The Composition Scheme is a simplified GST compliance option for small businesses. Pay tax at lower rates, file quarterly returns, and reduce compliance burden. But it comes with restrictions you must understand.
What is Composition Scheme?
Composition Scheme allows small taxpayers to pay GST at a fixed rate on turnover instead of the normal tax rates. It's designed to reduce compliance burden for small businesses.
📊 Normal vs Composition Scheme
Normal Scheme: ₹10L turnover @ 18% GST = ₹1.8L tax (can claim ITC) + Monthly returns
Composition Scheme: ₹10L turnover @ 1% = ₹10,000 tax (no ITC) + Quarterly returns
Savings: Much lower tax but lose ITC benefit + simpler compliance
Eligibility for Composition Scheme
Who Can Opt?
- Turnover limit: Up to ₹1.5 Crore (₹75 Lakh in some special category states)
- Business type: Manufacturers, traders, restaurants (without AC/bar)
- Location: Only intra-state supplies (within same state)
Who CANNOT Opt?
- E-commerce sellers (Amazon, Flipkart, etc.)
- Inter-state suppliers (selling to other states)
- Casual taxable persons
- Non-resident taxable persons
- Manufacturers of: Ice cream, pan masala, tobacco products
- Service providers (except restaurants & specific services)
❌ Service Restriction
Most service providers CANNOT opt for composition. Exception: Restaurants without AC/liquor license can opt at 5%.
Tax Rates Under Composition Scheme
| Business Type | Tax Rate | Breakdown |
|---|---|---|
| Manufacturers | 1% of turnover | 0.5% CGST + 0.5% SGST |
| Traders/Dealers | 1% of turnover | 0.5% CGST + 0.5% SGST |
| Restaurants (no AC/bar) | 5% of turnover | 2.5% CGST + 2.5% SGST |
| Other service providers | 6% of turnover | 3% CGST + 3% SGST |
Check Your Eligibility
Use our Composition Calculator to verify eligibility and estimate tax savings.
Calculate Now →Benefits of Composition Scheme
✓ Key Advantages
- Lower tax rate: 1-6% vs 5-28% in normal scheme
- Simple compliance: Quarterly GSTR-4 (vs monthly GSTR-1 & GSTR-3B)
- Less paperwork: Minimal documentation
- Easier accounting: No complex ITC calculations
- Annual return: Only GSTR-9A (simpler than GSTR-9)
Restrictions & Limitations
Major Restrictions
- No ITC claim: Cannot claim Input Tax Credit on purchases
- No inter-state supply: Can only sell within your state
- No e-commerce: Cannot sell through Amazon, Flipkart, etc.
- No tax invoice: Must issue "Bill of Supply" only
- Display requirement: Must display "Composition Taxable Person" on signboard
- All business units: If you have multiple GSTINs, all must be under composition
⚠️ ITC Impact
Your B2B customers CANNOT claim ITC on purchases from you. This makes you less competitive for B2B sales but fine for B2C.
How to Opt for Composition Scheme
For New Registration
- Select "Composition" option in GST registration form
- File Form GST CMP-02 within 30 days of registration
For Existing Taxpayers
- File Form GST CMP-02 online
- Must file by 31st March to opt from 1st April next FY
- Cannot switch mid-year
Compliance Requirements
Returns to File
| Return | Frequency | Due Date |
|---|---|---|
| GSTR-4 | Quarterly | 18th of month after quarter |
| GSTR-9A | Annual | 31st December of next FY |
Tax Payment
- Pay tax quarterly (with GSTR-4 filing)
- Calculate: Turnover × Applicable rate (1%, 5%, or 6%)
- Payment in cash only (no ITC to use)
Invoicing Rules
- Issue Bill of Supply (not Tax Invoice)
- Must mention: "Composition Taxable Person, Not Eligible to Collect Tax on Supplies"
- No separate GST shown on bill
- Include price only (tax already in price)
When to Choose Composition Scheme?
Good Fit If:
- Primarily B2C business (retail customers)
- Low input costs (little ITC to lose)
- Want simple compliance
- Only local sales (within state)
- Turnover under ₹1.5 Cr
NOT Suitable If:
- Mainly B2B business (buyers need ITC)
- High input costs (losing ITC hurts)
- Inter-state sales
- Selling via e-commerce
- Planning to scale beyond ₹1.5 Cr
Exiting Composition Scheme
Voluntary Exit
- File Form GST CMP-04
- Can exit from start of next financial year
- Or immediately if turnover crosses ₹1.5 Cr
Automatic Exit (Violations)
You're automatically moved to normal scheme if you:
- Make inter-state supply
- Sell via e-commerce
- Turnover exceeds ₹1.5 Cr
- Issue tax invoice instead of bill of supply
Penalty: Must pay normal tax rates from violation date + file all pending monthly returns
Common Mistakes to Avoid
- Issuing tax invoices: Must issue "Bill of Supply" only
- Claiming ITC: Composition dealers cannot claim any ITC
- Inter-state sales: Even one sale to another state = violation
- Missing display board: Must display "Composition Taxable Person"
- E-commerce sales: Selling on Amazon/Flipkart not allowed
- Not filing GSTR-4: Must file even with nil sales
💡 Pro Tip: Calculate Before Opting
Compare: (Tax saved under composition) vs (ITC you'll lose). If your purchase ITC is high, normal scheme might be better despite higher tax rate!
Frequently Asked Questions
Can I claim ITC on capital goods before opting for composition?
ITC on capital goods and inputs in stock must be reversed when opting for composition. Report in GSTR-4.
What if I exceed ₹1.5 Cr turnover?
File Form GST CMP-04 within 7 days. Switch to normal scheme from the day you exceed the limit.
Can I switch back to normal scheme mid-year?
No, voluntary switch only from start of next financial year. Exception: If you violate conditions, automatic exit anytime.
Do I need to maintain books of accounts?
Yes, but simpler than normal scheme. Maintain: Stock register, daily sales summary, purchase records.