GST Composition Scheme: Meaning, Eligibility, and Pros and Cons
The GST composition scheme can reduce return-filing work for a small business. However, it also affects how the business issues bills, claims input tax credit, sells outside its state, and supplies to GST-registered customers.
A lower tax rate should not be the only reason for choosing it. Your customer base, purchase costs, selling locations, and expected growth also need to be considered.
Quick summary
- The GST composition scheme simplifies tax payment and return filing for eligible registered businesses.
- The general turnover limit is ₹1.5 crore. A lower limit of ₹75 lakh applies in eight specified states.
- Eligible service providers and mixed suppliers can use a separate 6% scheme if their aggregate turnover in the previous financial year does not exceed ₹50 lakh.
- A composition taxpayer cannot collect GST separately from customers or claim input tax credit.
- Interstate outward supplies and exports are not allowed.
- Eligible taxpayers can make intra-state supplies of goods through e-commerce platforms, subject to prescribed conditions.
- Composition taxpayers normally submit CMP-08 quarterly and file GSTR-4 annually.
- The scheme generally suits local, consumer-facing businesses with relatively low GST-bearing purchase costs.
The GST registration threshold and the composition turnover limit are separate. The registration threshold determines whether GST registration is required. The composition limit determines whether an eligible registered taxpayer can use this simplified tax option.
What Is the GST Composition Scheme?
The GST composition scheme is an optional tax payment method under Section 10 of the CGST Act. A regular taxpayer generally charges GST at the rate applicable to each taxable supply and may claim eligible input tax credit on business purchases. A composition taxpayer instead pays tax at a prescribed percentage of turnover. A composition taxpayer generally:
- Pays tax at the rate prescribed for the relevant business category
- Submits Form CMP-08 every quarter
- Files Form GSTR-4 once a year
- Issues a Bill of Supply instead of a tax invoice
- Pays tax without collecting it separately from customers
- Does not claim input tax credit
The scheme reduces regular return-filing work, but its restrictions can affect pricing, customers, and business expansion.
Who Can Opt for the GST Composition Scheme?
Eligibility depends on the business category, aggregate turnover in the previous financial year, and the nature of supplies made.
| Business category | Aggregate turnover limit |
|---|---|
| Eligible traders and manufacturers | ₹1.5 crore |
| Eligible restaurant service providers | ₹1.5 crore |
| Eligible traders, manufacturers, and restaurants in specified states | ₹75 lakh |
| Eligible service providers and mixed suppliers under the separate 6% scheme | ₹50 lakh |
Business category
Aggregate turnover limit
Business category
Aggregate turnover limit
Business category
Aggregate turnover limit
Business category
Aggregate turnover limit
The lower limit of ₹75 lakh applies to businesses registered in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.
The ₹1.5 crore and ₹75 lakh limits are prescribed under Notification 14/2019. The separate 6% option is available to eligible service providers and mixed suppliers whose aggregate turnover in the previous financial year does not exceed ₹50 lakh.
A newly registered taxpayer may select the composition option while filing Form GST REG-01. An existing regular taxpayer must check aggregate turnover for the previous financial year before opting for the scheme.
How Is Aggregate Turnover Calculated?
Aggregate turnover is calculated across India using the same PAN. It is not calculated separately for each GST registration.
It includes taxable supplies, exempt supplies, exports, interstate supplies, and supplies made through every GSTIN linked to the same PAN. GST and compensation cess are excluded. Inward supplies on which the recipient pays tax under the Reverse Charge Mechanism are also excluded from the recipient’s aggregate turnover.
For example, if a business has one GSTIN in Delhi and another in Haryana under the same PAN, the turnover of both registrations must be combined when checking the composition limit.
What If a Business Has More Than One GSTIN?
The composition option applies at the PAN level. One eligible GSTIN cannot use the composition scheme while another eligible GSTIN under the same PAN remains under regular GST. All eligible registrations must opt together.
A business also cannot opt for composition if any GSTIN under the same PAN is registered as an SEZ unit or SEZ developer.
Can a Trader or Manufacturer Also Provide Services?
A trader or manufacturer using the main composition scheme may provide a limited amount of services. The permitted value is ₹5 lakh or 10% of turnover in the state or Union Territory during the previous financial year, whichever is higher.
For example, a trader may provide limited installation or support services without losing eligibility, provided the service income remains within this limit.
If the service limit is exceeded, the taxpayer becomes ineligible for the main composition scheme. The separate 6% scheme may be considered from the beginning of a financial year, provided aggregate turnover in the previous financial year did not exceed ₹50 lakh, and all other conditions are met.
Who Cannot Use the Composition Scheme?
A business cannot use the scheme if any of the following restrictions apply:
| Restriction | What it means |
|---|---|
| Interstate outward supplies | The business cannot sell goods or services to customers in another state |
| Exports | Goods or services cannot be exported under the scheme |
| Turnover above the applicable limit | Eligibility ends once aggregate turnover crosses the prescribed limit |
| Casual or non-resident taxable person status | These categories of taxpayers cannot opt for composition |
| Manufacture of notified excluded goods | Manufacturers of specified goods cannot use the scheme |
| Supplies not leviable to GST | A business making such supplies cannot opt for the scheme |
| Ineligible GSTIN under the same PAN | One ineligible registration can affect composition eligibility across the PAN |
Restriction
What it means
Restriction
What it means
Restriction
What it means
Restriction
What it means
Restriction
What it means
Restriction
What it means
Restriction
What it means
The restriction on interstate transactions applies to outward supplies. A composition taxpayer may generally purchase goods or services from a supplier located in another state.
Exempt supplies and supplies that are not leviable to GST are different. Exempt supplies generally form part of aggregate turnover, while making a supply that is not leviable to GST makes the taxpayer ineligible for composition. Businesses making a mixture of taxable, exempt, and non-GST supplies should verify their position before applying.
Which Manufacturers Are Excluded?
The notified exclusions cover manufacturers of:
- Ice cream and other edible ice
- Pan masala
- Tobacco and manufactured tobacco substitutes
- Aerated waters
- Specified bricks, blocks, and tiles covered by the separate brick-sector tax arrangement
The exact HSN classification matters. A manufacturer dealing in similar goods should check the applicable notification rather than relying solely on a general product description.
Can a Composition Taxpayer Sell Through an E-Commerce Platform?
From 1 October 2023, an eligible composition taxpayer may make intra-state supplies of goods through an e-commerce operator that is required to collect TCS. The e-commerce operator must:
- Prevent interstate supplies by the composition taxpayer
- Collect TCS on the eligible supplies
- Report the transactions in Form GSTR-8
For example, a composition taxpayer registered in Maharashtra may sell goods to a customer in Maharashtra through an online marketplace. The same taxpayer cannot use the scheme to sell those goods to a customer in Gujarat.
This relaxation specifically covers supplies of goods. A service provider using an app or online platform should check the rules for its particular service. Eligibility may depend on the nature of the service, whether Section 9(5) applies, and whether the operator is required to collect TCS.
GST Composition Scheme Tax Rates
The rates below combine the applicable CGST and SGST or UTGST components.
| Business category | Total rate | CGST | SGST or UTGST | General tax base |
|---|---|---|---|---|
| Eligible trader or other eligible supplier | 1% | 0.5% | 0.5% | Taxable turnover covered by the main scheme |
| Eligible manufacturer | 1% | 0.5% | 0.5% | Turnover in the state or Union Territory |
| Eligible restaurant service provider | 5% | 2.5% | 2.5% | Turnover in the state or Union Territory |
| Eligible service provider or mixed supplier under the separate scheme | 6% | 3% | 3% | First eligible supplies up to ₹50 lakh in the financial year |
Business category
Total rate
CGST
SGST or UTGST
General tax base
Business category
Total rate
CGST
SGST or UTGST
General tax base
Business category
Total rate
CGST
SGST or UTGST
General tax base
Business category
Total rate
CGST
SGST or UTGST
General tax base
Tax is calculated on the prescribed turnover amount, not on profit. The exact tax base varies by business category, so turnover should be classified correctly before CMP-08 is filed.
For example, assume an eligible trader has taxable turnover of ₹40 lakh and no relevant adjustment or reverse charge liability. At 1%, the composition tax would be ₹40,000. The trader cannot add this ₹40,000 separately to customer bills. The amount must be treated as a cost within the selling price.
If a transaction is covered by the Reverse Charge Mechanism, GST must be paid at the normal rate applicable to that inward supply. The lower composition rate does not apply to reverse charge liability.
GST Composition Scheme vs Regular GST
The main benefits and restrictions can be understood through the following comparison.
| Factor | Composition scheme | Regular GST |
|---|---|---|
| Tax calculation | Prescribed percentage of turnover | GST rate applicable to each taxable supply |
| GST shown separately on bill | Not allowed | Allowed |
| Input tax credit | Not available | Available, subject to conditions |
| Document issued | Bill of Supply | Tax invoice |
| Effect on B2B customers | Customers cannot claim ITC | Eligible customers may claim ITC |
| Interstate outward supplies | Not allowed | Allowed |
| Exports | Not allowed | Allowed |
| Intra-state goods through e-commerce | Allowed subject to conditions | Allowed |
| Main return filings | CMP-08 quarterly and GSTR-4 annually | GSTR-1 and GSTR-3B monthly or quarterly, along with other applicable filings |
| Record-keeping | Return reporting is simpler, but supporting records are still required | More detailed reporting and reconciliation may be required |
| Growth flexibility | Limited by turnover and supply conditions | Better suited to interstate sales and expansion |
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Factor
Composition scheme
Regular GST
Is the Composition Scheme Always Cheaper?
No. A lower tax rate does not automatically result in lower total business costs. Compare the two schemes in four steps:
- Calculate composition tax on the applicable turnover.
- Add the GST paid on purchases that would become an unrecoverable cost.
- Estimate the net tax under regular GST after eligible ITC.
- Consider whether customers need tax invoices and whether selling prices can be adjusted.
For example, a trader may pay only 1% under composition but lose substantial ITC on stock, rent, freight, machinery, and professional services. A regular taxpayer with high eligible ITC may have a lower effective cost even though the outward GST rate is higher.
Should You Choose the GST Composition Scheme?
The scheme is generally better suited to a local, consumer-facing business whose customers do not require ITC and whose GST-bearing purchase costs are relatively low. Regular GST is usually more suitable where the business serves registered buyers, incurs substantial input tax, plans interstate sales, or expects rapid growth.
Example 1: Local Grocery Shop
A grocery shop in Pune has annual turnover of ₹45 lakh and sells mainly to walk-in customers within Maharashtra. Its customers do not normally require ITC, and the business does not make interstate sales. The composition scheme may be suitable if its GST-bearing purchase costs and other conditions also support the decision.
Example 2: Garment Wholesaler
A garment wholesaler in Surat sells to retailers in Gujarat, Rajasthan, and Maharashtra. The business makes interstate outward supplies, so it cannot use the composition scheme. It must follow regular GST provisions.
Example 3: Freelance Designer
A freelance designer has annual turnover of ₹35 lakh and provides services to GST-registered companies within the same state.
The designer may qualify for the separate 6% scheme if all other conditions are met. However, regular GST may be commercially better if clients require tax invoices and the designer incurs substantial GST on software, equipment, rent, or professional services. Eligibility and commercial suitability are separate questions.
Businesses should monitor turnover throughout the year instead of checking it only at year-end. Using an invoicing app such as mazu can help keep sales records organised and make it easier to see when turnover is approaching the applicable limit.
How to Opt for the GST Composition Scheme
For a New GST Registration
An eligible new taxpayer can select the composition option while completing Form GST REG-01. The option applies from the effective date of registration, subject to the eligibility conditions.
For an Existing Regular Taxpayer
An existing regular taxpayer must generally:
- File Form GST CMP-02 before the beginning of the financial year for which composition is required.
- Calculate the ITC reversal on inputs held in stock, inputs contained in semi-finished or finished goods, and capital goods.
- File Form GST ITC-03 within 60 days from the beginning of the financial year for which composition is sought.
- Pay any amount arising from the ITC reversal in the prescribed manner.
An existing taxpayer cannot normally switch from regular GST to composition in the middle of a financial year. A taxpayer already using the scheme does not need to file a fresh CMP-02 every year. The option continues while all eligibility conditions are met.
Filing and Compliance Requirements
| Form and period | Frequency | Normal due date |
|---|---|---|
| CMP-08: April to June | Quarterly | 18 July |
| CMP-08: July to September | Quarterly | 18 October |
| CMP-08: October to December | Quarterly | 18 January |
| CMP-08: January to March | Quarterly | 18 April |
| GSTR-4 | Annual | 30 June following the financial year |
Form and period
Frequency
Normal due date
Form and period
Frequency
Normal due date
Form and period
Frequency
Normal due date
Form and period
Frequency
Normal due date
Form and period
Frequency
Normal due date
These dates may be extended through a government notification. For FY 2024-25 onwards, the normal GSTR-4 due date is 30 June following the end of the financial year. CMP-08 must be filed for each applicable quarter, including a nil statement where no tax is payable. Applicable CMP-08 statements should be completed before the annual GSTR-4 is filed.
Delayed filing or payment may result in interest and late fees. The applicable amount should be checked on the GST Portal and against current notifications because extensions or late-fee waivers may apply to specific periods.
Bill of Supply and Signboard Requirements
A composition taxpayer must issue a Bill of Supply instead of a tax invoice. The Bill of Supply must carry the words:
“Composition taxable person, not eligible to collect tax on supplies”
The words “Composition taxable person” must also be displayed prominently on every notice or signboard at the principal place of business and each additional place of business.
The business must continue to maintain the bills of supply, purchase records, payment documents, and other records needed to support its CMP-08 and GSTR-4 filings.
What Happens If the Turnover Limit Is Crossed?
The composition option ends on the date aggregate turnover crosses the applicable limit. The taxpayer cannot wait until the end of the quarter or financial year. The business must then:
- Follow regular GST provisions from the date of ineligibility.
- Issue tax invoices for taxable supplies made from that date.
- Charge GST at the applicable rate.
- File Form GST CMP-04 within seven days of becoming ineligible.
- File Form GST ITC-01 within 30 days to claim eligible ITC on qualifying inputs, stock, and capital goods.
- Begin filing the returns applicable to a regular taxpayer.
- Complete CMP-08 and GSTR-4 requirements for the period during which it remained under composition.
The same process applies when another eligibility condition is breached, such as beginning interstate outward supplies.
Conclusion
The GST composition scheme can make return filing easier, but it is not automatically the cheapest or most suitable option for every small business.
It generally works better for a local business that sells mainly to individual customers, has relatively low GST-bearing expenses, and expects to remain comfortably below the turnover limit. Regular GST is usually more suitable when customers require ITC, taxable purchase costs are high, the business sells outside its state, or rapid growth is expected.
Before opting, compare the effect on tax, purchase costs, selling prices, margins, and customer expectations. The decision should be based on the business’s actual transactions, not only on the lower composition rate.