What Is the GST Composition Scheme?
The GST composition scheme is a simplified tax option under Section 10 of the CGST Act, 2017 that lets small businesses pay GST at a flat percentage of turnover instead of standard slab rates. You file quarterly instead of monthly, issue a Bill of Supply instead of a tax invoice, and the compliance burden drops to a fraction of what regular taxpayers deal with. The trade-off is steep, though: you forfeit all input tax credit, you cannot sell across state lines, and B2B customers lose the ability to claim ITC on anything they purchase from you.
The turnover ceiling for opting in is Rs.1.5 crore in the preceding financial year. Special category states (Sikkim, Manipur, and the remaining northeastern states) have a lower cap of Rs.75 lakh. Service providers who come in through Section 10(2A) face an even tighter limit of Rs.50 lakh. Manufacturers of ice cream, pan masala, and tobacco products are locked out entirely, as is anyone making inter-state outward supplies.
What Are the Composition Scheme Tax Rates?
These rates apply on turnover, not value addition. You pay tax on the full revenue number, not on profit or margin, which is why the ITC question matters so much.
| Category | CGST | SGST | Total Rate |
|---|---|---|---|
| Manufacturers (other than excluded goods) | 0.5% | 0.5% | 1% |
| Traders (goods suppliers) | 0.5% | 0.5% | 1% |
| Restaurants not serving alcohol | 2.5% | 2.5% | 5% |
| Service providers under Section 10(2A) | 3% | 3% | 6% |
Here is where the maths gets interesting. A bakery in Jayanagar, Bangalore doing Rs.94 lakh annual turnover as a manufacturer pays Rs.94,000 in composition tax for the entire year. Under regular GST at 18%, the headline tax on that revenue would be far higher, but ITC on flour, sugar, and packaging would claw back a chunk of it. Whether composition actually saves money depends on your input costs. Low inputs, composition wins. Heavy raw material spend with 18% GST baked into every purchase invoice? The maths often flips, and you end up paying more under composition than you would under regular GST after ITC offsets.
How Does the Composition Scheme Work in Practice?
CMP-02 on the GST portal. That is the form you file to opt in, and the window usually opens in early February and shuts by 31 March for the upcoming financial year. Once inside, the compliance calendar shrinks to almost nothing compared to regular GST.
| Obligation | Frequency | Due Date |
|---|---|---|
| CMP-08 (self-assessed tax payment) | Quarterly | 18th of the month after the quarter ends |
| GSTR-4 (annual return) | Annual | 30th June of the following FY |
Four quarterly payments and one annual return. A regular taxpayer, by contrast, files GSTR-1 and GSTR-3B every single month. That gap in paperwork is why composition appeals to owners who would rather run their shop than sit with their accountant twice a month.
One restriction trips people up more than any other. You cannot collect GST from customers. Not on the bill, not as a line item, not even as a footnote. Section 10(4) of the CGST Act is explicit, and Rule 46A requires every Bill of Supply and every signboard to carry the words “composition taxable person, not eligible to collect tax on supplies.” Miss that notice on your shopfront and Section 125 allows a penalty of up to Rs.25,000.
Composition Scheme Example
Here is an illustrative example. A textile trader in Vijayawada with annual turnover of Rs.1,12,00,000 (Rs.1.12 crore) opts for composition in FY 2025-26.
| Quarter | Turnover | Tax @ 1% | CMP-08 Due Date |
|---|---|---|---|
| Apr-Jun 2025 | Rs.31,40,000 | Rs.31,400 | 18 July 2025 |
| Jul-Sep 2025 | Rs.26,80,000 | Rs.26,800 | 18 October 2025 |
| Oct-Dec 2025 | Rs.28,50,000 | Rs.28,500 | 18 January 2026 |
| Jan-Mar 2026 | Rs.25,30,000 | Rs.25,300 | 18 April 2026 |
| Full Year | Rs.1,12,00,000 | Rs.1,12,000 | GSTR-4 by 30 June 2026 |
Note: all figures above are illustrative. Bills of Supply go out instead of tax invoices. CMP-08 gets filed each quarter. One annual GSTR-4 wraps the year. No ITC is claimed on any purchase. If turnover crosses Rs.1.5 crore mid-year, composition lapses on that date itself under Section 10(3), and the trader must switch to regular GST immediately.
Why Does the Composition Scheme Matter for Indian SMEs?
Compliance cost. That is what it comes down to, and for a business owner juggling staff, inventory, and rent, the difference between 24 monthly filings and 5 annual submissions is not abstract.
A regular GST taxpayer files GSTR-1 and GSTR-3B every month, reconciles ITC against GSTR-2B, and tracks credit notes. A composition dealer does none of that. The accountant’s workload drops by roughly 60 to 70%.
Then there is the ITC wall. At Petpooja, across 8,000+ Invoice clients, we see businesses switch out of composition once input costs climb past a tipping point. A garment retailer in Panchkula buying stock with 12% GST on every purchase invoice absorbs that entire amount as a cost under composition; under regular GST, the same retailer claims it back and only pays the net difference. No universal rule exists for when the switch makes sense. It depends on your input-to-output ratio, and your CA should run both scenarios before you commit either way.
One more thing worth knowing: since 1 October 2023, composition dealers can sell goods through e-commerce platforms for intra-state delivery. The Finance Act 2023 amended Section 10(2)(b) to allow this. Selling services through e-commerce operators who collect TCS under Section 52 is still off the table.
How Petpooja Invoice Supports Composition Dealers
Petpooja Invoice generates Bills of Supply with the mandatory composition declaration printed on every document, so you do not need to remember to add it manually. The Tally integration syncs sales data for GSTR-4 preparation without re-entry. Turnover tracking runs in the background; approach the Rs.1.5 crore threshold mid-year and the system flags it before you cross over and trigger a forced switch. Clients like Ginger & Nuts use this to keep quarterly filings clean across counters.
Frequently Asked Questions
If it does not serve alcohol and aggregate turnover stays under Rs.1.5 crore, yes. The rate is 5% on turnover (2.5% CGST + 2.5% SGST). Alcohol falls outside GST entirely; state excise handles that. A restaurant with both food and liquor service needs to evaluate whether the food-only portion justifies composition, because the 5% rate with no ITC may not save much once you factor in GST paid on ingredients and kitchen equipment.
Section 10(3) is unforgiving on this. Composition lapses from the exact date you cross the threshold. From that day forward: monthly GSTR-1 and GSTR-3B, tax invoices instead of Bills of Supply, and GST at regular rates on every transaction. Tax already paid under composition for the earlier months does not get refunded or adjusted.
Goods only, and only within your state. The Finance Act 2023 amended Section 10(2)(b) effective 1 October 2023 to allow intra-state supply of goods through e-commerce platforms. Services sold via e-commerce operators who collect TCS under Section 52 remain barred. Before October 2023, even goods were off-limits.
Probably not. Every rupee of GST on your purchases becomes a sunk cost under composition because you cannot claim ITC. A trader buying stock at 12% GST with thin margins may find the ITC forfeited actually exceeds whatever the composition rate saves. Run the numbers with your CA before locking in.
Rs.50 per day (split as Rs.25 CGST and Rs.25 SGST), capped at Rs.2,000. Nil returns have a lower cap of Rs.500. Late payment of tax through CMP-08 does not attract a separate late fee but does carry 18% annual interest under Section 50 of the CGST Act.
