GST Composition Scheme: Limits, Rates, Returns and Who Should Opt
- The GST Composition Scheme lets small businesses pay a flat tax of 0.5%–3% of turnover instead of tracking input credits — ideal if your annual sales stay below ₹1.5 crore (₹75 lakh for most special category states).
- Composition dealers file only one annual return (GSTR-4) and pay tax quarterly, slashing compliance time dramatically compared to regular GST filers.
- The scheme is not for everyone — if your customers are GST-registered businesses who need input tax credit, opting in will cost you clients.
- Who Can Opt for the GST Composition Scheme?
- GST Composition Scheme Rates for FY 2025-26
- Worked Example: Real Rupee Comparison — Composition vs Regular GST
- Returns and Payment Schedule: What You Actually Need to File
- How to Opt In (and Opt Out)
- Common Mistakes Composition Dealers Make
- Should Your Business Opt In? A Quick Decision Framework
The GST Composition Scheme is a simplified tax option for small businesses: pay a low flat rate on your total turnover, skip the monthly return filing headache, and forget about tracking input tax credit. For FY 2025-26, the turnover limit is ₹1.5 crore for most states (₹75 lakh for most special category states like Himachal Pradesh, Uttarakhand, and the North-Eastern states). If you run a small retail shop, a restaurant, or a small manufacturing unit and your customers are mostly end-consumers, this scheme can save you both money and compliance effort. But it has real restrictions — and picking it without checking those restrictions is one of the most expensive mistakes small business owners make.
Who Can Opt for the GST Composition Scheme?
The scheme is open to traders, manufacturers, and restaurant services that do not cross the turnover threshold. Since 2019, a separate but similar Composition Scheme also covers service providers (other than restaurant services) under the CGST Act, with a lower limit of ₹50 lakh annual turnover. This is sometimes called the "Composition Scheme for Service Providers" or the QRMP-adjacent scheme, but it operates under a different notification and carries its own rules.
Who cannot opt in — ever:
- Businesses making inter-state outward supplies (you can buy from another state, but you cannot sell outside your state under this scheme).
- Businesses supplying goods through an e-commerce operator who collects tax at source (selling on Amazon or Flipkart as a seller who has TCS collected on you).
- Manufacturers of certain notified goods — ice cream, pan masala, tobacco, and aerated beverages are excluded.
- Anyone already registered as a regular taxpayer mid-year (you must opt in at the start of a financial year or at the time of new registration).
- Casual taxable persons and non-resident taxable persons.
GST Composition Scheme Rates for FY 2025-26
| Category of Taxpayer | CGST Rate | SGST Rate | Effective Total Rate |
|---|---|---|---|
| Manufacturers (other than notified goods) | 0.5% | 0.5% | 1% of turnover |
| Traders (pure resellers) | 0.5% | 0.5% | 1% of turnover |
| Restaurants not serving alcohol | 2.5% | 2.5% | 5% of turnover |
| Service providers (₹50 lakh limit, separate notification) | 3% | 3% | 6% of turnover |
Note: These rates apply on turnover in a state (not just taxable supplies — exempt supplies are also included in the denominator for composition tax calculation). IGST does not apply since inter-state sales are not allowed.
Worked Example: Real Rupee Comparison — Composition vs Regular GST
Let's take Ramesh, who runs a hardware retail shop in Pune with annual turnover of ₹90,00,000 (₹90 lakh). He mostly sells to individual customers who do not claim input tax credit. His purchase cost is ₹72,00,000 and he buys from registered suppliers who charge 18% GST.
Under Regular GST (18% on sales, 18% ITC on purchases):
- Output GST collected: ₹90,00,000 × 18% = ₹16,20,000
- Input Tax Credit on purchases: ₹72,00,000 × 18% = ₹12,96,000
- Net GST payable: ₹16,20,000 − ₹12,96,000 = ₹3,24,000
- Plus: 12 monthly GSTR-1 filings + 12 GSTR-3B filings = 24 returns per year
Under Composition Scheme (1% on turnover):
- Tax payable: ₹90,00,000 × 1% = ₹90,000
- No ITC benefit, but also no output GST collected from customers
- Net tax outflow: ₹90,000
- Returns: 1 annual GSTR-4 + quarterly CMP-08 (4 statements)
Tax saving: ₹3,24,000 − ₹90,000 = ₹2,34,000 per year — just by opting into composition. For Ramesh, whose customers are individual buyers who don't want GST invoices, this is a clear win. However, if even 30–40% of his buyers were GST-registered businesses needing ITC, he would lose those customers by switching to composition (since composition dealers cannot issue tax invoices).
Returns and Payment Schedule: What You Actually Need to File
This is one of the biggest practical advantages of the composition scheme. Here is what you file:
- CMP-08: A quarterly self-assessed tax payment statement. Due by the 18th of the month following each quarter (e.g., for April–June quarter, due by 18th July). This is not a full return — it is just a challan-cum-statement.
- GSTR-4: The annual return for composition dealers. Due by 30th April of the following financial year (so for FY 2024-25, due 30 April 2025). This consolidates all four quarters.
Compare that to a regular taxpayer who files GSTR-1 (monthly or quarterly) and GSTR-3B (monthly or quarterly) — often 8 to 24 filings a year. Under composition, you have effectively 5 filings a year (4 CMP-08 + 1 GSTR-4). That matters if you are running the business yourself without an accountant sitting in your office daily.
How to Opt In (and Opt Out)
If you are a new taxpayer, you can select the composition scheme at the time of GST Registration itself. If you are already registered under regular GST and want to switch, you must file Form CMP-02 on the GST portal before the start of the financial year you want the scheme to apply from. You cannot switch mid-year.
To opt out voluntarily, or if your turnover crosses the limit during the year, you must file Form CMP-04 within 7 days of the event that makes you ineligible. From that date, you become a regular taxpayer and must start charging GST and filing regular returns. You also lose any ITC you would have accumulated — because you had none under composition.
Common Mistakes Composition Dealers Make
- Issuing a "tax invoice" instead of a "bill of supply." Composition dealers are legally not allowed to collect GST from customers or issue a tax invoice. They must issue a Bill of Supply with the words "Composition taxable person, not eligible to collect tax on supplies" printed on it. Missing this can attract penalties and invalidate the scheme for that period.
- Forgetting to include exempt turnover in the composition tax calculation. Composition tax is payable on total turnover in the state — including exempt supplies. Many dealers compute tax only on taxable turnover and underpay.
- Making inter-state purchases thinking it disqualifies them. It does not. You can buy goods from another state. What you cannot do is make inter-state sales. Many small traders turn away out-of-state suppliers needlessly due to this confusion.
- Not opting out when turnover crosses the limit during the year. If your aggregate turnover exceeds ₹1.5 crore (or the applicable limit) during the financial year, you must exit the scheme immediately and register as a regular taxpayer. Continuing to pay composition tax after crossing the limit is a compliance violation with potential penalties and demand of differential tax.
- Assuming the scheme covers all their business activities. If a composition dealer also provides any non-restaurant service (say, a trader who also does installation work), all supplies — goods and services — are assessed together. You cannot pick and choose which part of your business is under composition.
Should Your Business Opt In? A Quick Decision Framework
Ask yourself these four questions:
- Are most of your customers end-consumers? If yes, they don't need a tax invoice, so composition works.
- Is your turnover comfortably below the limit? If you are close to ₹1.5 crore and growing, you risk crossing mid-year — which triggers an exit and a more complex transition.
- Do you have high input costs with GST-registered suppliers? If your input GST is large relative to output GST, regular registration with ITC may actually cost you less in tax — like Ramesh's example above but in reverse.
- Do you sell only within your state? If you want to expand to other states, composition will block you. Plan accordingly.
The composition scheme is genuinely excellent for local retailers, small dhaba-style restaurants, and small manufacturers selling locally to end-users. It is poorly suited for anyone in a B2B supply chain or anyone with serious growth plans that involve crossing state lines.
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Open GST Registration →Frequently asked questions
Can a composition dealer sell on Amazon or Flipkart?
No. If an e-commerce operator is required to collect Tax Collected at Source (TCS) on your behalf, you cannot opt for the composition scheme. This effectively rules out selling on major marketplaces like Amazon and Flipkart as a composition dealer.
What happens if I cross the ₹1.5 crore turnover limit during the year?
You must stop using the composition scheme from the day your aggregate turnover exceeds the limit. File Form CMP-04 within 7 days, obtain a regular GSTIN (your number stays the same but your registration type changes), start issuing tax invoices, and begin filing regular returns. You will also need to pay GST as a regular taxpayer from that date onward.
Can a composition dealer claim input tax credit on purchases?
No. This is one of the key trade-offs. A composition dealer cannot claim ITC on any purchases — whether raw materials, stock, or capital goods. The flat composition tax rate is paid on total turnover, and there is no credit offset. If your business has very high GST-bearing input costs, run the numbers carefully before opting in.
Is the GST Composition Scheme the same as the presumptive taxation scheme under Income Tax?
No, they are completely separate. The GST Composition Scheme is a GST compliance simplification — it affects how much GST you pay and how many GST returns you file. Presumptive taxation under Sections 44AD or 44ADA of the Income Tax Act is an income tax concept. You can use both simultaneously, or either one independently. Opting into the GST composition scheme has no bearing on your income tax filing method.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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