, not eligible to collect tax on supplies".

The bill must not show any CGST, SGST or IGST amount. If you want to compare it with a regular tax invoice, see our templates.

How do you leave the composition scheme?

You can exit in two ways:

Route	How	Effect
Voluntary withdrawal	File CMP-04 on the portal	Regular scheme from the date in the intimation
Automatic lapse	Turnover crosses the limit, or you become ineligible (e.g. start inter-state sales)	Regular scheme from the day of crossing or ineligibility; file CMP-04 within the prescribed time

After exit, file ITC-01 to claim credit on stock in hand, semi-finished and finished goods, and eligible capital goods on the day before you became a regular taxpayer, then start issuing tax invoices and filing GSTR-1 and GSTR-3B. Plan the switch at least a month ahead: price lists, invoice templates and customer communication all change.

Example: exit mid-year

A Kolhapur trader under composition crosses ₹1.5 crore on 12 January. From 12 January it must charge GST on every sale and file regular returns. On stock of ₹8,00,000 held on 11 January, bought with ₹40,000 GST paid to suppliers, it can claim that ₹40,000 through ITC-01 (subject to conditions), which cushions the transition.

Which states have the lower ₹75 lakh limit?

The GST portal's Welcome Kit for new taxpayers explains that the special category states decide the composition limit for goods in their own territory, and lists Manipur, Mizoram, Nagaland, Tripura, Arunachal Pradesh, Meghalaya, Sikkim and Uttarakhand as having a ₹75 lakh limit. The ₹50 lakh limit for service providers and mixed suppliers applies across all states and UTs. Because state positions can be revised by notification, confirm the current figure for your state on the portal before relying on it, especially in the hill and north-eastern states.

How the limit is tested

1. Use the preceding financial year. Eligibility to opt in depends on aggregate turnover in the previous year, not the current one.
2. Count the whole PAN. Aggregate turnover covers every registration under the same PAN across India, including exempt supplies and exports.
3. Keep watching during the year. The option lapses from the day current-year turnover crosses the limit, so the test continues after you have opted in.

Example. A Gangtok bakery had ₹70 lakh turnover last year and sells only within Sikkim. It may opt in under the ₹75 lakh limit that the Welcome Kit lists for Sikkim. If the same bakery were in Pune with ₹1.2 crore turnover, the ₹1.5 crore limit would apply instead. In both cases, if the bakery also ran a separate catering registration in another state under the same PAN, that turnover would be added to the test.

When is the composition scheme a bad idea?

• You sell to GST-registered businesses who want input tax credit.
• You plan to sell outside your state or on marketplaces that collect TCS.
• You buy heavily from registered suppliers and would recover a lot of ITC under the regular scheme.
• Your margins are thin, so 1% of turnover is a large share of profit.
• You expect to cross ₹1.5 crore soon — exiting mid-year means switching invoicing systems quickly.

Common mistakes under the composition scheme

• Charging GST on the bill. A composition dealer cannot collect tax; doing so creates liability to pay it in full.
• Omitting the declaration "composition taxable person, not eligible to collect tax on supplies".
• Making a single inter-state sale, which breaks eligibility.
• Forgetting reverse charge: tax on notified inward supplies (for example, certain transport services) is payable at normal rates and is not covered by the composition rate. See reverse charge mechanism.
• Opting in for one GSTIN only when the PAN has registrations in other states.
• Missing CMP-02 by 31 March and assuming you can switch mid-year.
• Not tracking turnover against ₹1.5 crore during the year.

Billing Software by Betterwork can issue bills of supply with the composition declaration and track turnover against the limit, so the business sees early if it is heading for the regular scheme. Our guide to the GST registration threshold limit explains how aggregate turnover is calculated.

Key takeaways

• Composition lets eligible small businesses pay tax at 1% (manufacturers/traders), 5% (restaurants) or 6% (services option) of turnover.
• Limits: ₹1.5 crore (₹75 lakh in certain special category states); ₹50 lakh for the services option.
• No ITC, no GST on bills, no inter-state outward supplies, and all GSTINs under a PAN must opt in together.
• Pay quarterly by CMP-08 (18th after quarter) and file GSTR-4 annually (30 April).
• Best for consumer-facing local businesses; poor fit for B2B suppliers and inter-state sellers.

This guide is general information, not tax advice. Rules last checked on 20 October 2026; confirm with your tax professional for your situation.