Composition Scheme

The GST Composition Scheme is a simplified tax payment option available to small businesses in India under Section 10 of the CGST Act 2017. Instead of paying GST at standard rates, calculating tax on every transaction, and filing monthly returns, eligible businesses under this scheme pay a small fixed percentage of their total turnover as tax and file returns quarterly and annually. The trade-off is that a composition dealer cannot collect GST from customers, cannot claim Input Tax Credit, and cannot make inter-state sales. It is designed specifically for kirana stores, small manufacturers, restaurants, and local traders who want to stay GST-compliant without the burden of complex monthly filings.

Quick reference

Governed by	Section 10 of the CGST Act 2017
Turnover limit for goods and manufacturing	Up to Rs. 1.5 crore per year
Turnover limit for service providers	Up to Rs. 50 lakh per year
Turnover limit for special category states	Up to Rs. 75 lakh per year
Tax rate for traders and manufacturers	1% of turnover (0.5% CGST + 0.5% SGST)
Tax rate for restaurants (no alcohol)	5% of turnover (2.5% CGST + 2.5% SGST)
Tax rate for service providers	6% of turnover (3% CGST + 3% SGST)
Returns to file	CMP-08 quarterly, GSTR-4 annually
Can collect GST from customers	No
Can claim Input Tax Credit	No
Can make inter-state sales	No
Invoice type	Bill of supply, not tax invoice
How to opt in	File Form CMP-02 on GST portal before 31st March

How the composition scheme works

Here is how a business operates under the composition scheme compared to the regular GST system:

1. You opt in before the financial year begins. To join the composition scheme for a financial year, you file Form CMP-02 on the GST portal before 31st March of the preceding year. For FY 2026-27, the deadline to opt in is 31st March 2026.

2. You sell without charging GST to your customers. A regular GST dealer adds GST to the invoice and collects it from the buyer. A composition dealer cannot do this. The tax comes out of your own pocket from the total sales you collect.

3. You pay tax on your total turnover, not on each transaction. At the end of every quarter, you file Form CMP-08 and pay tax at the fixed rate on your total sales for that quarter. You do not calculate tax on each individual invoice.

4. You issue bills of supply, not tax invoices. Since you cannot charge GST, you issue bills of supply. Every bill of supply must carry the words "Composition taxable person, not eligible to collect tax on supplies" printed prominently.

5. You file GSTR-4 once a year. Unlike regular dealers who file GSTR-1 and GSTR-3B every month or quarter, composition dealers file just one annual return, GSTR-4, after the financial year ends.

6. If your turnover crosses the limit, you exit the scheme. The moment your aggregate annual turnover exceeds the applicable threshold, you must switch to the regular GST scheme, start issuing tax invoices, file monthly returns, and become eligible to claim ITC.

Composition scheme example for Indian businesses

Sunita runs a stationery and gift shop in Pune. Her annual turnover is Rs. 80 lakh. Since she supplies goods within Maharashtra and her turnover is below Rs. 1.5 crore, she is eligible for the composition scheme.

Under the composition scheme at 1%:

• Q1 turnover (April to June): Rs. 18 lakh
• Tax payable for Q1: 1% of Rs. 18 lakh = Rs. 18,000
• Filing required: CMP-08 by 18th July

Sunita does not add any GST on her bills to customers. She simply collects Rs. 18 lakh from sales, pays Rs. 18,000 as tax to the government from that amount, and keeps the rest. She files GSTR-4 once a year in April after the financial year ends.

Compare this with a regular GST dealer who would need to charge 12% or 18% GST on each product sale, file GSTR-1 and GSTR-3B every month, and reconcile Input Tax Credit claims every quarter. For Sunita's small shop, the composition scheme saves significant time and accounting cost.

Who is eligible for the composition scheme

Traders and manufacturers of goods

Businesses that buy and sell goods, or manufacture products, with annual aggregate turnover up to Rs. 1.5 crore. This includes kirana stores, cloth merchants, hardware shops, pharmacies, small factories, and similar businesses. In special category states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand), the limit is Rs. 75 lakh.

Restaurants not serving alcohol

Restaurants, dhabas, and food stalls with annual turnover up to Rs. 1.5 crore (Rs. 75 lakh in special category states) can opt for the scheme and pay 5% on turnover instead of the standard 5% GST on food items.

Service providers

Independent service providers and mixed suppliers (selling both goods and services) with annual turnover up to Rs. 50 lakh can opt for the scheme and pay 6% on turnover. This was introduced from 1st April 2019 under the 32nd GST Council recommendations.

Who cannot use the composition scheme

The following businesses are specifically excluded and cannot opt in regardless of turnover:

• Businesses making inter-state supplies (selling to buyers in a different state)
• Businesses selling through e-commerce platforms like Amazon, Flipkart, or Meesho
• Manufacturers of tobacco products, ice cream, or pan masala
• Casual taxable persons and non-resident taxable persons
• Businesses that supply non-taxable goods like alcohol for human consumption
• Businesses that are required to pay tax under the Reverse Charge Mechanism

Important for freelancers and consultants: Most freelancers providing services to clients across India are making inter-state supplies, which disqualifies them from the composition scheme. If you invoice clients in multiple states, you cannot opt for composition, even if your turnover is below Rs. 50 lakh. You must register as a regular GST taxpayer.

Composition scheme vs regular GST

	Composition scheme	Regular GST
Tax rate	Fixed 1% to 6% on turnover	Standard rates: 5%, 12%, 18%, 28% on each transaction
GST collected from customers	No	Yes
Input Tax Credit	Not available	Available
Inter-state sales	Not allowed	Allowed
E-commerce sales	Not allowed	Allowed
Invoice type	Bill of supply	Tax invoice
Returns frequency	CMP-08 quarterly, GSTR-4 annually	GSTR-1 and GSTR-3B monthly or quarterly
Compliance burden	Low	Higher
Best suited for	Local small businesses, kirana stores, small restaurants	Businesses buying from GST suppliers and wanting ITC, or selling across states

Key rules composition dealers must follow

• Display "Composition taxable person, not eligible to collect tax on supplies" on every bill of supply and prominently at the place of business
• Pay tax from their own pocket from the turnover collected, they cannot pass the tax burden to the customer
• File CMP-08 within 18 days from the end of each quarter
• File GSTR-4 by 30th April of the following financial year
• Maintain records of purchases, sales, and stock
• Cannot claim ITC on any purchases, not even on capital goods like machinery or equipment

Common composition scheme mistakes Indian businesses make

• Charging GST from customers. A composition dealer who collects GST from buyers is in direct violation. The customer cannot claim ITC on it either, since no valid tax invoice exists. This can lead to penalties and cancellation of composition registration.

• Making even one inter-state sale. A single inter-state sale disqualifies you from the composition scheme for that entire financial year. Many small businesses make this mistake when they ship goods to a customer in another state without realising the implication.

• Selling through an e-commerce platform. Listing on Amazon, Flipkart, or any online marketplace is not allowed under the composition scheme. Even one sale through an e-commerce platform violates the rules.

• Not switching to regular GST when turnover crosses the limit. If your turnover crosses Rs. 1.5 crore (or Rs. 50 lakh for services) at any point during the year, you must immediately switch to regular GST. Continuing to file as a composition dealer after crossing the threshold is a compliance violation.

• Forgetting to opt in before 31st March. The composition scheme is not automatic. You must file CMP-02 on the GST portal before 31st March to apply for the scheme for the next financial year. Missing this deadline means you are on regular GST for the entire year.

Frequently asked questions

What is the composition scheme under GST?

The GST Composition Scheme is a simplified tax option for small businesses. Eligible businesses pay a fixed low rate of 1% to 6% on their total turnover instead of standard GST rates on each transaction. They file fewer returns, but cannot collect GST from customers, cannot claim Input Tax Credit, and cannot make inter-state sales.

What is the turnover limit for the composition scheme in India?

For traders and manufacturers of goods, the turnover limit is Rs. 1.5 crore per year. For service providers and mixed suppliers, the limit is Rs. 50 lakh per year. For businesses in special category states, the goods limit is Rs. 75 lakh. These limits are based on aggregate turnover in the preceding financial year.

Can a freelancer or service provider opt for the composition scheme?

Yes, but only if their annual turnover is below Rs. 50 lakh and they supply services only within their own state. Most freelancers who serve clients across multiple states make inter-state supplies, which automatically disqualifies them from the composition scheme.

Can a composition dealer sell on Amazon or Flipkart?

No. Selling through any e-commerce platform is specifically prohibited for composition scheme dealers. This restriction applies to all online marketplaces regardless of whether the sale is intra-state or inter-state.

What happens if my turnover crosses the composition scheme limit?

If your aggregate turnover exceeds the applicable threshold at any point during the year, you must immediately stop filing under the composition scheme and switch to the regular GST regime. You must start issuing tax invoices, file GSTR-1 and GSTR-3B, and you become eligible to claim Input Tax Credit from that point.

Related terms

Bill of Supply · Input Tax Credit · GST Invoice · CGST · SGST · GSTR-4 · Annual Return

---

Create GST-compliant bills of supply for your composition scheme business in JetInvoice

If you are registered under the GST composition scheme, JetInvoice generates properly formatted bills of supply with the mandatory declaration text automatically. Stay compliant without the paperwork.

Create your bill of supply free at jetinvoice.in