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GST

GST Composition Scheme

Virtual Auditor2026-03-20🕒 16 min read

📌 Quick Answer: What Is the GST Composition Scheme?

The GST Composition Scheme under Section 10 of the CGST Act is a simplified tax payment and compliance mechanism for small taxpayers with aggregate turnover up to ₹1.5 crore (₹75 lakh for special category States). Composition taxpayers pay tax at reduced flat rates (1% for manufacturers, 1% for traders, 5% for restaurants) on their turnover and file quarterly returns in Form CMP-08 instead of monthly GSTR-1 and GSTR-3B. However, they cannot claim input tax credit (ITC), cannot make inter-State supplies, and cannot issue tax invoices. The scheme is governed by Rules 3 to 7 of the CGST Rules. For evaluating whether the composition scheme is right for your business, consult our GST advisory team.

📖 Definition — Composition Levy: Under Section 10(1) of the CGST Act, 2017, the composition levy is an alternative method of levy and collection of tax at a prescribed percentage of turnover, available to registered persons whose aggregate turnover in the preceding financial year did not exceed the prescribed limit. The composition taxpayer pays a flat percentage of their turnover as tax instead of the regular GST rates applicable to their goods or services.

📖 Definition — Aggregate Turnover for Composition: As per Section 2(6) of the CGST Act, aggregate turnover includes all taxable supplies, exempt supplies, exports, and inter-State supplies of persons having the same PAN, computed on an all-India basis. For composition eligibility, this turnover is calculated for the preceding financial year (or the current financial year for new registrants).

1. Eligibility Criteria for the Composition Scheme — Section 10(1) and (2)

1.1. Turnover Threshold

The following turnover thresholds apply for opting into the composition scheme:

Category General States Special Category States
Manufacturers & Traders ₹1.5 crore ₹75 lakh
Service Providers (Section 10(2A)) ₹50 lakh ₹50 lakh
Restaurants (not serving liquor) ₹1.5 crore ₹75 lakh

The turnover threshold was enhanced from ₹1 crore to ₹1.5 crore vide Notification No. 14/2019-Central Tax dated 07.03.2019. For special category States (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, and Uttarakhand), the limit is ₹75 lakh, enhanced from ₹50 lakh by the same notification.

1.2. Who Cannot Opt for Composition Scheme? — Section 10(2)

The following categories of persons are not eligible to opt for the composition scheme:

  • Persons making inter-State outward supplies — Section 10(2)(a). A composition dealer cannot sell goods or services to a buyer located in another State. This is one of the most restrictive limitations of the scheme.
  • Casual taxable persons and non-resident taxable persons — Section 10(2)(b) and (c)
  • Persons supplying goods through e-commerce operators who are required to collect TCS under Section 52 — Section 10(2)(d). However, this restriction has been partially relaxed through amendments allowing certain small suppliers on e-commerce platforms to opt for composition.
  • Manufacturers of notified goods — The following goods are notified under Section 10(2)(e) via CBIC Notification No. 08/2017-Central Tax: ice cream and other edible ice (HSN 2105), pan masala (HSN 2106), tobacco and manufactured tobacco substitutes (Chapter 24), and aerated water (HSN 2202 10 10)
  • Persons supplying goods or services not leviable to tax under the CGST Act

1.3. Extension to Service Providers — Section 10(2A)

The composition scheme was originally available only to suppliers of goods and restaurants. Through the CGST (Amendment) Act, 2019, Section 10(2A) was inserted, extending the benefit to service providers (or mixed suppliers of goods and services) with aggregate turnover up to ₹50 lakh in the preceding financial year. Such persons are required to pay composition tax at 3% CGST + 3% SGST (total 6%) on first supplies of goods or services or both up to the threshold. This provision was notified effective from 01.04.2019 via Notification No. 02/2019-Central Tax (Rate) dated 07.03.2019.

2. Composition Tax Rates

Category CGST Rate SGST/UTGST Rate Total Rate Statutory Basis
Manufacturers 0.5% 0.5% 1% Section 10(1) read with Notification 01/2018-CT(Rate)
Traders (goods supply) 0.5% 0.5% 1% Section 10(1) read with Notification 01/2018-CT(Rate)
Restaurants (not serving liquor) 2.5% 2.5% 5% Section 10(1)(b)
Service Providers / Mixed (Section 10(2A)) 3% 3% 6% Section 10(2A) read with Notification 02/2019-CT(Rate)

Important: The composition tax is calculated on the turnover in State or turnover in Union territory (as defined in Section 2(112)), not on the aggregate turnover. The tax is paid out of the pocket of the composition dealer — they cannot collect it from the buyer as they are prohibited from issuing tax invoices.

3. Procedure for Opting into the Composition Scheme — Rules 3 and 4

3.1. For Existing Registered Persons — Rule 3(1)

An existing registered person who wishes to opt for the composition scheme must file an intimation in Form GST CMP-02 on the GST Portal prior to the commencement of the financial year for which the composition scheme is being opted. The intimation must be filed on or before 31st March of the preceding financial year.

Upon filing CMP-02, the registered person must:

  • File a statement of stock in Form GST ITC-03 within 60 days from the commencement of the financial year, detailing the ITC relating to inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and capital goods on which ITC has been claimed — this ITC must be reversed as the composition taxpayer is not eligible for ITC
  • Issue a bill of supply instead of a tax invoice for all subsequent supplies

3.2. For New Registrants — Rule 3(2)

A person applying for new GST registration may opt for the composition scheme in Part B of Form GST REG-01 at the time of registration itself. The option for composition is available in the “Business Details” tab of the registration application on the GST Portal. For assistance with GST registration including composition scheme election, our team handles the entire process.

3.3. Conditions for Opting In — Rule 4

Rule 4 prescribes the conditions that must be fulfilled for a person to opt for composition:

  • The person must not be engaged in making supply of goods not leviable to tax
  • The person must not be engaged in making inter-State outward supplies
  • The person must not be making supplies through e-commerce operators required to collect TCS (subject to recent relaxations)
  • All persons registered under the same PAN must opt for the composition scheme — the scheme cannot be availed selectively for one registration while maintaining regular status for another registration under the same PAN
  • The person must display the words “composition taxable person, not eligible to collect tax on supplies” on every notice or signboard displayed at the place of business
  • Every bill of supply must prominently mention the words “composition taxable person, not eligible to collect tax on supplies”

4. Key Limitations and Restrictions

4.1. No Input Tax Credit (ITC)

This is the most significant trade-off of the composition scheme. Under Section 10(4), a composition taxpayer cannot claim ITC on any of their purchases — whether goods, services, or capital goods. The GST paid on all inward supplies becomes a cost to the business. This means:

  • GST paid on raw materials, trading goods, and consumables is a direct cost
  • GST paid on capital goods (machinery, equipment, vehicles) is not available as credit
  • GST paid on services (rent, professional fees, insurance, transportation) is not creditable

Furthermore, any ITC already claimed in the regular scheme must be reversed through Form GST ITC-03 when opting into composition. This reversal covers ITC on inputs in stock, semi-finished goods, and finished goods as on the date of transition, plus ITC on capital goods reduced by 5% per quarter of use. For detailed ITC reversal calculations, see our guide on ITC reversal under Rules 42 and 43.

4.2. No Inter-State Supplies

Composition taxpayers cannot make inter-State outward supplies of goods or services. This restriction applies to:

  • Sale of goods to buyers in another State
  • Supply of services where the place of supply is in another State
  • Stock transfers to own branches or warehouses in another State

However, a composition dealer can make inter-State inward supplies (purchases from other States). The restriction is only on outward supplies. If a composition dealer inadvertently makes an inter-State supply, they may be liable for cancellation of their composition status and conversion to regular taxpayer.

4.3. No Tax Collection from Buyers

Under Section 10(4), a composition taxpayer cannot collect tax from the recipient on supplies made. They must issue a bill of supply instead of a tax invoice (Section 31(3)(c) read with Rule 49). The bill of supply does not mention tax separately and must contain the words “composition taxable person, not eligible to collect tax on supplies.”

This creates a disadvantage for B2B transactions because the buyer cannot claim ITC on purchases from a composition dealer. Consequently, GST-registered businesses often prefer to procure from regular taxpayers who issue tax invoices with separately charged GST.

4.4. No Supply of Exempt Goods Only

A person engaged in supply of goods or services that are wholly exempt from tax cannot opt for the composition scheme — Section 10(2)(f). However, a person who supplies both taxable and exempt goods can opt for composition, provided other conditions are met.

5. Returns and Compliance Under Composition Scheme — Rule 62

5.1. Quarterly Statement — Form CMP-08

Composition taxpayers must file a quarterly statement in Form GST CMP-08 electronically through the GST Portal. This statement contains the self-assessed tax payable for the quarter and the details of payment. The due date for filing CMP-08 is the 18th of the month succeeding the quarter:

Quarter Period CMP-08 Due Date
Q1 April – June 18th July
Q2 July – September 18th October
Q3 October – December 18th January
Q4 January – March 18th April

5.2. Annual Return — Form GSTR-4

In addition to quarterly CMP-08 statements, composition taxpayers must file an annual return in Form GSTR-4 by 30th April of the year following the financial year. GSTR-4 captures the summary of outward supplies, inward supplies attracting reverse charge, tax paid, and other details for the entire financial year.

Note: Prior to the annual return regime, composition dealers were required to file quarterly GSTR-4 returns. The system was simplified to quarterly CMP-08 statements plus an annual GSTR-4 return to reduce the compliance burden.

5.3. Reverse Charge Obligations

Even though composition taxpayers cannot claim ITC, they are still liable to pay tax on inward supplies attracting reverse charge under Section 9(3) and Section 9(4) of the CGST Act. Common reverse charge scenarios for composition dealers include:

  • Services received from Goods Transport Agencies (GTA) — where the composition dealer is a factory, society, or partnership firm
  • Legal services received from advocates
  • Services received from an unregistered person (for specific categories notified under Section 9(4))
  • Import of services from outside India

The reverse charge tax must be paid through cash ledger only — it cannot be adjusted against any credit. This tax must be reported in the CMP-08 statement and the annual GSTR-4 return.

🔍 Practitioner Insight — CA V. Viswanathan

At Virtual Auditor (IBBI/RV/03/2019/12333), I advise many small business owners on whether the composition scheme truly benefits them. The decision is not straightforward — it depends on the business’s cost structure, customer profile, and growth plans. The composition scheme works best for businesses that primarily serve end consumers (B2C) and have low GST on their input costs. For a restaurant paying high rent, the inability to claim ITC on rent (which attracts 18% GST) means the actual tax burden under composition could be higher than under the regular scheme. I always prepare a comparative tax computation for clients — comparing total tax outflow under composition versus regular scheme — before recommending a switch. Additionally, businesses planning to expand to other States should avoid composition as the inter-State restriction will constrain growth. For businesses on the verge of receiving demand notices, switching to composition mid-year is not advisable as it complicates pending assessments.

6. Withdrawal from the Composition Scheme — Rule 6

6.1. Voluntary Withdrawal

A composition taxpayer who wishes to revert to the regular scheme must file Form GST CMP-04 on the GST Portal. Upon withdrawal, the person becomes a regular taxpayer and must:

  • File GSTR-1 and GSTR-3B from the effective date of withdrawal
  • Issue tax invoices instead of bills of supply
  • Claim ITC on inputs held in stock, semi-finished goods, and finished goods as on the date of withdrawal — by filing Form GST ITC-01 within 30 days from the date of withdrawal
  • Claim ITC on capital goods — reduced by 5% per quarter or part thereof from the date of invoice until the date of withdrawal

6.2. Mandatory Withdrawal — Section 10(3)

Withdrawal from the composition scheme becomes mandatory if:

  • The aggregate turnover exceeds ₹1.5 crore (₹75 lakh for special category States) during the financial year
  • The person starts making inter-State outward supplies
  • The person becomes ineligible due to any other disqualification under Section 10(2)

In such cases, the proper officer may also issue a show cause notice in Form GST CMP-05 and pass an order in Form GST CMP-07 denying or withdrawing the composition option. The affected person must pay the differential tax (difference between regular GST rates and composition rate) along with interest at 18% from the date the disqualification occurred.

7. Composition Scheme vs Regular Scheme — Detailed Comparison

Parameter Composition Scheme Regular Scheme
Turnover Limit ₹1.5 crore (₹50 lakh for services) No upper limit
Tax Rate 1% / 5% / 6% (flat on turnover) Standard rates (5%, 12%, 18%, 28%)
Input Tax Credit Not available Available (subject to conditions)
Inter-State Supply Not permitted (outward) Permitted
Invoice Type Bill of supply Tax invoice
Return Filing Quarterly CMP-08 + Annual GSTR-4 Monthly GSTR-1, GSTR-3B + Annual GSTR-9
Tax Collection from Buyer Cannot collect Must collect and remit
E-commerce Supply Restricted (with recent relaxations) Permitted

8. Practical Scenarios — When Composition Makes Sense

8.1. Scenario 1 — Small Retailer Serving End Consumers

A grocery store in Chennai with annual turnover of ₹80 lakh, purchasing goods worth ₹60 lakh (with average 5% GST). Under composition: tax = ₹80,000 (1% of ₹80 lakh). Under regular: output tax = ₹4 lakh (5% of ₹80 lakh) minus ITC of ₹3 lakh (5% of ₹60 lakh) = ₹1 lakh. Composition saves ₹20,000 and significantly reduces compliance burden. The composition scheme is clearly beneficial here.

8.2. Scenario 2 — Manufacturer with High-GST Inputs

A furniture manufacturer with turnover of ₹1 crore, purchasing timber and hardware worth ₹70 lakh (attracting 12-18% GST). Under composition: tax = ₹1 lakh (1% of ₹1 crore). Under regular: output tax = ₹12 lakh (12% of ₹1 crore) minus ITC of ₹10.5 lakh (avg 15% of ₹70 lakh) = ₹1.5 lakh. Composition saves ₹50,000 but the manufacturer cannot sell outside the State and the buyer cannot claim ITC — this may reduce the customer base.

8.3. Scenario 3 — B2B Service Provider

An IT services firm with turnover of ₹45 lakh serving registered businesses. Under composition (10(2A)): tax = ₹2.7 lakh (6% of ₹45 lakh), no ITC available. Under regular: output tax = ₹8.1 lakh (18% of ₹45 lakh) minus ITC of ₹3.6 lakh = ₹4.5 lakh. Composition saves ₹1.8 lakh in net tax. However, the B2B clients will lose ITC on their purchases from this firm, potentially making the firm less competitive. This scenario requires careful customer analysis.

9. E-Commerce Relaxations for Composition Dealers

Recognising the growing importance of e-commerce for small businesses, the GST Council has progressively relaxed the restriction on composition dealers making supplies through e-commerce platforms. Notification No. 34/2023-Central Tax dated 31.07.2023 and subsequent amendments have permitted certain categories of composition dealers to supply goods through e-commerce operators, subject to conditions including that the supplies must be intra-State.

These relaxations are significant for small manufacturers and artisans who wish to sell their products on platforms like Amazon, Flipkart, or Meesho while retaining the simplified compliance of the composition scheme. However, the inter-State restriction continues to apply — composition dealers can only sell through e-commerce platforms to buyers within the same State.

10. Penalties and Consequences of Non-Compliance

Composition taxpayers must be aware of the following penalty provisions:

  • Collecting tax from recipients — Under Section 10(4), if a composition dealer collects tax on supplies, they must deposit the amount collected with the Government along with interest at 18% and may face penalty under Section 122(1)(ii) of up to ₹5,999 (professional fees only; govt fees and stamp duty extra) or the tax amount, whichever is higher
  • Making inter-State supplies — Results in automatic denial of composition status and liability to pay the differential tax with interest from the date of contravention
  • Exceeding turnover threshold — Must immediately switch to regular scheme and pay differential tax with interest
  • Non-filing of CMP-08 or GSTR-4 — Late fee of ₹50 per day of delay under Section 47 (₹25 CGST + ₹25 SGST), subject to a maximum as prescribed
  • Suo motu cancellation — Registration may be cancelled if the composition taxpayer fails to file returns for 3 consecutive quarters

For challenging wrongful denial of composition benefits or contesting penalties, see our GST appeal guide under Section 107. Our GST appeal services include representation before the Appellate Authority and preparation of grounds of appeal.

📋 Key Takeaways

  • Composition scheme is available for turnover up to ₹1.5 crore (₹75 lakh for special category States; ₹50 lakh for service providers under Section 10(2A))
  • Tax rates are reduced — 1% for manufacturers and traders, 5% for restaurants, 6% for service providers
  • No ITC can be claimed — all GST on purchases becomes a cost; existing ITC must be reversed via Form ITC-03
  • Inter-State outward supplies are prohibited — composition dealers can only sell within their State
  • Cannot issue tax invoices — must issue bills of supply, which means B2B buyers lose their ITC entitlement
  • Simplified compliance — quarterly CMP-08 statements plus annual GSTR-4, instead of monthly GSTR-1 and GSTR-3B
  • All registrations under the same PAN must be composition — selective application is not permitted
  • Always compare net tax outflow under both schemes before opting — composition is not automatically cheaper

Frequently Asked Questions

Can a service provider opt for the GST composition scheme?

Yes, since 01.04.2019, service providers with aggregate turnover up to ₹50 lakh in the preceding financial year can opt for composition under Section 10(2A) of the CGST Act. The applicable rate is 6% (3% CGST + 3% SGST). This option is also available for mixed suppliers who supply both goods and services, provided the total turnover does not exceed ₹50 lakh.

Can a composition dealer sell on Amazon or Flipkart?

Recent relaxations have permitted certain composition dealers to supply goods through e-commerce operators, subject to conditions. The key restriction is that supplies must be intra-State only — the composition dealer cannot sell to buyers in another State even through e-commerce platforms. Check the latest notifications on the CBIC website for current eligibility conditions.

What happens if a composition dealer exceeds the ₹1.5 crore turnover limit?

The composition dealer must immediately switch to the regular scheme from the date the turnover exceeds the threshold. They must file Form GST CMP-04 for withdrawal, start filing GSTR-1 and GSTR-3B, issue tax invoices, and pay the differential tax (difference between regular GST rate and composition rate paid) with interest at 18% from the date of exceeding the limit.

Can I claim ITC when switching from composition to regular scheme?

Yes. Upon switching from composition to regular scheme, you can claim ITC on inputs held in stock, semi-finished goods, and finished goods as on the date of withdrawal by filing Form GST ITC-01 within 30 days. ITC on capital goods is also available, reduced by 5% per quarter from the date of invoice to the date of withdrawal. This ITC reclaim is an important financial benefit of switching.

Is the composition scheme beneficial for a restaurant?

It depends on the restaurant’s cost structure. The composition rate for restaurants is 5% (without ITC), while the regular rate is also 5% (without ITC, as per Notification No. 46/2017-CT(Rate)). Since both rates are effectively the same and neither allows ITC, the only benefit of composition for restaurants is reduced compliance — quarterly filing instead of monthly. However, restaurants serving liquor are not eligible for composition and must register under the regular scheme.

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