The Composition Scheme under GST is a less complex way to pay taxes that is aimed at small taxpayers and businesses. In short, it lets the sanctioned businesses pay the tax at a certain fixed rate of their turnover instead of the usual standard GST rates.
The scheme, which is less complex in its nature, was introduced under Section 10 of the CGST Act, 2017. It enables the taxpayers to make their payments on a quarterly basis and file a return once a year instead of the monthly filings that are required from the regularly registered taxpayers.
Essentially, the main objective behind this scheme is the simplification of taxation, reduction of the administrative work, and thus increasing the availability of cash for the small traders, manufacturers, and service providers in the form of working capital.
Eligibility Criteria for Composition Scheme under GST
The Composition Scheme under GST may be availed of only by small taxpayers that satisfy certain turnover and business criteria. It is intended to offer comfort to small enterprises by making the compliance process easier and lessening the tax burden. Nevertheless, being eligible is determined by well defined limits and requirements in Section 10 of the CGST Act, 2017, and the corresponding GST Rules.
1. Turnover Limits for Goods and Services
To opt into the scheme, the taxpayer’s aggregate annual turnover in the preceding financial year must not exceed the prescribed limits:
| Type of Business | Turnover Limit | Applicable GST Law Reference |
|---|---|---|
| Suppliers of goods / manufacturers / traders | Up to ₹1.5 crore | Section 10(1) of CGST Act |
| Suppliers in North-Eastern States & Uttarakhand | Up to ₹75 lakh | Section 10(1) Proviso |
| Suppliers of services or mixed suppliers (goods + services) | Up to ₹50 lakh | Section 10(2A) of CGST Act |
Note: These limits are calculated on a PAN-India basis, not state-wise. That means if a business operates branches in multiple states, their combined turnover will determine eligibility.
2. Conditions for Eligibility
To qualify under the Composition Scheme, the business must also satisfy the following operational and compliance-based conditions:
- The taxpayer must deal only in intra-state supplies (no inter-state supply of goods or services).
- The taxpayer cannot supply non-taxable goods (e.g., petroleum, alcohol for human consumption).
- The taxpayer cannot supply goods through e-commerce operators required to collect TCS under Section 52 of the CGST Act.
- The taxpayer must not be a casual or non-resident taxable person.
- The taxpayer must display the words “Composition Taxable Person” on all signboards and documents.
- The taxpayer must issue a Bill of Supply, not a Tax Invoice, since GST cannot be charged from customers.
If any of these conditions are violated, the taxpayer becomes ineligible and must withdraw from the scheme immediately.
3. How to Calculate Aggregate Annual Turnover
The aggregate annual turnover (AATO) determines eligibility for the Composition Scheme and is computed on an all-India basis using the same Permanent Account Number (PAN).
AATO includes:
- Taxable supplies (sales on which GST is payable)
- Exempt supplies (zero-rated or nil-rated)
- Exports of goods or services
- Inter-state supplies made from all business locations using the same PAN
AATO excludes:
- Taxes and cess paid under GST (CGST, SGST, IGST, UTGST)
- Value of inward supplies liable to reverse charge
- Interest or discount earned from loans, deposits, or advances
Example:
If a Delhi trader has the following turnover in FY 2024-25:
- Taxable sales: ₹90 lakh
- Exempt sales: ₹5 lakh
- Export sales: ₹10 lakh
Then, Aggregate Annual Turnover = ₹90 lakh + ₹5 lakh + ₹10 lakh = ₹1.05 crore,
which is within the ₹1.5 crore limit — making the business eligible for the Composition Scheme in FY 2025-26
A taxpayer can opt for the Composition Scheme only if the total turnover across India remains below the prescribed threshold, and all eligibility conditions are satisfied. Once the turnover crosses the limit or any condition is violated, the taxpayer must switch to the regular GST regime and comply accordingly.
Who Cannot Opt for the Composition Scheme under GST
While the Composition Scheme under GST offers simplified tax compliance and reduced rates for small businesses, not every taxpayer is allowed to opt in. The GST law clearly specifies certain categories of persons who are ineligible to register under the scheme.
This ensures that only small, local, and low-risk businesses benefit from the simplified tax system while keeping large or complex operations under the regular GST structure.
1. Casual Taxable Persons
A casual taxable person is someone who occasionally undertakes supplies in a State or Union Territory where they do not have a fixed place of business.
Example: A trader from Delhi participating in a trade fair in Maharashtra.
Since such persons are temporary suppliers with no fixed business base, they cannot opt for the Composition Scheme.
2. Non-Resident Taxable Persons
A non-resident taxable person (NRTP) is an individual or entity making supplies in India but without a fixed place of business or residence in India.
GST rules exclude NRTPs from the Composition Scheme since they operate on a short-term basis and are not considered small domestic taxpayers.
3. Businesses Engaged in Inter-State Supplies
A key restriction is that a Composition Dealer cannot make inter-state supplies of goods or services.
This means all sales and purchases must happen within the same state (intra-state).
If a business makes or plans to make inter-state transactions, it must register under the regular GST scheme.
Example:
A textile wholesaler in Gujarat selling fabric to a retailer in Maharashtra cannot opt for the Composition Scheme.
4. Suppliers of Non-Taxable Goods
Businesses dealing in goods that are not taxable under GST are automatically excluded.
Common examples include:
- Petroleum crude
- High-speed diesel (HSD)
- Motor spirit (petrol)
- Natural gas
- Aviation turbine fuel (ATF)
- Alcoholic liquor for human consumption
Since GST does not apply to these products, suppliers of such goods are not eligible for the Composition Scheme.
5. Businesses Selling through E-Commerce Operators
Any business that sells goods or services through an e-commerce operator (ECO) required to collect Tax Collected at Source (TCS) under Section 52 of the CGST Act cannot opt for this scheme.
For example, sellers operating on Amazon, Flipkart, or Zomato are ineligible because these platforms collect GST at source.
6. anufacturers of Notified Goods
The government has notified certain categories of manufacturers who are not eligible for the Composition Scheme under Section 10(2)(e) of the CGST Act.
These typically include manufacturers of:
- Ice cream and other edible ice
- Pan masala
- Tobacco and manufactured tobacco substitutes
These goods attract higher tax rates and are excluded to prevent misuse of the simplified scheme.
7. Input Service Distributors (ISDs) and Agents
Entities acting as Input Service Distributors or agents on behalf of another taxable person are not eligible.
They function primarily as intermediaries, not independent small businesses, and hence must follow the regular GST model.
8. Taxpayers Who Have Opted but Become Ineligible
Even after opting in, a taxpayer may lose eligibility for the scheme if:
- The aggregate turnover exceeds ₹1.5 crore / ₹50 lakh in a financial year.
- They start inter-state trade or export goods or services.
- They violate any conditions (e.g., issue a tax invoice instead of a Bill of Supply).
In such cases, the taxpayer must immediately withdraw from the scheme by filing FORM GST CMP-04, and begin paying tax under the regular GST regime.
The Composition Scheme under GST is designed to be used by small, local, and simple businesses only.
In case your business is doing inter state trade, selling through e commerce, or dealing in high tax products, you must get a registration under the normal GST system.
It is a good practice to analyze thoroughly your business model before making the choice to participate in the scheme as the incorrect selection may lead to fines and revocation of tax benefits.
Registration and Intimation Process under the Composition Scheme
A taxpayer willing to take advantage of the Composition Scheme under GST has to go through the steps of registration and intimation by filing certain forms. Though the procedure is straightforward, it should be carried out only before the start of the financial year for which the taxpayer intends to avail the scheme.
By doing this, the taxpayer is accorded the status of a composition dealer and can duly commence the payment of tax at the predetermined fixed rate.
For New Taxpayers
When an individual is procuring GST registration for the very first time and intends to take the Composition Scheme, they are required to file an application through Form GST REG 01 on the GST portal. It is in Part B of the form, where they should mark the choice of tax payment under the Composition Levy Scheme. After the sanction of the registration, it is from the very date of registration that the Composition Scheme shall be in effect.
For Existing Registered Taxpayers
One who is a taxpayer under the normal GST regime and is willing to change to the Composition Scheme has to electronically submit the application in Form GST CMP 02 on the GST common portal (www.gst.gov.in) before the beginning of the financial year. Along with the filing of CMP 02, the taxpayer should within 60 days from the financial year commencement, file Form GST ITC 03. The said form is for declaring and reversing any Input Tax Credit (ITC) on the stock, semi finished, and finished goods that are in possession on the date of transition.
It is very significant to point out that the Composition Scheme is not available if one is in the middle of a financial year. The option is only valid when it is exercised prior to the start of the financial year.
Timeline and Renewal Rules
Form CMP-02 must be filed before the beginning of the financial year, usually by March 31. Form ITC-03 must be filed within 60 days from the commencement of the new financial year. Once opted, there is no need to reapply every year. The scheme remains valid as long as the taxpayer continues to meet all eligibility conditions, such as turnover limits and intra-state supply requirements.
If the taxpayer’s turnover exceeds the limit or any eligibility condition is violated, they must withdraw from the scheme by filing Form GST CMP-04.
Validity and Effective Date of the Scheme
The effective date of the Composition Scheme depends on whether the taxpayer is newly registered or already registered under GST.
- For a new registrant, the scheme becomes effective from the date of registration approval, as per Form GST REG-01.
- For an existing taxpayer, the scheme becomes effective from the first day of the financial year in which Form GST CMP-02 is filed.
Once the scheme becomes effective, the taxpayer is treated as a Composition Dealer from that date onward and must comply with specific requirements. They must issue a Bill of Supply instead of a Tax Invoice and mention the phrase “Composition Taxable Person – not eligible to collect tax on supplies” on all such bills. The taxpayer must also display the words “Composition Taxable Person” at all their business premises.
Withdrawal from the Composition Scheme
A taxpayer may need to withdraw from the Composition Scheme if they no longer meet eligibility criteria or if they wish to shift to the regular GST regime. In such cases, the taxpayer must file Form GST CMP-04 before the intended date of withdrawal. They must also submit Form GST ITC-01 within 30 days to claim Input Tax Credit on stock, semi-finished, and finished goods held on the date of withdrawal. From that point onward, the taxpayer will issue tax invoices and comply with normal GST filing requirements, such as monthly or quarterly returns.
Tax Rates under the Composition Scheme
The Composition Scheme under GST provides a fixed and simplified rate of tax that varies depending on the nature of the business. Instead of paying tax at regular GST slab rates of 5, 12, 18, or 28 percent, composition taxpayers pay a nominal percentage of their turnover. The rates are prescribed under Section 10 of the CGST Act, 2017, and corresponding state GST provisions.
Tax Rates for Composition Scheme
- Manufacturers of Goods
Eligible manufacturers are required to pay tax at the rate of one percent of their turnover in the state or union territory. This includes 0.5 percent Central GST (CGST) and 0.5 percent State GST (SGST). - Traders or Dealers
Traders engaged in the supply of goods are also liable to pay one percent of their taxable turnover. This is split equally between CGST and SGST at 0.5 percent each. - Restaurant Service Providers
Businesses providing restaurant services that do not serve alcohol are taxed at five percent of their turnover. This rate consists of 2.5 percent CGST and 2.5 percent SGST. The rate is applicable only to restaurants not eligible for input tax credit. - Service Providers and Mixed Suppliers
The GST law was later amended to extend the Composition Scheme to small service providers and mixed suppliers (those dealing in both goods and services). Such entities can opt to pay tax at six percent of their turnover—three percent as CGST and three percent as SGST—provided their aggregate annual turnover does not exceed fifty lakh rupees in the preceding financial year.
Why Composition Scheme May Not Be Ideal For You
The Composition Scheme under GST is a frequently cited example of a small business “miracle” simple, predictable, and without a lot of trouble. However, while it certainly facilitates compliance, the scheme is not altogether without its trade offs. It blocks business enterprises from several different restrictions that may directly affect their competitiveness, potential to grow, and profit margins. It is still a good idea to know what you might be giving up in exchange for the simplicity if you decide to take this path.
No Access to Input Tax Credit
The most limiting feature of the Composition Scheme is, perhaps, the prohibition of Input Tax Credit (ITC). In other words, the GST you paid on the business purchases be it raw materials, equipment, or services is not refundable.
What this really means is that your business costs increase because you are in effect paying the same tax twice: one on your purchases and the other when you pay your composition levy. Besides, your customers are also not allowed to claim ITC on your supplies. This may make your goods or services less attractive to GST registered buyers who prefer vendors offering input credits if your business is B2B.
Restricted to Local Sales Only
One of the most significant restrictions is that composition dealers are limited to making intra state sales only, i.e., sales within the same state. They are not allowed to sell goods or provide services in another state by crossing the state boundaries, nor can they export.
It might not be an issue for a small shop or a service provider that is solely focused on local customers. However, for any business that has the intention of growing or taking orders from other states, this limitation can become a barrier very quickly. Once a dealer engages in inter state trade, he has to exit the Composition Scheme and switch to the regular GST regime.
No Tax Invoice or GST Collection
You are not permitted to issue a tax invoice or collect GST from the customers if you are operating under this scheme. What you have to do instead is to provide a Bill of Supply indicating clearly “Composition Taxable Person not eligible to collect tax on supplies”.
While this may seem easy, it actually has its implications. The reason being that you are not allowed to collect GST and therefore, you have to bear this cost out of your own pocket. Regardless of the fact that the rate is low, it still has a negative effect on your margins. For trading businesses that are in price sensitive markets, this can pose a challenge in competing with normal taxpayers who are allowed to take credit of their Input tax through ITC.
Limited Room for Growth
The Composition Scheme is built around the idea of small taxpayers, and the advantages it offers are limited to your turnover. In case your annual sales go beyond ₹1.5 crore (for goods) or ₹50 lakh (for services), you are required to move to the regular GST regime. This implies new filing requisites, record keeping, and system upgrades all at the halfway point.
If you are running a business that is growing rapidly, this changeover might be quite inconvenient. It is possible that you will need to revise your invoice format, upgrade your accounting package, and notify your customers about the new tax changes. In many cases, the switch is as tough as starting anew for entrepreneurs.
Lower Credibility in B2B Markets
One more real limitation is perception. Since composition dealers are not allowed to collect GST, their invoices do not provide any input tax benefit to the buyers. Hence, big distributors, wholesalers, or corporate clients refrain from buying from them.
In case the majority of your customers are other registered businesses, it might limit your potential client base. The Composition Scheme is inclined to be suitable for business to consumer (B2C) traders and service providers who sell directly to the end customers.
Conclusion
The Composition Scheme is a model of its promise of simplicity less number of returns, reduced rates, and less paperwork. Nevertheless, the simplicity comes with a drawback. It is an appropriate solution for small, locally focused businesses that are looking for a straightforward way to comply with GST without getting into the details of complex tax procedures.
On the other hand, if you have a plan to go beyond your state, serve B2B clients, or take your business to the next level, the regular GST structure might be more beneficial for you in the long run. The main thing is to assess your business’s future before deciding.
FAQ on the Composition Scheme under GST
1. Can I change the GST regular scheme to the Composition Scheme within the financial year?
Not at all. A taxpayer may only choose the Composition Scheme at a new financial year’s account. A mid year change is not allowed under the GST regulations.
2. Is it necessary for me to notify the GST department every year if I want to stay in the Composition Scheme?
Not really. The scheme stays in force automatically in the following years once you have made the option, provided that you meet the eligibility requirements and abide by the scheme’s terms. A new notification is only needed if you have withdrawn and then want to return.
3. What will happen if my turnover exceeds the limit set during the year?
You will have to immediately change to the regular GST scheme if your turnover exceeds Rs. 1.5 crores (for goods) or Rs. 50 lakhs (for services) anytime during a financial year. Consequently, you will be issuing tax invoices and filing regular returns from the day your turnover crosses the limit.
4. Is it possible for a composition dealer to purchase goods or services from another state?
Yes. A composition dealer may purchase goods from outside the state or get services from other states. But they are not allowed to carry out a sales transaction inter state. Any tax due on reverse charge must still be paid separately.
5. What is the procedure for reverse charge transactions under the Composition Scheme?
Composition taxpayers are required to remit GST on reverse charge transactions, like services or goods identified by the government, as per the reverse charge mechanism. The payment should be made at the applicable rate under the regular GST regime and not at the composition rate.
6. Are there any mandatory e invoices (electronic invoices) for composition dealers?
Not yet. Currently, the composition taxpayers do not have the obligation to issue e invoices nor are they required to use the e way bill system for small value transactions in the local area. Nevertheless, they must keep proper records of all sales and purchases.
7. Is it possible for composition dealers to claim refunds under the GST system?
Negative. Because composition dealers do not collect GST or claim input tax credit, they cannot claim refunds unless there is an excess payment of the tax or an error in the accounts.
8. Should a composition dealer keep detailed books of accounts?
Only very basic records will suffice. A composition taxpayer is required to maintain summarized details of outward supplies, inward supplies, and stock but not to maintain invoice wise or item wise details as in the case of the regular scheme.
9. What kind of invoice would a composition dealer give to customers?
A composition dealer would give a Bill of Supply in place of a tax invoice. This bill should indicate that the dealer is a “Composition Taxable Person not eligible to collect tax on supplies”.
10. Is it possible for a composition dealer to give up the scheme voluntarily?
When a taxpayer decides to file Form GST CMP 04 unilaterally, he thereby rescinds the scheme. After the exit, they will carry out transactions under the normal GST regime and thus will be entitled to take input tax credit from that time onward.
11. Can online service providers opt for the Composition Scheme?
They are not. Service businesses operating through e commerce platforms or digital marketplaces are excluded from the scheme as e commerce operator supply with TCS are not allowed under it.
12. What fines are levied if a business erroneously chooses the Composition Scheme?
If the tax authorities find that a taxpayer is ineligible or has incorrectly chosen the scheme and accordingly issue a show cause notice to him. After receiving the notice, the taxpayer has to pay the differential tax along with interest and penalty as per GST law.
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