Composition Scheme Under GST: Eligibility, Rates, and When It’s Actually Worth It
A flat, low rate on turnover instead of standard GST with ITC — simpler compliance, but a real trade-off that doesn’t suit every small business
Published: September 12, 2026 · Last updated: September 12, 2026
The composition scheme lets small taxpayers pay GST as a flat percentage of turnover, file quarterly instead of monthly, and skip most of the invoice-matching machinery that regular GST compliance involves. The trade-off is you give up input tax credit entirely and can’t charge GST separately to your customers. It’s a real simplification, but it only pays off for a specific kind of business.
Who’s Eligible
Eligibility is turnover-based and category-based:
- Traders and manufacturers of goods: aggregate annual turnover up to ₹1.5 crore (₹75 lakh in special category states).
- Service providers (under the separate Section 10(2A) scheme for services): turnover up to ₹50 lakh.
- Restaurant services (not serving alcohol) qualify under the goods-side scheme at a different rate — see the rate table below.
You’re not eligible if you make any inter-state outward supply, if you manufacture certain notified goods (ice cream, pan masala, tobacco products), or if you’re a casual or non-resident taxable person. Thresholds and notified exclusions are revised periodically, so confirm current figures on the GST portal or with a practitioner before opting in — don’t rely on a fixed number indefinitely.
Composition Tax Rates
| Category | Rate (of turnover) |
|---|---|
| Manufacturers and traders (goods) | 1% (0.5% CGST + 0.5% SGST) |
| Restaurant services (no alcohol) | 5% (2.5% + 2.5%) |
| Other eligible service providers | 6% (3% + 3%) |
The rate applies to total turnover, not profit margin or value added — which is exactly where the scheme’s economics get interesting.
What You Give Up
- No input tax credit at all — GST paid on your purchases becomes a pure cost, unlike the regular scheme’s ITC mechanism.
- You can’t collect GST from customers. The flat rate comes out of your own margin; you issue a Bill of Supply, not a tax invoice with GST shown separately.
- No inter-state outward supply. One inter-state sale and you’re out of the scheme.
- Your business buyers can’t claim ITC on what they buy from you, since there’s no tax invoice with GST charged — this makes composition dealers a harder sell to GST-registered business customers specifically.
In exchange: quarterly payment via CMP-08 and a single annual return (GSTR-4), instead of monthly GSTR-1/GSTR-3B filing.
Composition vs. Regular Scheme
| Composition | Regular | |
|---|---|---|
| Tax basis | Flat % of turnover | Rate on value, minus ITC |
| ITC | Not available | Available (subject to conditions) |
| Inter-state sales | Not allowed | Allowed |
| Filing frequency | Quarterly payment + annual return | Monthly GSTR-1 & GSTR-3B |
| Invoice type | Bill of Supply | Tax invoice with GST shown |
A Worked Example
A stationery trader with ₹40,00,000 annual turnover, entirely intra-state B2C retail, pays composition tax at 1%: a flat ₹40,000 for the year, regardless of margin. Under the regular scheme, the same trader would charge 18% on sales (₹7,20,000 output tax on ₹40 lakh) but claim ITC on purchases — if the trader bought stock for ₹28,00,000 at 18% (₹5,04,000 ITC), the net regular-scheme liability would be ₹7,20,000 − ₹5,04,000 = ₹2,16,000. In this example, composition’s flat ₹40,000 is dramatically cheaper — but that’s because retail margins here are wide and customers are end consumers who never needed ITC passed through anyway. The comparison flips for low-margin, high-volume, or B2B-heavy businesses.
When It Actually Makes Sense
Composition tends to suit small retailers and service providers selling mainly to end consumers within one state, with margins wide enough that a flat 1-6% on turnover beats standard rate minus ITC. It tends to not suit businesses selling to other GST-registered businesses (who lose the ability to claim ITC on what they buy from you), anyone with even occasional inter-state sales, or thin-margin, high-turnover operations where the flat percentage on gross turnover ends up costing more than tax on value added would have.
Quick Questions
Can a composition dealer sell on Amazon or Flipkart?
Rules around e-commerce and composition dealers have been amended over time and vary by whether the platform requires TCS collection for your category — check current notifications before assuming either way.
Can I switch between composition and regular scheme?
Yes, but only at the start of a financial year (opting in) or immediately upon breaching eligibility (mandatory opt-out), via the GST portal.
Do composition dealers file GSTR-1 or GSTR-3B?
No — composition taxpayers file quarterly statement CMP-08 and an annual return, GSTR-4, instead of the regular monthly returns.
What happens if I cross the turnover threshold mid-year?
You must exit the scheme from the date the threshold is breached and switch to regular GST compliance from that point.
Composition is a genuine simplification, not a discount — whether it saves you money depends entirely on your margin structure and who your customers are, not just your turnover.
Related reading: Input Tax Credit guide, GST Registration Process, and the GST calculator.