GST Composition Scheme: Benefits and Eligibility

The GST Composition Scheme lets small businesses pay a fixed, low tax rate on turnover instead of detailed monthly GST compliance. But it comes with real trade-offs. Here's how to decide if it's right for you.

What is the GST Composition Scheme?

The Composition Scheme under Section 10 of the CGST Act lets small taxpayers pay GST at a fixed, low percentage of their total turnover instead of the standard GST rates applied to individual goods and services, with far simpler return filing.

Who is Eligible?

• Traders & manufacturers: Aggregate annual turnover up to ₹1.5 crore (₹75 lakh in special category states like Himachal Pradesh and most North-Eastern states)
• Service providers: A separate composition scheme for services, with a turnover limit of ₹50 lakh
• Restaurants (non-alcohol serving): Eligible under the goods composition scheme up to ₹1.5 crore turnover

Tax Rates Under Composition Scheme

• Manufacturers & traders: 1% of turnover (0.5% CGST + 0.5% SGST)
• Restaurants (not serving alcohol): 5% of turnover
• Service providers (special scheme): 6% of turnover

These rates apply to your total sales turnover — not your profit margin — so the actual tax burden depends heavily on your margins.

Key Restrictions

• No Input Tax Credit: You cannot claim ITC on any purchases — GST paid on inputs becomes a straight cost
• Cannot collect GST from customers: Composition dealers issue a "Bill of Supply," not a tax invoice, and cannot charge GST separately to customers
• No inter-state outward supply of goods: You cannot sell goods to other states under the composition scheme
• No e-commerce sales of goods: Businesses selling goods through e-commerce platforms that collect TCS cannot use the goods composition scheme
• Mandatory display: Must display "Composition Taxable Person" at the place of business and on every bill of supply

Filing Requirements

• Form CMP-02: One-time intimation to opt into the scheme, filed before the start of the financial year (by March 31)
• Form CMP-08: Quarterly self-assessed tax payment statement, due by the 18th of the month after each quarter ends
• Form GSTR-4: Annual return summarizing the full year's turnover and tax paid, due by April 30 of the following financial year

This is dramatically simpler than the regular scheme, which requires monthly GSTR-1 and GSTR-3B filings.

Is Composition Scheme Right for You?

It generally makes sense if most of your customers are end consumers (not GST-registered businesses who'd want to claim ITC), your margins are thin enough that paying GST on the full turnover at 1%/5%/6% works out cheaper than regular GST rates, and your business is purely local with no inter-state sales. It's usually a poor fit for B2B businesses whose buyers need ITC, or businesses planning to scale beyond the turnover threshold soon, since switching back and forth has compliance complications.

What If You Cross the Turnover Limit?

The moment your aggregate turnover in a financial year crosses the prescribed limit, you must exit the composition scheme and switch to the regular GST scheme for the remainder of the year — you're required to intimate this in Form GST CMP-04 within 7 days of crossing the threshold.