Understanding the GST Composition Scheme
The GST Composition Scheme is a simplified, alternate tax payment mechanism designed by the Central Board of Indirect Taxes and Customs (CBIC) specifically for small taxpayers. The primary objective of the scheme is to bring simplicity and reduce the compliance cost for small businesses, startups, and local retailers in India.
Under the normal GST scheme, a business must maintain meticulous records of every purchase and sale, calculate Input Tax Credit (ITC) for hundreds of invoices, and file complex monthly returns (GSTR-1, GSTR-3B). By opting into the Composition Scheme, small businesses can bypass all of this. Instead, they simply calculate their total aggregate turnover for the quarter and pay a small, flat percentage of it directly to the government. Use our GST Composition Scheme Calculator to find your exact liability instantly.
Who is Eligible for the Composition Scheme?
Eligibility is determined by your aggregate annual turnover from the preceding financial year, your business activity, and the state in which your principal place of business is registered under Section 10 of the CGST Act.
- Section 10 Goods Suppliers (Manufacturers and Traders): Eligible if aggregate turnover in the preceding financial year was up to ₹1.5 Crore. For businesses in Special Category States (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand), the statutory limit is ₹75 Lakhs.
- Section 10(1)(b) Restaurant Services: Eligible if annual aggregate turnover is up to ₹1.5 Crore. Note that restaurants serving alcoholic beverages cannot opt for composition, as alcohol is non-GST.
- 6% Service Supplier Scheme: Pure service providers (or mixed suppliers not covered under Section 10) are governed by Section 10(2A) and Notification No. 2/2019-Central Tax (Rate), which establishes a distinct ₹50 Lakhs turnover ceiling.
The Tax Rates (1%, 5%, 6%)
Under the composition framework, tax rates are lower than standard GST rates (which range from 5% to 28%). However, the taxpayer must pay this flat tax directly without collecting it from customers:
- Manufacturers (Goods): 1% (0.5% CGST + 0.5% SGST) on total turnover.
- Traders & Retailers: 1% (0.5% CGST + 0.5% SGST) on the turnover of taxable supplies only.
- Restaurants: 5% (2.5% CGST + 2.5% SGST) on total turnover.
- Service Providers (Notification 2/2019): 6% (3% CGST + 3% SGST) on total turnover.
Statutory Limitations and Operational Conditions
While it reduces return filing complexity, the Composition Scheme comes with defined statutory constraints. Review these factors before deciding to opt in:
- No Input Tax Credit (ITC): You cannot claim ITC on purchases or capital goods. Any tax paid to your suppliers becomes an operational cost.
- No Tax Collection: You cannot charge GST on customer invoices. You must issue a "Bill of Supply" endorsed with the words "Composition taxable person, not eligible to collect tax on supplies".
- No Inter-State Outward Sales: You are restricted to making intra-state outward supplies of goods and services. Inter-state inward purchases are permitted.
- E-Commerce Supplies (Notification 36/2023): Composition dealers may supply goods through e-commerce operators under the notified procedure, but the operator must block inter-state supplies, collect TCS, and report the supplies. Check the marketplace's current onboarding requirements and the official notification before selling.
- Non-Taxable & Excluded Goods: You cannot supply goods outside GST (such as motor spirits or alcohol). Furthermore, manufacturers of notified products (such as pan masala, tobacco, ice cream, and aerated waters) are ineligible for the scheme.
Quarterly Return Filing & Due Dates
Composition dealers file statement CMP-08 quarterly by the 18th of the month following each quarter, and submit the annual return GSTR-4 by 30th April following the financial year. You can track all upcoming quarterly deadlines with our GST due dates calendar, or use our general GST calculator to model regular regime tax splits.