GST composition scheme explained: eligibility, rates, restrictions and when to choose it

The composition scheme under Section 10 of the CGST Act lets a small manufacturer, trader or restaurant with turnover up to ₹1.5 crore pay GST at a flat 1% or 5% of turnover instead of charging tax on every invoice, and lets service providers up to ₹50 lakh pay 6%. In return you give up input tax credit, cannot sell to other states, cannot collect tax from customers, and file only a quarterly CMP-08 and an annual GSTR-4. It suits businesses selling to consumers with thin input credit; it hurts anyone selling to registered buyers.

Who is eligible

Section 10(1) allows a registered person whose aggregate turnover in the preceding financial year did not exceed ₹1.5 crore to opt in. The limit is ₹75 lakh in the special category states listed in the notification (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand). The eligibility is measured on the PAN as a whole; if you have registrations in two states under the same PAN, both must opt for composition or neither can.

Section 10(2A), added in 2019, extends a separate composition option to service providers and mixed suppliers with turnover up to ₹50 lakh in the previous year, at 6%.

You cannot opt in (Section 10(2)) if you:

• Supply services beyond the small permitted limit (for goods composition, services up to 10% of turnover in the state or ₹5 lakh, whichever is higher, are allowed alongside goods).
• Supply goods or services that are not taxable under GST (alcohol, petrol).
• Make any inter-state outward supply.
• Supply services through an e-commerce operator that collects TCS. Since October 2023 composition dealers may supply goods through an e-commerce operator within their state; confirm the current conditions before listing.
• Manufacture ice cream, pan masala, tobacco products, aerated water, or fly ash bricks and a few other notified goods.
• Are a casual taxable person or a non-resident taxable person.

Turnover for the ₹1.5 crore test is aggregate turnover under Section 2(6), including exempt supplies. Turnover for computing the tax is "turnover in the state", which for traders excludes exempt goods.

Rates by business type

The tax is paid from your own pocket. You cannot add "GST 1%" to the customer's bill and you cannot show tax on your document. In practice you build it into your prices.

Reverse charge is separate. If a composition trader pays a goods transport agency ₹20,000 for freight, the trader pays 5% RCM (₹1,000) at the normal rate in CMP-08 and gets no credit for it.

The restrictions, in plain terms

No input tax credit. GST paid on your purchases, rent, software and equipment is a cost. Section 17(5)(e) also blocks your customers from claiming credit on what they buy from you, which is why registered buyers avoid composition suppliers.

No tax collection. Section 10(4) forbids collecting any tax from recipients. Your document is a bill of supply, not a tax invoice.

No inter-state outward supply. Goods and services alike. A Jaipur handicrafts shop that ships one order to Delhi is out of the scheme from that day.

Bill of supply with a declaration. Rule 49 requires a bill of supply with the words "composition taxable person, not eligible to collect tax on supplies" printed at the top (Rule 5(1)(f)). You must also display "composition taxable person" on every signboard at your place of business (Rule 5(1)(g)). The difference between a bill of supply and a tax invoice is covered in our guide to tax invoice, bill of supply and proforma.

Turnover crossing the limit. The option lapses on the day your aggregate turnover crosses ₹1.5 crore (or ₹75 lakh) during the year (Section 10(3)). File CMP-04 within 7 days, start issuing tax invoices, and claim credit on stock held through ITC-01 within 30 days (Section 18(1)(c)).

All or nothing. All registrations under the same PAN must be in the scheme.

How to opt in and out

• New registrant: tick the composition option in Part B of REG-01. The option takes effect from the date of registration.
• Existing regular taxpayer: file Form GST CMP-02 on the portal before the start of the financial year for which you want the scheme (the window is usually open until 31 March). You must then file ITC-03 within 60 days to pay back the credit on stock and capital goods you hold on the day before switching (Section 18(4)).
• Voluntary exit: file CMP-04. You become a regular taxpayer from the date in the form and can claim credit on stock via ITC-01 within 30 days.
• Forced exit: if you become ineligible (inter-state sale, crossing the limit, notified goods), file CMP-04 within 7 days of the event. The officer can also issue CMP-05 to deny the option, and pass an order in CMP-07.

Once you opt in, the option continues year after year until you exit; you do not re-file CMP-02 annually.

Returns: CMP-08 and GSTR-4

The GSTR-4 due date moved from 30 April to 30 June from FY 2024-25 onwards. CMP-08 needs your quarterly turnover figure and reverse charge purchases; GSTR-4 needs supplier-wise inward supplies, which means you must keep a purchase register even though you claim no credit. The GST due dates calendar lists both.

A composition dealer who does not file GSTR-4 for a financial year within three months of its due date can have registration cancelled (Rule 21). See our late fees and penalties guide for what cancellation involves.

Composition versus regular: a worked comparison

The comparison depends on three things: who your customers are, how much GST sits in your purchases, and how much your margin is.

Case A: Kochi electronics shop, turnover ₹80 lakh, selling to consumers. Purchases ₹68 lakh plus 18% GST (₹12,24,000). Sales ₹80 lakh excluding tax.

Under regular registration the ₹2,16,000 is money the customers paid; the shop's own profit is untouched. Under composition the shop pays ₹80,000 from its pocket and also loses ₹12,24,000 of credit, so it must price as if the purchase cost 18% more. For a low-margin trader of taxable goods, composition rarely wins, even though the return count is lower.

Case B: Pune freelance designer, turnover ₹40 lakh, mostly unregistered clients. Expenses with GST: ₹3 lakh plus 18% (₹54,000).

Here composition makes her 18% cheaper to unregistered clients while costing her 6% of turnover. If half her clients were registered agencies claiming credit, the picture changes: those clients would lose ₹18,000 of credit per ₹1 lakh job and may go elsewhere. The GST calculator helps run these numbers for your own mix.

Case C: Bengaluru cloud kitchen, turnover ₹1.2 crore. Restaurants already pay 5% without ITC under the regular scheme, so the tax cost is the same either way. Composition adds the benefit of a quarterly statement instead of monthly GSTR-1 and 3B, and the drawback that food delivery through an app is a supply through an e-commerce operator, which may be permitted for goods but not for services; confirm before opting in. Many cloud kitchens stay regular for this reason.

When to choose composition

Choose it when most of these are true:

• Your customers are consumers or unregistered businesses who do not claim credit.
• Your purchases carry little GST (fresh produce, unregistered suppliers, mostly labour).
• You sell only within your state and do not plan to ship outside it.
• Your margin comfortably absorbs 1%, 5% or 6% of turnover.
• You want fewer filings and no invoice-level reporting.

Stay regular when:

• Registered buyers make up a meaningful share of sales.
• You buy taxable stock at 18% and resell it at a thin margin.
• You sell on marketplaces to other states, or plan to.
• You export or supply to SEZ (zero-rating requires regular registration).
• You are close to ₹1.5 crore and will have to switch mid-year anyway.

Common mistakes

• Charging GST on a composition bill. Collecting tax you are not allowed to collect attracts a penalty equal to the tax under Section 10(5) and Section 73 or 74, plus the tax itself.
• Missing the declaration on the bill of supply. "Composition taxable person, not eligible to collect tax on supplies" must be on every bill.
• One inter-state sale. A single online order to a customer in another state ends your eligibility. Check the delivery address before you ship.
• Forgetting reverse charge. RCM on freight and legal fees is payable at full rate through CMP-08.
• Not filing ITC-03 after switching in. The credit on opening stock must be paid back within 60 days.
• Assuming exempt turnover does not count. It counts for the ₹1.5 crore eligibility test even though traders exclude it from the tax base.
• Skipping the purchase register. GSTR-4 needs supplier-wise inward supplies with GSTIN, and the annual figures should reconcile with your CMP-08 totals.
• Ignoring the signboard rule. "Composition taxable person" must appear at every place of business.

How VyaparKit helps

The non-GST invoice tool produces a bill of supply without tax columns, so you can add the composition declaration line and issue compliant bills; the free plan carries a small "Made with VyaparKit" line and Pro removes it. Use the GST calculator to compare regular and composition outcomes on your own numbers, the GST due dates calendar for CMP-08 and GSTR-4 dates, and the GST late fee calculator to see what a delayed GSTR-4 would cost. VyaparKit does not file CMP-08 or GSTR-4; it keeps the bills and the purchase register ready for your CA.

Next steps

• Work out your previous year's aggregate turnover and confirm you are under ₹1.5 crore (or ₹50 lakh for services).
• List your customers by registered and unregistered, and your purchases by GST paid, then run the comparison above.
• If you choose composition, file CMP-02 before 31 March, then ITC-03 within 60 days, and update your bill format and signboard.
• Set reminders for CMP-08 on the 18th after each quarter and GSTR-4 by 30 June.
• Re-check eligibility every quarter, especially inter-state orders and turnover.