The GST composition scheme

The GST composition scheme lets small businesses with turnover up to ₹1.5 crore (₹50 lakh for service providers) pay GST at a low fixed rate on their turnover and file fewer returns. The price is that they cannot collect GST from customers or claim input tax credit on purchases.

It is an option within GST Registration, not a separate Registration. You choose it while applying, or later by filing a form, and you can leave it when it no longer suits you. The legal basis is Section 10 of the CGST Act; see cbic-gst.gov.in for the current rules. The September 2025 rate changes (the new 5%, 18% and 40% slabs) did not change the composition limits or rates.

Who can opt for the composition scheme?

Business	Turnover limit (previous year)	Typical rate
Manufacturers and traders of goods	₹1.5 crore (₹75 lakh in some special category states)	1%
Restaurants (not serving alcohol)	₹1.5 crore	5%
Service providers and mixed suppliers	₹50 lakh	6%

The rate is split equally between Central and State GST — for example, 1% is 0.5% CGST plus 0.5% SGST. For traders, the 1% applies to turnover of taxable goods only; for manufacturers, restaurants and service providers it applies to the total turnover in the state.

The lower ₹75 lakh limit for goods applies in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. The turnover is counted on your whole PAN across India, not just one shop.

Who cannot opt for the composition scheme?

• Businesses making inter-state outward supplies (selling to customers in other states).
• Casual taxable persons and non-resident taxable persons.
• Manufacturers of certain notified goods, such as ice cream, pan masala, tobacco products and aerated waters.
• Service providers who supply services through an e-commerce operator that collects tax at source.
• Businesses supplying goods or services that are not taxable under GST, such as alcohol for human consumption.

Since 1 October 2023, a composition dealer can sell goods within its own state through an e-commerce platform, subject to conditions. Also note that composition is all-or-nothing for a PAN: if you hold GST Registrations in two states under the same PAN, both must opt in, or neither can.

What are the trade-offs?

• You cannot collect GST from customers — you issue a bill of supply, not a tax invoice.
• You cannot claim input tax credit on purchases.
• You generally cannot make inter-state outward supplies of goods.
• Some businesses, such as manufacturers of certain notified goods, cannot opt in.

You must also mention "composition taxable person" on your bills and on the signboard at your place of business, so customers know you cannot charge GST.

One more point is often missed: where tax is payable under reverse charge (for example, on certain services bought from unregistered or specified suppliers), a composition dealer pays it at the normal rate, not the composition rate, and still gets no credit for it.

How does composition compare with regular GST?

Point	Composition	Regular GST Registration
Tax charged to customers	None — bill of supply	GST shown on a tax invoice
Tax paid	Fixed % of turnover, from your own pocket	Tax collected minus input tax credit
Input tax credit	Not available	Available, subject to conditions
Selling to other states	Not allowed	Allowed
Returns	CMP-08 quarterly, GSTR-4 yearly	GSTR-1 and GSTR-3B monthly or quarterly, GSTR-9 yearly where applicable

How do you opt in and out?

• New applicants — choose composition in the GST Registration application itself.
• Existing taxpayers — file Form GST CMP-02 before the start of the financial year.
• Leaving — file Form GST CMP-04. You must leave once turnover crosses the limit during the year.

The paperwork around stock matters too. An existing taxpayer moving into composition files Form GST ITC-03 to reverse the input tax credit on stock held on the day before switching. When you leave, you file CMP-04 within seven days, and you can then claim input tax credit on the stock you hold through Form GST ITC-01, generally within 30 days.

Which returns does a composition dealer file?

• CMP-08 — a quarterly statement with tax payment, due by the 18th of the month after the quarter.
• GSTR-4 — an annual return, due by 30 June after the financial year.

The details of returns for regular taxpayers are covered in the lesson on GST returns after Registration.

Is composition cheaper? A worked illustration

Take a hypothetical grocery shop in one state with yearly sales of ₹80 lakh, all to walk-in consumers. Under composition it pays 1% on its taxable turnover — roughly ₹80,000 if all sales are of taxable goods — and files five returns a year. Under regular GST it would charge 5% or 18% on its sales and claim credit on its purchases; its customers, being consumers, could not claim that GST back, so prices would effectively rise.

Now take a hypothetical consultant billing ₹40 lakh a year to companies. Under composition they would pay 6% — about ₹2.4 lakh — out of their own fees, and their clients would get no credit. Under regular GST they would add 18% to invoices, which the clients claim back as credit. For this consultant, composition is usually the more expensive choice.

Who does the composition scheme suit?

Local businesses selling mostly to consumers — a neighbourhood shop, a small restaurant — where customers don't need input tax credit. It suits them less when their customers are registered businesses, because those customers get no credit for the tax.

What are the common mistakes with the composition scheme?

• Charging "GST" on a bill while registered under composition — this is not allowed.
• Making even occasional sales to customers in another state.
• Forgetting that turnover of all businesses under the same PAN counts towards the limit.
• Missing CMP-04 after crossing the limit, and carrying on at the composition rate.
• Missing GSTR-4 — not filing an annual return for more than three months after its due date is one of the grounds on which the department can cancel the Registration.

If most of your customers are businesses, also read the blog post on GST Registration for freelancers, service providers and startups.

Key takeaways

• Low fixed rate (1%, 5% or 6%) and fewer returns, within limits of ₹1.5 crore for goods and ₹50 lakh for services.
• No input tax credit, no tax collection from customers and no inter-state sales.
• Best for small, local, consumer-facing businesses; usually a poor fit when customers are businesses.
• CMP-08 every quarter and GSTR-4 once a year; CMP-02 to opt in and CMP-04 to leave.