GST Composition Scheme: Eligibility, Rates, Limits, and Returns
Picture a stationery shop in Pune or a sweet shop in Kolkata. The owner sells mostly to walk-in customers, buys from two or three wholesalers, and has no accountant on the payroll. For a business like this, filing GSTR-1 and GSTR-3B every month and matching every purchase bill for input tax credit can take more effort than the tax itself. The composition scheme was designed for exactly this kind of business.
Below we look at how the scheme works, who can use it, what it costs, which forms you file, and how to tell whether it actually saves you money.
The scheme in brief
The composition scheme lets a small registered business pay GST as a fixed, low percentage of its turnover instead of charging tax on each sale and claiming credit on each purchase. It comes from Section 10 of the CGST Act, 2017 and the Composition Rules, and joining it is entirely optional.
The trade-off is simple: you file far less, but you give up input tax credit, you cannot add GST to your bills, and you must keep your outward sales within your own state.
At a glance | Composition scheme |
|---|---|
Who it is for | Small manufacturers, traders, restaurants and (under a separate option) small service providers |
Turnover ceiling | ₹1.5 crore (₹75 lakh in special category states); ₹50 lakh for service providers |
Tax rate | 1%, 5% or 6% of turnover, depending on the business |
Sales document | Bill of Supply, with no GST shown |
Input tax credit | Not available |
Returns | CMP-08 every quarter and GSTR-4 once a year |
How much turnover is allowed?
Type of business | Maximum turnover in the previous financial year |
|---|---|
Manufacturers, traders and restaurants (most states) | ₹1.5 crore |
Manufacturers, traders and restaurants in special category states | ₹75 lakh |
Service providers and mixed suppliers under Section 10(2A) | ₹50 lakh |
The figure that counts is aggregate turnover: the total value of all taxable, exempt, export and interstate supplies made by every GST registration under the same PAN anywhere in India. The GST collected on those sales is left out.
Worked example: a garment retailer holds one PAN and runs three outlets, each with its own registration, turning over ₹60 lakh, ₹45 lakh and ₹30 lakh. Individually every outlet looks small, but the aggregate turnover is ₹1.35 crore. That is still under ₹1.5 crore, so the business qualifies. If it later opened a fourth outlet doing ₹20 lakh, the total would reach ₹1.55 crore and all three original outlets would have to move to the regular scheme together. A business cannot keep some registrations under one PAN in composition and others outside it.
Who can join
- Manufacturers of most goods, apart from a few notified items.
- Traders: retailers, wholesalers and distributors of taxable goods.
- Restaurants and eateries that do not serve alcohol.
- Service providers, through the separate option in Section 10(2A), as long as turnover stays within ₹50 lakh.
A goods business under the main scheme may also earn some income from services, such as a repair charge or interest income, up to 10% of its turnover or ₹5 lakh, whichever is higher.
Who is left out
- Businesses that sell goods or services to other states. Interstate purchases are allowed; interstate sales are not.
- Casual taxable persons and non-resident taxable persons.
- Manufacturers of notified goods such as ice cream, pan masala and tobacco products.
- Businesses supplying goods that are outside GST, such as petrol and diesel or alcohol for human consumption.
- Service providers selling through e-commerce operators that collect tax at source. Since 1 October 2023, goods suppliers may sell through e-commerce platforms within their own state, subject to conditions.
Composition tax rates
Business | Rate (CGST + SGST) | Charged on |
|---|---|---|
Manufacturers | 1% (0.5% + 0.5%) | Turnover in the state |
Traders | 1% (0.5% + 0.5%) | Turnover of taxable goods only |
Restaurants not serving alcohol | 5% (2.5% + 2.5%) | Turnover in the state |
Service providers under Section 10(2A) | 6% (3% + 3%) | Turnover in the state |
Because a trader pays only on taxable sales, exempt items such as fresh vegetables or unbranded grains add nothing to the bill.
Worked example: a stationery trader sells ₹48 lakh of taxable goods and ₹6 lakh of exempt goods in a year. The composition tax is 1% of ₹48 lakh, which is ₹48,000, split as ₹24,000 CGST and ₹24,000 SGST and paid in four quarterly instalments. The exempt sales are not taxed.
Remember that this tax is paid out of the business's own pocket. Customers are not charged GST, so the cost has to be built into your selling prices.
A note on purchases. Two kinds of purchase still create tax for you on top of the composition rate. If you buy from an unregistered supplier something that falls under reverse charge, or you import goods or services, you pay that tax at the normal rate, and you cannot claim credit for it.
Opting in, and opting out
- New businesses choose the composition option in the GST registration application (Form REG-01).
- Businesses already registered file Form CMP-02 on the GST portal before the start of the financial year in which they want to switch, normally by 31 March.
- When switching from the regular scheme, file Form ITC-03 within 60 days to reverse the input tax credit on stock you hold on the switch date.
- To leave the scheme voluntarily, file Form CMP-04. If your turnover crosses the limit, you must move to the regular scheme from the day it crosses.
Once you are in, update your bill format, price lists and books so they reflect composition status from the very first day.
Your compliance calendar
What | Form | When |
|---|---|---|
Quarterly statement and tax payment | CMP-08 | 18 July, 18 October, 18 January and 18 April |
Annual return | GSTR-4 | 30 June after the year ends (from FY 2024–25), e.g. 30 June 2027 for FY 2026–27 |
Monthly GSTR-1 and GSTR-3B | — | Not required |
That is five filings a year instead of more than twenty. Late filing still attracts late fees and interest, so it is worth keeping a reminder for each date. Check the GST portal each quarter for any extensions.
Billing rules you must follow
- Issue a Bill of Supply, not a tax invoice, for every sale.
- Print the words "composition taxable person, not eligible to collect tax on supplies" at the top of the bill.
- Do not show any CGST, SGST or IGST amount on the bill. The price you charge is the full price.
- Put the words "composition taxable person" on the signboard at your shop or office as well.
Showing GST on a bill while registered under composition is a common mistake. It can lead to penalties and to having to pay the tax shown on the bill.
Weighing it up
Works in your favour | Works against you |
|---|---|
Five filings a year instead of monthly returns | No input tax credit on purchases, rent or capital goods |
Low, flat rate that is easy to budget for | Cannot sell to customers in other states |
No need to match every purchase bill against supplier filings | Registered business buyers get no credit, so they may prefer other suppliers |
Lower accounting and consultant costs | Tax comes out of your margin because it cannot be added to the bill |
Suits shops that sell mainly to the public | Turnover must be watched constantly to stay eligible |
A quick test before you switch
Answer these five questions honestly:
- Do most of your customers buy for personal use rather than for business?
- Do you sell only within your own state, with no plans to change that soon?
- Is the GST on your purchases fairly small compared with your sales?
- Is your turnover comfortably below the limit, not just under it?
- Would simpler filing save you real time or money?
Mostly "yes"? Composition is probably a good fit. If you answered "no" to the first three, the regular scheme is likely to work out cheaper, because input tax credit and B2B sales matter more to you than lighter paperwork. For a precise answer, take last year's figures and work out the tax under both schemes side by side.
Composition dealers and IntelligentGST
IntelligentGST handles both sides of the composition scheme:
- If your business is a composition dealer, answer "Are you opted for Composition Scheme?" when you create your company, and the company is set up with the Composition GST type.
- If you buy from or sell to composition dealers, set their GST Supplier Type to Composition in the account master (see how to create a customer). Purchases from composition suppliers are then reported separately in GSTR-3B.
Frequently asked questions
Can I collect GST from my customers under the composition scheme?
No. You pay the composition tax yourself. Your Bill of Supply must not show any GST amount.
Do composition dealers file GSTR-1 or GSTR-3B?
No. They file CMP-08 every quarter and GSTR-4 once a year.
Can a composition dealer buy goods from another state?
Yes. Interstate purchases are allowed. Only interstate sales are barred.
What happens if my turnover crosses the limit mid-year?
You must leave the scheme from the day the limit is crossed, file the withdrawal intimation, and start issuing tax invoices under the regular scheme.
Can a restaurant that serves alcohol opt in?
No. The scheme is open only to restaurants that do not serve alcoholic liquor.
Can a freelancer or consultant use the composition scheme?
Yes, through the Section 10(2A) option, as long as turnover stays within ₹50 lakh and all supplies are within the state. The rate is 6%.
Can a composition dealer sell on online marketplaces?
Since 1 October 2023, suppliers of goods may sell through e-commerce operators within their own state, subject to conditions. Service providers selling through e-commerce operators remain excluded.
The bottom line
The composition scheme trades input tax credit and interstate reach for simplicity. For a small local shop, restaurant or workshop selling to the public, that trade is often well worth making. For a growing business that buys heavily, sells to other businesses or plans to sell across state lines, the regular scheme usually wins.
GST rules change through notifications, so confirm the current limits, rates and due dates on the GST portal or with your tax adviser before you file.