Expert verified For a small business owner drowning in GST paperwork, the Composition Scheme for GST might be a time saver.
Learn with us all you need to know about GST composition scheme rules, eligibility, tax rates and whether you should or shouldn’t opt for it.
What is the Composition Scheme for GST?
The Composition Scheme under GST is a simplified tax scheme created to help small businesses reduce their compliance burden and make tax payments easier.
It allows eligible businesses to pay a fixed, lower rate of GST and file fewer returns – saving time, money, and effort.
This scheme is especially useful for small traders, manufacturers, and restaurants who don’t want to deal with complex GST rules.
Key Features:
Reduced Compliance Burden:
- File quarterly returns (GSTR-4) instead of monthly.
- Simplified record-keeping -no detailed invoice-level reporting required.
- One annual return (GSTR-4A/CMP-08) consolidating quarterly payments.
Predictable Tax Liability:
- Pay a fixed rate based on your business type:
- Tax is paid on total turnover, not profit, simplifying calculation.
Lower Tax Rates:
Businesses pay GST at a reduced rate, than regular GST slabs, improving cash flow.
Limited Interaction:
Reduced need for frequent interaction with tax authorities due to simplified filing.
Eligibility & Turnover Limit for Composition Scheme under GST
The Composition Scheme under GST is designed to make tax compliance easier for small businesses in India.
The scheme is voluntary and must be opted in via the GST portal during the designated window. However, not everyone can opt in. Let’s find out who can and who cannot.
Who Is Eligible for Composition Scheme under GST?
To qualify for the GST Composition Scheme, you must meet these key conditions:
1. Turnover Limits
- Manufacturers, Traders, and Restaurants (Non-alcoholic):
- Up to ₹1.5 crore in most states
- Up to ₹75 lakh in special category states* (e.g., NE states, Himachal Pradesh, Uttarakhand)
- Service Providers (non-restaurant):
- Up to ₹50 lakh across India
NOTE: If turnover exceeds the prescribed limit during the year, the business must exit the scheme and switch to the regular GST regime.
2. Eligible Business Types
- Manufacturers and traders of taxable goods (excluding notified goods like ice cream, pan masala, tobacco).
- Restaurants not serving alcohol.
- Service providers within the ₹50 lakh limit (under specific conditions).
3. Key Conditions
- Operates only within one state (no inter-state sales or supplies)
- Does not supply goods through e-commerce platforms (like Amazon, Flipkart)
- Must not manufacture or sell excluded goods (e.g., ice cream, pan masala, tobacco)
- Must not supply non-taxable goods (e.g., alcohol, petroleum)
- Must not be a casual or non-resident taxable person
- All businesses under the same PAN must opt in collectively.
4. Compliance Requirements
- Cannot collect GST from customers, must pay out of their own revenue.
- Cannot claim Input Tax Credit (ITC), GST on purchases becomes a cost.
- Must state on invoices: “Composition Taxable Person – not eligible to collect tax on supplies.”
- Must display status on business premises and bills.
Who Cannot Opt In for the Scheme
Businesses involved in:
- Inter-state sales (even occasionally)
- E-commerce platforms requiring TCS
- Manufacturing of notified goods (ice cream, pan masala, tobacco)
- Supply of alcohol or petroleum products
- Casual or non-resident taxable persons
How & Who Should Opt for GST Composition Scheme?
As a small business owner, opting for the GST composition scheme is an option to consider. But let’s understand how to do it and who should consider it.
How to Opt for the Scheme (Step-by-Step):
Check Eligibility:
Check that you meet the eligibility criteria and other important conditions
Apply at the Right Time:
- New Businesses: File within 30 days of GST registration.
- Existing Businesses: File by March 31 for the upcoming financial year (April 1–March 31).
Fill in Form GST CMP-02
- Log in to the GST Portal using your credentials.
- Navigate to: Services → Registration → Application to Opt for Composition Levy.
- GSTIN, business name, and address will auto-populate.
- Select your business category (e.g., manufacturer, trader, service provider).
- Carefully read and tick the Composition Declaration and Verification checkboxes to confirm your eligibility and agreement to abide by the scheme’s rules
Select Authorized Signatory & Place
- Choose the authorized signatory from the dropdown.
- Enter the place of filing
Submit the Form:
- Companies/LLPs: Submit using DSC (Digital Signature Certificate)
- Others: Use EVC or e-signature
Receive Confirmation:
- You’ll get an Acknowledgement Reference Number (ARN) and confirmation via email/SMS.
- Form GST CMP-03 (acknowledgment) will be issued
- Your GST certificate will reflect the “Composition Taxpayer” status
After choosing the scheme, you must file GST CMP-03 within 90 days to declare your stock and purchases as of the opt-in date.
Who Should Opt for the Scheme?
✅ Opt for it if:
- You run a local B2C business – retail shop, kirana store, or small restaurant not serving alcohol
- Your turnover is within the prescribed limits
- You operate only within one state and do not use e-commerce platforms like Amazon or Flipkart that require TCS.
- Your input costs are low, so the inability to claim Input Tax Credit (ITC) won’t significantly affect your profitability.
- You prefer simplicity and reduced compliance, and are okay with sacrificing some flexibility for ease of doing business.
❌ Avoid if:
- You sell primarily B2B, where customers need ITC and prefer suppliers under the regular GST scheme.
- You make inter-state supplies or use e-commerce platforms to sell your products/services.
- Your input costs are high, such as in manufacturing or bulk trading—since you can’t claim ITC, it would hurt profitability.
- You plan to grow quickly or expect to cross the turnover limits soon, which would force you to exit the scheme mid-year.
Withdrawing from the Scheme
- Voluntary Exit: Must file Form GST CMP-04 on the GST portal. This is usually done to switch to the regular GST system for benefits like input tax credit or interstate trading.
- Mandatory Exit: Required if no longer meets the scheme’s conditions, such as when their turnover exceeds the prescribed limit. In such cases, filing Form GST CMP-04 is necessary to inform the GST department of the ineligibility.
- Switching to Regular GST: After exiting the Composition Scheme, the taxpayer must apply for regular GST registration by filing Form GST REG-01 within 30 days. This allows them to comply with the regular GST rules, including detailed invoicing and return filing.
GST Composition Scheme Tax Rate
One of the biggest benefits of the Composition Scheme under GST is the lower, fixed tax rates. Instead of calculating complex GST slabs, small businesses just pay a single flat percentage of their turnover.
Here are the latest GST Composition Scheme tax rates:
| Business Type | GST Rate (Total) | CGST + SGST Split |
| Manufacturers | 1% | 0.5% + 0.5% |
| Traders/Dealers (Goods) | 1% | 0.5% + 0.5% |
| Restaurants (No Alcohol) | 5% | 2.5% + 2.5% |
| Service Providers | 6% | 3% + 3% |
| Mixed Suppliers | 6% | 3% + 3% |
Key Rules & Restrictions
- Tax is based on total turnover within the state/UT, including taxable, exempt, and export supplies (though exports are not allowed under the scheme).
- Cannot collect GST from customers. The tax is paid out of your own revenue.
- No Input Tax Credit (ITC) allowed – costs of purchases cannot be offset.
- Interstate sales are prohibited under the Composition Scheme.
- E-commerce sellers, casual taxable persons, and certain manufacturers (like tobacco and ice cream) are not eligible.
- All invoices must carry the statement: “Composition Taxable Person, not eligible to collect tax on supplies”
Example Calculation
- Business Type: Small Retail Shop in Kolkata
- Annual Turnover: ₹1.2 crore
- Applicable Rate: 2% (1% CGST + 1% SGST)
Tax Payable: ₹1,20,00,000 × 2% = ₹2,40,000 (paid quarterly)
Note: If your input GST on raw materials is ₹1,80,000, you cannot claim it as ITC, which makes the scheme less beneficial in such cases.
Pros and Cons of Composition Scheme for GST
Here are the main advantages and disadvantages of Composition Scheme under GST:
Advantages of the Composition Scheme
Simpler Compliance:
- File only one quarterly return (GSTR-4) instead of three monthly returns.
- No need to maintain detailed invoice-level records.
- Annual return (CMP-08) consolidates quarterly payments.
Lower Tax Rates:
- Fixed tax rates: 1% for manufacturers/traders, 5% for restaurants, 6% for services.
- Tax calculated on total turnover, not profit.
Predictable Cash Flow:
Tax liability is a fixed percentage of revenue, avoiding complex calculations.
Reduced Compliance Costs:
- Less accounting expertise required.
- Saves time and money on GST filings.
Limited Tax Authority Interaction:
Lower risk of audits due to simplified filing
Disadvantages & Limitations
No Input Tax Credit (ITC): Cannot claim credit for GST paid on purchases, increasing effective cost.
Geographic Restrictions: Sales limited to within the registered state; no inter-state sales allowed.
Loss of B2B Customers: GST-registered businesses avoid buying from you due to inability to claim ITC.
E-commerce Ban: Cannot sell through platforms like Amazon or Flipkart requiring TCS.
Tax on Revenue, Not Profit: Tax paid even if operating at a loss or low margins.
Growth Ceiling: Must exit scheme if turnover exceeds ₹1.5 crore (₹75 lakh in NE/Himachal) for goods/restaurants, or ₹50 lakh for services.
Invoice Constraints: Must print “Composition Taxable Person – not eligible to collect tax” on every bill.
No Exports/SEZ Supplies: Exports and SEZ supplies are prohibited.
Here’s an overview:
| Gain | Sacrifice |
| Lower tax rate | No ITC claims |
| Simple compliance | No inter-state/e-commerce sales |
| Cash flow predictability | Loss of B2B customers |
Return Filing under the GST Composition Scheme
Here’s what you must know about return filing under the scheme:
1. Annual Return (GSTR-4)
- Who files: All taxpayers under the Composition Scheme during the year, even if they switched or cancelled registration mid-year.
- How often: Once a year.
- Due date: 30th June after the financial year ends (e.g., for FY 2024–25, file by 30 June 2025).
- What it includes: Summary of sales, purchases, taxes paid (including reverse charge), and any changes.
- Must file: Yes, even if no business happened during the year
- File via: GST Portal → Services → Returns → GSTR-4.
2. Quarterly Statement (CMP-08)
- Frequency: Quarterly
- Note: It’s just for tax payment, not a full return.
- Deadline: 18th of the month following each quarter (e.g., April 18 for Jan-Mar).
- Calculate Tax: Based on your industry
- Payment: Pay via: GST Portal → Services → Payments → *Create Challan (CMP-08)*.
3. Important Tips for GSTR-4
- Documents needed: Bills of supply, purchase invoices, credit/debit notes, GST payment challans, stock details.
- Reverse Charge Tax: Must be reported and paid but no input credit can be claimed.
- Late filing: Leads to penalties and may risk your GST registration.
- No corrections: You cannot revise GSTR-4 after submitting it.
4. Penalties for Misuse of Composition Scheme
- Late Fees: ₹50/day (₹25 CGST + ₹25 SGST) – max ₹5,000.
- Interest: 18% p.a. on unpaid tax.
- Scheme Disqualification: Exceeding turnover limits or missing filings forces exit from the scheme.
FAQs About Composition Scheme for GST
1. What is the GST Composition Scheme?
The GST Composition Scheme is a simplified tax scheme for small businesses to pay a fixed percentage of their turnover as tax. It reduces compliance, paperwork, and return filing hassles.
2. Who is eligible for the GST Composition Scheme?
Businesses with a turnover up to ₹1.5 crore (₹75 lakhs in special states) and engaged in intra-state trade of goods or specific services are eligible. Interstate sellers, e-commerce operators, and certain service providers are excluded.
3. What is the GST rate under the Composition Scheme?
The rate varies: 1% for traders, 1% for manufacturers, 5% for restaurants, and 6% for small service providers. These rates apply to total turnover, not profit.
4. Can I claim Input Tax Credit (ITC) under the Composition Scheme?
No, ITC is not allowed under this scheme. You must pay tax from your own revenue.
5. What returns need to be filed under the Composition Scheme?
You need to file CMP-08 quarterly and GSTR-4 annually. There’s no need to file GSTR-1 or GSTR-3B.
