GST Composition Scheme: Simplified Taxation for Small Businesses
The Composition Scheme under GST is designed to simplify tax compliance for small taxpayers. Instead of dealing with complex monthly returns and input tax credit calculations, eligible businesses can pay GST at a fixed rate on their turnover and file returns quarterly.
This comprehensive guide explains everything you need to know about the Composition Scheme - eligibility criteria, tax rates, advantages, restrictions, and how to make the right choice for your business.
What is the Composition Scheme?
The Composition Scheme is an alternative tax compliance mechanism under GST that allows small taxpayers to:
- • Pay GST at a fixed, lower rate on turnover (not on value addition)
- • File simplified quarterly returns instead of monthly returns
- • Maintain minimal records and documentation
- • Focus on business growth rather than tax compliance
Who Administers It?
The scheme is administered under Section 10 of the CGST Act, 2017, and is optional for eligible taxpayers. Once opted in, you must remain in the scheme for the entire financial year.
Eligibility Criteria
1. Turnover Limit
Aggregate turnover in the preceding financial year must not exceed:
- • ₹1.5 crore for normal category states
- • ₹75 lakh for special category states (North-Eastern states, Himachal Pradesh, Uttarakhand)
2. Ineligible Persons
The following CANNOT opt for composition scheme:
- • Suppliers of services (except restaurant services)
- • Suppliers of non-taxable goods (alcohol, petroleum)
- • Manufacturers of ice cream, pan masala, tobacco
- • E-commerce operators and suppliers through e-commerce
- • Casual taxable persons or non-resident taxable persons
- • Interstate suppliers
- • Input Service Distributors
3. New Registrations
New businesses can opt for composition scheme at the time of GST registration. If you expect your turnover to be within limits, you can start with composition and switch to regular scheme later if needed.
Composition Tax Rates
| Category of Registered Person | Rate | Effective Rate* |
|---|---|---|
| Manufacturers (other than specified goods) | 1% (0.5% CGST + 0.5% SGST) | 1% of turnover |
| Traders/Suppliers (Goods) | 1% (0.5% CGST + 0.5% SGST) | 1% of turnover |
| Restaurants (not serving alcohol) | 5% (2.5% CGST + 2.5% SGST) | 5% of turnover |
| Mixed Suppliers of Goods & Services (New) | 6% (3% CGST + 3% SGST) | 6% of turnover |
| Service Providers (Other than restaurants) | NOT ELIGIBLE | N/A |
*Tax is calculated on total turnover, not on value addition. No input tax credit can be claimed.
Advantages of Composition Scheme
✓ Lower Tax Liability
Pay only 1-6% on turnover compared to regular GST rates of 5%, 12%, 18%, or 28%. Significant savings for businesses with thin margins.
✓ Simplified Returns
File only quarterly return (CMP-08) and annual return (GSTR-4) instead of monthly GSTR-1 and GSTR-3B.
✓ Reduced Compliance
No need to maintain detailed invoices for claiming ITC. Less documentation and record-keeping required.
✓ Competitive Pricing
Since tax is paid out of pocket and not collected from customers, you can offer better prices to B2C customers.
Disadvantages and Restrictions
✗ No Input Tax Credit
Cannot claim ITC on purchases. Tax paid on inputs becomes a cost to the business.
✗ No Inter-state Sales
Cannot make interstate outward supplies. Limited to intra-state sales only.
✗ No E-commerce
Cannot supply goods through e-commerce platforms like Amazon, Flipkart.
✗ Bill of Supply Only
Cannot issue tax invoices. Must issue "Bill of Supply" without GST breakup.
How to Opt for Composition Scheme
Check Eligibility
Ensure your turnover is within limits and you don't fall under ineligible categories. Review your business activities and projected turnover.
Login to GST Portal
Access gst.gov.in with your credentials. Navigate to Services > Registration > Application to Opt for Composition Levy.
Fill Form CMP-02
Complete the composition opt-in form with business details, turnover declaration, and category selection. Declare that you meet all eligibility conditions.
Submit and Acknowledge
Submit the application using DSC or EVC. You will receive an acknowledgment. The composition status will be updated in your GST registration.
Returns Under Composition Scheme
CMP-08 (Quarterly)
- • Summary of self-assessed tax
- • Due date: 18th of month following quarter
- • April-June: Due July 18
- • July-Sept: Due October 18
- • Oct-Dec: Due January 18
- • Jan-March: Due April 18
GSTR-4 (Annual)
- • Annual return for composition dealers
- • Due date: April 30 of next FY
- • Contains consolidated details
- • Includes inward and outward supplies
- • Tax payment details
Switching from Composition to Regular
You must switch to regular GST scheme if:
- • Turnover exceeds ₹1.5 crore (₹75 lakh for special states) during the year
- • You want to start inter-state sales
- • You want to sell through e-commerce platforms
- • You want to claim input tax credit
Process to Switch:
- 1. File Form GST CMP-04 (intimation of withdrawal)
- 2. File Form GST ITC-01 (details of stock for ITC claim)
- 3. Start filing regular returns from next quarter
- 4. Issue tax invoices instead of Bill of Supply
Composition vs Regular GST: Comparison
| Aspect | Composition | Regular |
|---|---|---|
| Tax Rate | 1-6% on turnover | 5%, 12%, 18%, 28% on value |
| Input Tax Credit | Not available | Available |
| Inter-state Sales | Not allowed | Allowed |
| E-commerce | Not allowed | Allowed |
| Return Filing | Quarterly + Annual | Monthly/Quarterly + Annual |
| Invoice Type | Bill of Supply | Tax Invoice |
Is Composition Right for You?
Choose Composition If:
- ✓ B2C business with end consumers
- ✓ No interstate transactions
- ✓ Low input tax on purchases
- ✓ Want simplified compliance
Choose Regular If:
- ✓ B2B business with GST-registered buyers
- ✓ Interstate sales planned
- ✓ High input tax on purchases
- ✓ Want to sell on e-commerce