The GST composition scheme lets an eligible small business pay GST at a set rate on the relevant turnover. It can make compliance simpler, but there are two important costs: you cannot collect GST from customers, and you cannot claim input tax credit (ITC).
ITC is the credit for eligible GST paid on business purchases. Under composition, that purchase tax stays in your cost. So a lower tax rate does not automatically mean a better result. Check whether the scheme is legally available, then compare what you would earn at the price your customers will actually pay.
What changes when you choose composition?
| Point | Regular GST scheme | Composition scheme |
|---|---|---|
| Tax collection from customer | Tax invoice generally issued and GST collected | Composition taxpayer cannot collect tax from recipient |
| Input tax credit | Usually available subject to section 16, section 17 and other conditions | Not available |
| Effect on costs | Eligible purchase GST can reduce output GST payable | Purchase GST stays in cost; composition tax is paid by the business |
| Document for outward supply | Tax invoice | Bill of supply |
| Commercial considerations | Often preferred where business customers need ITC | May suit eligible local businesses selling mainly to consumers |
Which turnover limit applies to your business?
Under section 10(1), the previous financial year’s aggregate turnover must normally be ₹1.5 crore or less. The limit is ₹75 lakh in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
For eligible service or mixed suppliers who cannot use sections 10(1) and 10(2), section 10(2A) has a separate previous-year limit of ₹50 lakh. Do not apply the ₹1.5 crore limit to this route. See the ICAI composition handbook’s turnover discussion and chapter 3.
Aggregate turnover is tested across the same PAN. It is not a fresh allowance for each shop or GST registration. Also check the statutory inclusions and exclusions when calculating it.
Being below the limit is only the first test. Check these restrictions too:
- Inter-State sales: you cannot make outward supplies of goods or services that are inter-State under GST law. Buying from another State is a different question.
- Supplies outside the GST levy: you cannot supply goods or services that are not leviable to GST.
- Excluded businesses or products: check the notified exclusions for the route you plan to use, including excluded manufacturers.
- Registration category: casual taxable persons and non-resident taxable persons cannot opt for composition.
- Other registrations on the same PAN: all such registered persons must opt consistently under the relevant composition sub-section. One eligible shop cannot be assessed in isolation.
- Services and online sales: apply the separate conditions explained below.
The legal conditions are in section 10.
Use the correct rate and the correct sales amount
| Category | Combined CGST and SGST/UTGST | Amount on which tax is calculated in the State/UT |
|---|---|---|
| Eligible manufacturer, section 10(1) | 1%: 0.5% + 0.5% | Turnover |
| Eligible restaurant/food-service category under Schedule II, paragraph 6(b) | 5%: 2.5% + 2.5% | Turnover |
| Other eligible section 10(1) supplier, including a trader | 1%: 0.5% + 0.5% | Turnover of taxable supplies of goods and services |
| Eligible section 10(2A) supplier | 6%: 3% + 3% | Turnover of supplies of goods and services |
The percentages above combine central and State/UT tax. The amount used for the calculation differs by category. For example, the trader category uses turnover of taxable supplies; do not automatically use the manufacturer’s turnover base. Read Rule 7 with the corresponding State/UT levy and statutory exclusions.
How much additional service income is allowed?
A person using section 10(1) can provide additional services, apart from the specified restaurant/food-service category, up to the higher of 10% of the previous year’s turnover in that State/UT or ₹5 lakh.
Hypothetical example: a spare-parts seller had previous-year State turnover of ₹30 lakh. Ten per cent is ₹3 lakh, so the higher allowance is ₹5 lakh. Installation and maintenance services of ₹6 lakh exceed it.
The seller must check when eligibility was lost and follow the withdrawal process. The separate section 10(2A) route needs its own eligibility and option assessment; it does not apply automatically when this allowance is exceeded.
Can you sell through an e-commerce operator?
From 1 October 2023, eligible composition taxpayers can sell goods within the State through an operator required to collect tax at source (TCS). Under Notification 36/2023-Central Tax, the operator must prevent inter-State goods supplies, collect TCS and report the supplies in GSTR-8.
This change does not remove the other composition conditions. The restriction on supplying services through a TCS-collecting operator continues to need a separate check.
Compare the result at the same customer price
Hypothetical facts: an eligible Gujarat trader makes only local taxable goods sales to consumers. All composition conditions are assumed to be satisfied. Customers will pay ₹1,18,000 for the same batch under either model.
Purchases cost ₹60,000 plus an assumed 18% GST of ₹10,800. The full ₹10,800 qualifies for ITC under regular GST. Other costs are ₹10,000 of wages, with no GST. Ignore opening credits, capital goods, reverse charge and other adjustments.
| Cash working | Regular GST | Trader composition |
|---|---|---|
| Customer payment | ₹1,18,000, comprising ₹1,00,000 value and ₹18,000 GST | ₹1,18,000 bill of supply; no GST collected separately |
| Purchase payment | ₹70,800 | ₹70,800; no ITC |
| Other costs | ₹10,000 | ₹10,000 |
| GST paid in cash | ₹18,000 − ₹10,800 ITC = ₹7,200 | ₹1,18,000 × 1% = ₹1,180 |
| Amount remaining after these costs and GST | ₹1,18,000 − ₹70,800 − ₹10,000 − ₹7,200 = ₹30,000 | ₹1,18,000 − ₹70,800 − ₹10,000 − ₹1,180 = ₹36,020 |
Composition leaves ₹6,020 more in this example. This is the amount left after the listed costs and GST, not a promise of overall profit or savings for every business.
Now consider a wholesaler whose customers are registered dealers. Those buyers may compare prices after ITC. A composition supplier cannot give them a tax invoice carrying credit, and cannot claim ITC on its own purchases. Regular GST may therefore work better even when composition is legally available. Use actual product rates, eligible credits and customer prices in your comparison.
Opt in and keep the acknowledgement
An existing regular taxpayer ordinarily files CMP-02 before the financial year begins and ITC-03 within 60 days from the start of that financial year. ITC-03 deals with the required credit reversal on moving to composition. An eligible new applicant can select composition in REG-01. See Rule 3.
For CMP-02, complete the declarations and sign through a permitted method on the portal. Keep the success confirmation and application reference number (ARN). The GST portal’s composition-option manual explains the process. Saving a draft is not the same as submitting the option.
Once covered, issue a bill of supply with the prescribed composition declaration. Do not collect GST separately from the customer. Keep the required composition notice at the business premises. Composition also does not remove applicable reverse-charge liabilities—cases where the recipient must pay GST. Check the relevant notification and its exceptions; the ICAI handbook’s reverse-charge and return discussion explains this area.
Quarterly payment and annual filing: finish both
The ordinary deadline for CMP-08 is the 18th of the month after each quarter. The ordinary annual GSTR-4 deadline is 30 June after the financial year, from FY 2024-25 onwards. Check notified extensions and any separate rules for a period in which composition ends. See Rule 62.
For CMP-08: choose the correct quarter in the Returns Dashboard, enter the figures, preview the statement and ensure enough money is available in the electronic cash ledger. Then complete filing with the permitted signing method shown for your taxpayer. The current manual includes DSC, EVC and STAK options. A challan payment alone does not complete filing.
Confirm that the statement shows “Filed”, save the ARN and download the filed statement. Follow the official CMP-08 manual.
For annual GSTR-4: use Services → Returns → Annual Return and select the correct year. Reconcile the annual figures with your books and CMP-08 payments, preview the return, check the calculated liability and provide any additional cash required. Complete the declaration and sign using the applicable DSC or EVC option.
Again, check for “Filed” status and an ARN, then retain the filed summary. These final steps are shown in the official annual GSTR-4 manual. Do not treat a saved draft or a funded cash ledger as proof of filing.
Act when the business becomes ineligible
Monitor turnover and changes in services, products, States and sales channels throughout the year. If a composition condition stops being met, regular GST applies from that day. Issue tax invoices for taxable supplies from then and file CMP-04 within seven days. A voluntary exit has a different timing rule: file CMP-04 before the chosen withdrawal date. See Rule 6.
Keep the eligibility calculation, customer-price comparison, option acknowledgement, payment reconciliations and filed returns together. These records show both why the scheme was chosen and whether its conditions are still met.
For the related decisions, read input tax credit under GST and GST registration explained.
