GST Composition Scheme: Eligibility, Tax Rates & Compliance

The GST Composition Scheme is a simplified tax route under Section 10 of the Central Goods and Services Tax Act that lets small businesses with aggregate turnover below ₹1.5 crore pay GST at a flat percentage of revenue instead of navigating the full compliance system.¹ The trade-off is real: you cannot claim input tax credit on your purchases, and you cannot collect GST from your customers. For businesses with straightforward operations and modest input costs, that swap saves time and often money. For others, it quietly costs more than regular GST would.

Who Can Join

The gate is turnover. Your aggregate turnover in the preceding financial year must be below ₹1.5 crore to opt in as a manufacturer or trader of goods, or as a restaurant that does not serve alcohol for human consumption. In nine special-category states, including several northeastern and hill states such as Arunachal Pradesh, Himachal Pradesh, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand, the cap drops to ₹75 lakh.¹

A separate window sits alongside the main scheme. Under Section 10(2A), service providers other than restaurants can opt in if their aggregate turnover in the preceding financial year did not exceed ₹50 lakh.¹ This is the route for small consultants, professionals, and other service businesses that would otherwise be locked out.

Aggregate turnover is calculated across every GSTIN linked to your PAN. If any one registration opts in, every other registration under the same PAN must operate under the composition scheme too. You cannot have one location under composition and another under regular GST.

Who Is Barred From the Scheme

Some businesses are shut out no matter how low their turnover is.

You cannot join if you make inter-state outward supplies of goods. The scheme is designed for intra-state commerce, so shipping products across state lines pushes you into the regular regime.¹ You are also barred if you sell through an e-commerce operator required to collect tax at source under Section 52.²

Manufacturers of certain notified goods are excluded, including ice cream, pan masala, and tobacco products.³ Casual taxable persons and non-resident taxable persons must register under regular provisions and cannot use the scheme either.¹

The Tax Rates

Rates vary by business type. Each figure below is the combined CGST and SGST (or UTGST) total.

Manufacturers: 2% of turnover (1% CGST + 1% SGST).
Traders: 1% of turnover (0.5% CGST + 0.5% SGST).
Restaurant service providers: 5% of turnover (2.5% CGST + 2.5% SGST).
Other service providers under Section 10(2A): 6% of turnover (3% CGST + 3% SGST).³

Note that the rate applies to your entire turnover, not your profit.

What You Give Up in Exchange

Composition dealers sit outside the input tax credit chain. GST paid on raw materials, rent, equipment, and other business expenses cannot be offset against your tax liability; it becomes an operating cost.³ You also cannot pass GST on to your customers, so the tax you pay comes out of your margin rather than being collected from buyers.

Reverse charge obligations do not go away. When you buy goods or services from an unregistered supplier, or receive notified supplies that fall under reverse charge, you are liable to pay GST on those inputs yourself, at the applicable regular rates rather than your composition rate.³ And you cannot claim credit for reverse charge tax either. If a large share of your purchases come from unregistered suppliers, this cost can quietly erase the savings the scheme promises.

How to Opt In

The process depends on whether you already have a GST registration.

Existing taxpayers file Form GST CMP-02 on the GST portal before the start of the financial year the scheme should apply to. In practice that means filing by March 31 for the year beginning April 1.⁴ Miss the deadline and you stay on regular GST for the whole year. New businesses can select the composition scheme directly on the initial GST registration application.

There is a settling-up step that catches people out. Because you are giving up the right to input tax credits from the effective date onward, you also have to reverse credits already claimed on stock you still hold. On the day before your opt-in takes effect, take an inventory of raw materials, semi-finished goods, finished goods, and capital goods. Then file Form GST ITC-03 to pay back that credit, either by debiting your electronic credit ledger or electronic cash ledger.⁵ Any remaining balance in your electronic credit ledger lapses after the form is filed. Factor this reversal into your decision before you file CMP-02.

Compliance Once You Are In

Invoicing

Because you cannot collect tax from customers, you issue a Bill of Supply, not a tax invoice.³ The Bill of Supply looks like a standard invoice but carries no separate tax component. It must show your name, address, and GSTIN, and it must carry a header at the top identifying you as a composition taxable person not eligible to collect tax on supplies.⁶

Signage

Rule 5 of the CGST Rules requires the phrase “composition taxable person” on every notice or signboard at your principal place of business and at every additional business location.⁶ The point is that customers and inspectors can tell at a glance that you cannot charge GST.

Records

The scheme lightens your filing burden, not your record-keeping. Under Rule 56 of the CGST Rules, composition dealers must maintain records of all inward and outward supplies, invoices, bills of supply, delivery challans, credit notes, and debit notes. If you run manufacturing, trading, and services under one umbrella, you need separate accounts for each activity, and advances received and paid must be tracked separately. The relief: you do not have to maintain the detailed stock registers and input tax credit registers required of regular taxpayers, because you are not claiming credits in the first place.⁷

Returns and Payments

Composition dealers pay quarterly, not monthly. You file Form GST CMP-08, which functions as a self-assessment statement and payment challan, by the 18th of the month following each quarter.⁸ Tax for April to June is due by July 18. No late fee applies for delayed CMP-08 filing, but interest of 18% per annum accrues on tax paid after the due date.

Once a year, you file Form GSTR-4 by June 30 following the end of the financial year. It summarizes your activity for the whole year and lets tax authorities verify you stayed within the turnover cap. Late filing of GSTR-4 attracts a penalty of ₹50 per day, capped at ₹2,000; if your tax liability for the year was nil, the maximum drops to ₹500.

If You Cross the Turnover Limit

Composition status lapses on the day your aggregate turnover crosses ₹1.5 crore (or ₹75 lakh in special-category states). You do not finish the quarter or the year on the scheme.

Within seven days of crossing the limit, file Form GST CMP-04 to formally withdraw. Approval is automatic on the portal.⁹ From that date, you operate as a regular taxpayer: tax invoices, GST collected from customers, and returns under the standard regime.

The upside is that input tax credit becomes available again. Within 30 days of the withdrawal date, file Form GST ITC-01 detailing the stock of inputs, semi-finished goods, finished goods, and capital goods you held on that date, and you can claim credit on that inventory going forward.⁹ Multi-location businesses should note that withdrawing one GSTIN automatically removes every other GSTIN under the same PAN.

You can also leave voluntarily even without breaching the limit. The procedure is the same: CMP-04, then ITC-01 within 30 days. The effective withdrawal date cannot be backdated.⁹

Penalty for Wrongful Enrollment

If a tax officer finds you opted in while ineligible, the consequences run past a simple reversion to regular GST. Under Section 10(5) of the CGST Act, you owe the full tax that would have been due under regular provisions for the entire period you were wrongly enrolled, plus a penalty assessed through the demand and recovery process under Section 73 or 74.¹ Interest on the unpaid tax accrues on top. The penalty is not a fixed number; it depends on the facts of the case. Confirming your eligibility carefully before filing CMP-02 is worth the effort.

1
Central Board of Indirect Taxes and Customs. CGST Act Section 10 – Composition Levy
2
Central Board of Indirect Taxes and Customs. Frequently Asked Questions on Tax Collected at Source
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Central Board of Indirect Taxes and Customs. Frequently Asked Questions on Composition Levy
4
Goods and Services Tax. Opt for Composition Scheme
5
Goods and Services Tax. FAQs – Form GST ITC-03
6
Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Rules, 2017 – Section: Rule 5
7
Central Board of Indirect Taxes and Customs. Accounts and Records Rules
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Goods and Services Tax. FAQs – Filing Form GST CMP-08
9
Goods and Services Tax. Withdraw from Composition Scheme