GST Composition Scheme
— Complete Guide for Small Businesses
Eligibility up to Rs 1.5 crore, tax rates from 1-6% on turnover, only 5 filings per year vs 24, ITC restrictions explained, Bill of Supply rules, and when composition beats regular GST for your business.
What Is the GST Composition Scheme?
The GST Composition Scheme is India’s simplified tax option for small businesses — designed to replace the complex invoice-level GST tracking with a straightforward fixed percentage of turnover. Launched alongside GST in July 2017, it recognises that small businesses often lack the accounting infrastructure to manage monthly GSTR-1, GSTR-3B, and ITC reconciliation. The scheme trades away Input Tax Credit for dramatically reduced compliance — just 5 filings per year versus 24 under regular GST.
Eligibility — Who Can Use the Composition Scheme
| Business Type | Turnover Limit | Rate | Key Exclusion |
|---|---|---|---|
| Trader (goods dealer) | Rs 1.5 crore (Rs 75L special states) | 1% | No inter-state supply |
| Manufacturer | Rs 1.5 crore (Rs 75L special states) | 1% | No ice cream, tobacco, pan masala |
| Restaurant (no alcohol) | Rs 1.5 crore | 5% | Alcohol service disqualifies |
| Service provider (Rule 7) | Rs 50 lakh | 6% | Special scheme for services only |
| Mixed (goods + services) | Rs 1.5 crore | As applicable | Service portion max 10% of turnover |
Businesses that CANNOT use the scheme regardless of turnover: inter-state suppliers of goods; e-commerce sellers; manufacturers of ice cream, pan masala, tobacco, aerated water; casual and non-resident taxable persons; persons liable to pay tax under Reverse Charge Mechanism as recipient; and Input Service Distributors.
Composition Tax Rates vs Regular GST — When Each Wins
The key financial question: is 1% of turnover lower or higher than your net GST under regular scheme? The answer depends on your input costs and ITC eligibility:
| Business Profile | Net GST Under Regular Scheme | Composition Tax (1% of turnover) | Better Choice |
|---|---|---|---|
| Rs 80L turnover, Rs 70L purchases from registered suppliers at 5% | Rs 4L output – Rs 3.5L ITC = Rs 50,000 | Rs 80,000 | Regular GST |
| Rs 80L turnover, mostly local unregistered supplier purchases | Rs 4L output – Rs 0 ITC = Rs 4,00,000 | Rs 80,000 | Composition (saves Rs 3.2L) |
| Rs 1.2Cr restaurant, 5% GST rate | Rs 6L output – minimal ITC = Rs 5L+ | Rs 6L (5% scheme) | Similar — evaluate compliance saving |
The calculation is straightforward: if most of your suppliers are unregistered (no ITC on purchases), composition almost always wins. If most purchases carry GST with strong ITC, run the numbers carefully before opting in.
Bill of Supply — Composition Dealer’s Document
Composition dealers must issue Bills of Supply instead of Tax Invoices. The legal obligation:
- Heading must say “Bill of Supply” — not “Tax Invoice” or “GST Invoice”
- Must display mandatory text: “Composition Taxable Person, Not Eligible to Collect Tax on Supplies”
- Total amount shown — no separate GST line (because you don’t charge GST from customer)
- Buyer cannot claim ITC on Bill of Supply — the tax is absorbed by the composition dealer
- Bills of Supply are not reported invoice-by-invoice to GST portal — only the quarterly turnover summary goes into CMP-08 and annual GSTR-4
Commercial implication: if your customers are registered GST businesses that claim ITC on their purchases, buying from a composition dealer costs them more in effective terms. A B2B customer buying goods for Rs 1,000 from a regular dealer (5% GST) pays Rs 1,050 but claims Rs 50 ITC — effective cost Rs 1,000. Buying from a composition dealer at Rs 1,000 — effective cost is Rs 1,000 but no ITC benefit. The composition dealer must price competitively enough to offset the ITC disadvantage.
Filing Calendar — 5 Returns vs 24
| Filing | Period | Due Date | Purpose |
|---|---|---|---|
| CMP-08 (Q1) | April–June | July 18 | Self-assess and pay Q1 turnover tax |
| CMP-08 (Q2) | July–September | October 18 | Self-assess and pay Q2 turnover tax |
| CMP-08 (Q3) | October–December | January 18 | Self-assess and pay Q3 turnover tax |
| CMP-08 (Q4) | January–March | April 18 | Self-assess and pay Q4 turnover tax |
| GSTR-4 (Annual) | Full Financial Year | April 30 | Annual comprehensive return and reconciliation |
Late fee: Rs 200/day per return (Rs 100 CGST + Rs 100 SGST), maximum Rs 5,000. Interest at 18% per annum on delayed payment of quarterly tax. Even with simplified filing, timely compliance is essential.
How to Opt In to the Composition Scheme
- Verify eligibility: Turnover below Rs 1.5 crore; no disqualifying supply type
- File Form CMP-02: On the GST portal (gst.gov.in) before March 31 for the scheme to apply from April 1
- Reverse ITC on stock: File Form ITC-03 to reverse all ITC availed on goods held in stock, inputs, semi-finished goods, and capital goods on the date of switching. Pay back reversed ITC via Electronic Cash Ledger
- Update invoicing: Switch to Bills of Supply with mandatory composition text from April 1
- Update records: Inform regular suppliers, update accounting software, display GSTIN and composition status at place of business
How to Opt Out of the Composition Scheme
Exit is required when: turnover crosses Rs 1.5 crore limit in the financial year; you start making inter-state supplies; you begin selling on e-commerce platforms. Voluntary exit is also possible.
- File Form CMP-04 on GST portal within 7 days of the event triggering exit
- Effective from the date of crossing the threshold or the date mentioned in CMP-04
- File Form ITC-01 to claim ITC on opening stock held on the date of switching back
- Resume issuing Tax Invoices and start filing GSTR-1 and GSTR-3B from the following month
- File pending GSTR-4 for the period under composition before switching to regular
Composition Scheme Decision Checklist
- Verify annual turnover is below Rs 1.5 crore (goods/manufacturing) or Rs 50 lakh (services)
- Confirm no inter-state supply, no e-commerce selling, no notified goods manufacturing
- Calculate: is 1%/5%/6% of turnover lower than net GST under regular scheme (output minus ITC)?
- Assess customer base: B2C buyers — composition works well; B2B registered buyers — potential commercial disadvantage
- File CMP-02 before March 31 for April 1 effective date
- Reverse all ITC on closing stock via ITC-03 before switching
- Issue Bills of Supply (not Tax Invoices) from day one with mandatory composition text
- Monitor turnover monthly — exit immediately via CMP-04 if Rs 1.5 crore limit is breached
- File CMP-08 by 18th of the month after each quarter and GSTR-4 by April 30 annually
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Frequently Asked Questions
The GST Composition Scheme is a simplified tax compliance mechanism for small businesses. Instead of tracking GST on every invoice and claiming Input Tax Credit, composition taxpayers pay a fixed percentage of total turnover as tax — reducing bookkeeping and filing burden dramatically. Eligible businesses: traders and manufacturers with aggregate annual turnover up to Rs 1.5 crore (Rs 75 lakh for special category states); restaurant businesses not serving alcohol; and service providers up to Rs 50 lakh under the special Rule 7 composition. Excluded categories: inter-state suppliers, e-commerce sellers, manufacturers of notified goods (ice cream, pan masala, tobacco), casual taxable persons, and non-resident taxable persons. Composition is perfect for B2C small businesses with simple supply chains and end-consumer customer base.
Composition scheme tax rates are applied as a percentage of aggregate turnover (not on each individual transaction’s value addition). Rates: manufacturers — 1% of annual turnover (0.5% CGST + 0.5% SGST); traders dealing in goods — 1% of turnover; restaurant businesses not serving alcohol — 5% of turnover (2.5% CGST + 2.5% SGST); service providers under the special composition scheme (CGST Rule 7) — 6% of turnover (3% CGST + 3% SGST). The tax is paid from the business’s own funds — composition dealers cannot collect GST from customers. Bills issued must be called Bills of Supply (not Tax Invoices) and must carry the mandatory text: ‘Composition Taxable Person, Not Eligible to Collect Tax on Supplies.’ Failure to display this text is a compliance violation.
No — and this is the defining restriction of the scheme. Composition dealers cannot claim Input Tax Credit on any purchases: not on raw materials, capital goods, services, or any other business expense. GST paid on all purchases flows directly into the cost of goods or services and is recovered through the selling price. This restriction makes the composition scheme most suitable for businesses where: customers are end consumers who don’t need ITC (B2C businesses); purchases are mostly from unregistered suppliers where no ITC would have been available anyway; or margins are high enough that the 1% turnover tax is lower than the net tax under regular scheme. For B2B businesses where customers are registered GST taxpayers who need ITC, the composition scheme creates a commercial disadvantage — buyers lose ITC on their purchases from a composition dealer, making your goods or services more expensive for them.
Composition scheme taxpayers file only 5 returns per year instead of 24 under regular GST. Quarterly: CMP-08 (Statement-cum-Challan) — filed quarterly to self-assess and pay tax on the quarter’s turnover. Due dates: Q1 (April-June) by July 18; Q2 (July-September) by October 18; Q3 (October-December) by January 18; Q4 (January-March) by April 18. Annual: GSTR-4 — a comprehensive annual return filed by April 30 of the following year. GSTR-4 consolidates the full year’s turnover, tax paid, and inward supplies. Late fee for delayed CMP-08 or GSTR-4: Rs 200 per day (Rs 100 CGST + Rs 100 SGST), maximum Rs 5,000 per return. Composition taxpayers do not file GSTR-1 or GSTR-3B — the simplified structure eliminates these monthly obligations entirely.
Composition scheme is financially superior when: the composition tax percentage of turnover (1% or 5%) is lower than net GST payable under regular scheme after ITC offset; customers are primarily end consumers (B2C) who do not need ITC — no commercial disadvantage from being a composition dealer; most purchases are from unregistered suppliers (no ITC to lose); administrative simplicity is valued — only 5 filings per year vs 24. Example: a kirana store with Rs 1 crore annual sales and Rs 90 lakh in purchases. Regular GST on 5% goods: output tax Rs 5L, ITC on purchases Rs 4.5L, net payable Rs 50,000. Composition: 1% on Rs 1 crore = Rs 1 lakh. Here regular GST is cheaper. But for a retailer with mostly local unregistered suppliers (no ITC available), composition at Rs 1 lakh beats regular GST where ITC might only be Rs 1L on Rs 4.5L of ITC-eligible purchases, making net GST Rs 4L — composition saves Rs 3L. Always compute both before choosing.
To switch from regular GST to the Composition Scheme for the next financial year: (1) File Form CMP-02 on the GST portal before March 31 — the scheme takes effect from April 1. (2) File Form ITC-03 to reverse all ITC availed on closing stock held on the date of switching — this reversal must be paid back via the Electronic Cash Ledger. (3) From April 1, stop issuing Tax Invoices and start issuing Bills of Supply displaying the mandatory composition text. (4) File CMP-08 quarterly and GSTR-4 annually instead of GSTR-1 and GSTR-3B. To switch back from composition to regular: file Form CMP-04 within 7 days of exceeding the Rs 1.5 crore turnover limit or voluntarily wanting to return to regular. After switching back, claim ITC on opening stock in Form ITC-01, and resume GSTR-1 and GSTR-3B filing from the following month.