October 06, 2025
7 mins read
The GST Composition Scheme is a simplified tax option for small businesses with lower turnover, offering fixed GST rates, reduced compliance, and quarterly returns. This page covers eligibility, limits, rates, forms, billing rules, payment process, advantages, disadvantages, and how to opt in.
The GST Composition scheme is particularly suited to small businesses with limited annual revenues. A business eligible to use this scheme will pay GST at a fixed rate and therefore face fewer compliance requirements and will have a simplified filing process.
Opting for this scheme means that a business will pay tax based on its turnover during the financial year instead of having to pay GST on every transaction.
As a result, the business does not issue tax invoices charging GST to customers or claim input tax credits for the GST paid on goods purchased for its own business.
To be eligible for the GST composition scheme, businesses need to meet specific criteria based on their annual revenue level and the type of activity they conduct.
Manufacturers and traders, as well as specified service providers permitted under the scheme, may qualify if they meet the required criteria and operate within the prescribed limits of the scheme.
The GST Composition Scheme was developed specifically for small businesses with very limited annual revenues. Eligible businesses will pay a fixed percentage GST rather than determining the amount of GST applicable to each transaction.
With the GST Composition Scheme, eligible businesses follow a simplified compliance structure. They pay tax at a fixed rate, cannot collect GST from customers, and are not allowed to claim input tax credit. Returns are filed in a simplified manner compared to regular GST taxpayers.
The GST Composition Scheme is primarily designed for manufacturers, wholesalers and certain types of service providers who meet the predefined criteria.
Small companies can use the composition scheme as a means of managing their business taxes in a simpler way with fewer reporting requirements and, if applicable, potentially lower tax rates than traditional GST.
Usually, most manufacturers and retailers of goods meet eligibility requirements, provided they are located in only one state and trade in non-prohibited goods listed as such under GST legislation.
Most service providers may opt for the composition scheme if the service falls within defined parameters of the scheme and the annual revenue meets or exceeds the annual limits set out by the tax administrator(s) designated by their respective jurisdictions.
You cannot register under a composition scheme if your business requires you to conduct inter-state sales or provide services outside your registered state.
The composition scheme is generally open only to those engaged in retail and manufacturing; exceptions apply to specified service providers.
Only taxable persons with a physical presence in one state are permitted to register as a casual taxpayer, or as a non-resident taxpayer under the scheme.
If you sell goods through e-commerce operators required to collect TCS and the state has mandated you to collect tax at the source, you cannot register under a composition scheme.
Certain manufacturers’ specified goods, such as ice cream, pan masala, and tobacco products, are considered to be specifically excluded under the GST law from registration under the composition scheme of GST.
A taxable person will no longer qualify as a composition taxpayer once their gross turnover surpasses the established threshold limit of that financial year and will be required to switch to the regular GST scheme, as applicable.
If you fall into any of the above groups, you are not eligible for the scheme. You can use a GST Calculator to estimate your tax liabilities under the regular GST regime to prepare your GST invoice and file returns.
To be eligible for the GST Composition Scheme, you must meet these conditions:
You cannot claim ITC or Input Tax Credit for purchases made while under the scheme.
According to the Composite Scheme rules, you are not allowed supply goods like alcohol which are not taxable under GST.
You must pay tax at standard rates on reverse charge transactions.
All businesses under the same PAN must either collectively opt in or stay out of the scheme.
You must display "composition taxable person" at all business premises.
All bills of supply must include the phrase "composition taxable person."
You can supply services up to 10% of turnover or ₹5 lakh, whichever is higher.
You can opt for the GST Composition Scheme if your annual turnover from the supply of goods does not exceed ₹1.5 crore in the previous financial year.
If your business operates in states like Manipur, Mizoram, Sikkim, Tripura, and others classified as special category, the turnover limit is set at ₹75 lakh.
Service providers are eligible for the scheme if their total turnover in the preceding financial year is ₹50 lakh or less.
If you deal in both goods and services, you can apply for the scheme as long as turnover from goods is up to ₹1.5 crore and services are within ₹5 lakh or 10% of total turnover, whichever is higher.
As a composition dealer under GST, you will need to fill out specific forms for registration, compliance, and reporting. These forms help you manage entries like opting into the scheme, declaring stock, and handling notices. The table below outlines each form and its purpose for easy reference:
Form | Purpose |
GST CMP-01 | To opt in by provisional GST registrants |
GST CMP-02 | For existing GST registrants opting into the scheme |
GST CMP-03 | Submit stock details and inward supplies |
GST CMP-04 | Inform withdrawal from the scheme |
GST CMP-05 | Show cause notice from authorities |
GST CMP-06 | Response to show cause notice |
GST CMP-07 | Order issued based on notice |
GST REG-01 | Register under the composition scheme |
GST ITC-01 | Declare inputs in stock on exiting the scheme |
GST ITC-03 | Declare available input tax credit |
The scheme is available for specific types of businesses, with some restrictions:
Cannot sell through e-commerce operators collecting TCS
Non-resident and casual taxable persons are excluded
Ice cream, pan masala, and tobacco manufacturers are not eligible
Cannot purchase goods from unregistered dealers (with exceptions)
Cannot supply goods and services that are exempt under GST
Manufacturers & Traders: 1% of turnover
Restaurants: 5% of turnover
Service Providers: 6% of turnover (where applicable)
Input Tax Credit is not allowed. Tax must be paid from your own funds.
The bill should clearly display the title "GST Composition Scheme Bill" or "Composition Scheme Invoice" at the top.
You must include your business name, full address, GSTIN Number, and any other relevant registration numbers.
Include the customer's name, address, and GSTIN if the transaction is business-to-business (B2B).
Make sure the bill has a unique invoice number along with the date it was issued.
List each good or service supplied, along with its description, quantity, rate, and total price.
You must clearly state that the invoice is issued under the GST Composition Scheme.
The bill should show the complete amount payable after including all applicable amounts and adjustments.
Mention the payment method accepted and any due dates or credit terms agreed upon.
Ensure the bill contains all legally required disclosures or disclaimers as per GST law.
The invoice should be signed or stamped by an authorized person from your business to confirm its authenticity.
You can opt for the GST Composition Scheme either when registering as a new taxpayer or before the start of a financial year as an existing taxpayer.
If you are registering for GST for the first time, you can opt for the GST Composition Scheme by selecting it during the registration process. This is done through Form GST REG-01 on the GST portal while applying for a new GSTIN Number. Make sure your eligibility matches the turnover and business conditions prescribed under the scheme.
If you are already registered under the regular GST scheme, you must submit Form GST CMP-02 to opt into the Composition Scheme. This form must be filed before the start of the financial year in which you wish to apply the scheme. The option is not available mid-year, so timely application is essential.ā
A composition dealer must issue a Bill of Supply instead of a GST invoice (tax invoice) since they are not permitted to collect GST from customers. This bill must include the declaration: "Composition taxable person, not eligible to collect tax on supplies."
As a composition dealer, you are required to pay GST using a simplified process. However, you still need to follow specific payment rules related to supplies, reverse charges, and purchases from unregistered dealers.
Under the GST Composition Scheme, you are not allowed to collect GST from customers. Instead, you must calculate and pay a fixed percentage of your total turnover as tax directly from your own funds. This amount varies depending on your business type—typically 1% for traders and manufacturers, and 5% for certain service providers.
You are liable to pay GST under the reverse charge mechanism for certain transactions where the tax responsibility shifts from the supplier to the recipient. Even as a composition dealer, you must pay this tax separately at the applicable rates and cannot use your composition tax for these payments.
Initially, composition dealers were required to pay GST on purchases made from unregistered suppliers. However, as of February 1, 2019, this provision has been suspended and is not currently applicable unless the government notifies it again in the future. Therefore, you do not need to pay GST on such purchases unless specifically required.
As a composition dealer under the GST Composition Scheme, you are required to file Form CMP-08 on a quarterly basis, by the 18th of the month following the end of each quarter. This form allows you to pay self-assessed tax for your turnover. In addition, you must submit Form GSTR-4 as an annual return by April 30 of the succeeding financial year, which summarises your quarterly filings. The previously applicable Form GSTR-9A, meant for annual returns, has been waived for FY 2017–18 and FY 2019–20. These simplified returns reduce compliance while ensuring your tax obligations remain up to date.
The documentation required under the Composition Scheme is less than what is required for a regular GST registration. Therefore, overall compliance with GST filing requirements is comparatively lower than for a regular GST-registered business.
Because fixed rates calculated on a business's total income serve as the sole basis for tax calculation, there is no need for detailed GST calculations for each transaction during the financial year.
Less documentation means more time available for small business owners to focus on their business operations instead of handling tax administration tasks.
Simplified invoicing format enables a business to issue an invoice and bill a customer without having to charge GST on the invoice and manage this internally.
The main disadvantage of the Composition Scheme is that businesses cannot claim input tax credits for purchases made; therefore, businesses that purchase taxable inputs will incur higher costs to operate.
Businesses will be prevented from making interstate sales, as the composition scheme limits a business's ability to expand across state borders.
As a result of not being able to collect GST from customers, businesses registered under the regular GST scheme may face limitations in pricing flexibility compared to businesses that are registered under the Composition Scheme.
The composition scheme is only available to small businesses whose turnover does not exceed a specified limit, and if they exceed the specified limit, they must transition to the regular GST scheme.
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Check your GST portal dashboard. If registered, your status will show "Composition Taxpayer," and CMP-08 will appear in the return filing section.
Log in to the GST portal using your GSTIN Number. Under the taxpayer dashboard, check "My Profile" to view your scheme status.
No, inter-state sales are not allowed under the GST Composition Scheme. You must conduct all transactions within your registered state.
No. A composition dealer can only issue a Bill of Supply and not a tax invoice, as GST cannot be collected from customers.
If your turnover exceeds the limit, you must switch to the regular GST scheme and inform the authorities. You will also need to pay tax under the regular method from that day onward.
No, sellers supplying goods through e-commerce platforms where TCS is applicable cannot register under the GST Composition Scheme.
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