What Is the GST Composition Scheme?
The GST Composition Scheme is a simplified tax mechanism under the CGST Act, 2017, designed to ease the compliance burden on small taxpayers. Instead of paying tax at regular GST rates, eligible small businesses can pay tax at a fixed percentage of turnover, without claiming input tax credit (ITC).
Introduced under Section 10 of the CGST Act, this scheme allows small traders, manufacturers, and restaurants to focus on business operations instead of complex filings. It also minimizes paperwork, ensuring legal compliance through annual returns.
Eligibility Criteria for Composition Dealers
To opt for the composition scheme under GST, a taxpayer must meet certain conditions:
- Turnover Threshold:
- Businesses with annual aggregate turnover up to ₹1.5 crore (₹75 lakh in special category states) in the previous financial year.
- Business Type:
- Manufacturers, traders, and small restaurants can opt in.
- Service providers are eligible under specific conditions (as per Notification No. 2/2019 – Central Tax).
- Exclusions:
- Businesses supplying through e-commerce operators are not eligible.
- Interstate supply, non-taxable supply, or import/export activities are restricted.
- Registration:
- The taxpayer must not be registered as a casual taxable person or non-resident taxable person.
Turnover Limits and Registration Process
Turnover Limits (As of FY 2025–26)
- ₹1.5 crore: For most states, including Bihar.
- ₹75 lakh: For northeastern and hilly states.
Registration Steps:
- Log in to GST Portal.
- File Form CMP-02 before the start of the financial year.
- File Form ITC-03 to reverse ITC on existing stock (if transitioning).
- Display the words “Composition taxable person” on every bill of supply and signboard.
GST Composition Scheme Tax Rates (2025 Update)
As per Notification No. 14/2019 – Central Tax, the current composition rates are:
| Category | Tax Rate | Description |
|---|---|---|
| Manufacturers | 1% | Of turnover in the state |
| Traders (Goods) | 1% | Of turnover in the state |
| Restaurants (not serving alcohol) | 5% | Of turnover in the state |
| Service Providers (under Notification 2/2019) | 6% | Of turnover (limited services) |
Composition dealers must pay tax quarterly using Form CMP-08 and file an annual return in Form GSTR-4.
Returns and Compliance Requirements (GSTR-4, Payment, etc.)
Compliance Steps:
- Quarterly Tax Payment:
Deposit tax via Form CMP-08 by the 18th of the month after each quarter. - Annual Return:
File Form GSTR-4 by 30th April of the following financial year. - Record Keeping:
Maintain summary records of sales, purchase, and stock. - No Tax Invoice:
Only Bill of Supply can be issued (since tax is not charged from customers).
👉 For a detailed guide, read: How to File GSTR-4 Return Online (Step-by-Step Guide)
Advantages and Disadvantages for Small Businesses
Advantages
- Lower tax rates and reduced compliance.
- Simplified record maintenance.
- Enhanced liquidity as tax burden reduces.
- Predictable tax outflow improves budgeting.
Disadvantages
- No input tax credit (ITC) on purchases.
- Not eligible for inter-state trade or e-commerce.
- Mandatory mention of “Composition Dealer” on documents.
- Limited ability to compete with regular dealers on price.
Comparison: Regular vs Composition Scheme
| Parameter | Regular GST | Composition GST |
|---|---|---|
| Tax Rates | As per GST slabs (5%, 12%, 18%, 28%) | Fixed lower rate (1%–5%) |
| Returns | Monthly (GSTR-1, GSTR-3B) | Annual (GSTR-4) |
| ITC | Available | Not available |
| Eligible Turnover | No limit | Up to ₹1.5 crore |
| Invoice Type | Tax Invoice | Bill of Supply |
| E-commerce Supply | Allowed | Not allowed |
For a detailed comparison, see: Difference Between Regular and Composition Dealer under GST
Latest Amendments and Notifications
Recent CBIC notifications and circulars relevant to the composition scheme include:
- Notification No. 14/2019 – Central Tax: Updated turnover limits.
- Circular No. 97/16/2019-GST: Clarified eligibility for mixed suppliers.
- Notification No. 2/2019 – Central Tax: Extended composition benefits to service providers.
Stay updated on the CBIC Composition Scheme Page.
Case Study: How a Local Trader Benefits from the Scheme
Example:
A restaurant owner in Patna, Bihar with ₹75 lakh turnover opts for the composition scheme. Instead of paying GST at 18%, he pays 5% on turnover. By filing only one annual return (GSTR-4) and quarterly CMP-08, compliance costs drop by 60%, freeing time and cash for business expansion.
Key Takeaways & Expert Advice
- The GST Composition Scheme is best suited for micro and small businesses prioritizing simplicity over input tax credits.
- Review turnover annually and stay within limits to avoid penalties.
- Always consult a GST lawyer or tax advisor before opting in.
- Regularly check GST Portal – Composition Taxpayer Info for updates.
Frequently Asked Questions (FAQs)
1. What is the GST Composition Scheme?
A simplified tax scheme for small taxpayers to pay GST at a fixed rate and file fewer returns.
2. Who is eligible for the composition scheme?
Businesses with turnover up to ₹1.5 crore (₹75 lakh in some states) can opt in.
3. Can service providers opt for the scheme?
Yes, under specific conditions per Notification No. 2/2019-Central Tax.
4. What are the GST rates under the composition scheme?
1% for traders, 2% for manufacturers, 5% for restaurants (as of 2025).
5. Can a composition dealer issue a tax invoice?
No, they can issue only a bill of supply since they cannot collect tax.
6. How to opt for the composition scheme under GST?
Apply via Form CMP-02 on the GST portal before the start of the financial year.
7. What returns must composition dealers file?
They must file GSTR-4 annually and make quarterly tax payments.
8. What happens if turnover exceeds the limit?
The taxpayer must switch to the regular scheme and pay differential tax.
9. Is input tax credit available?
No, composition dealers cannot claim ITC on purchases.
10. Can composition dealers sell online through e-commerce?
No, they are restricted from supplying through e-commerce operators.
- CBIC – Composition Scheme Page
- GST Portal – Composition Taxpayer Info
- Ministry of Finance Notifications
- CGST Act, 2017 – Section 10
Disclaimer
This article is for informational and educational purposes only. It should not be construed as legal advice. Consult a qualified tax professional or GST lawyer for specific queries.
Conclusion
The GST Composition Scheme remains one of the most practical solutions for India’s small business ecosystem. It offers compliance simplicity, predictable tax liability, and legal peace of mind.
Need expert guidance on GST compliance? Connect with a GST lawyer at gstlawyer.in for personalized assistance today!
About the Author – Advocate Tabish Ahmad
Advocate Tabish Ahmad (B.A. LL.B., LL.M., Diploma in Cyber Law – GLC Mumbai) is a Certified Cyber Law Practitioner and practising Advocate at the Patna High Court. He specializes in Cyber Crime, GST Litigation, and Tax Appeals, with extensive experience in representing clients before judicial and quasi-judicial forums.
He serves as President of the Cyber Lawyers Association and is a Member of the Advocates’ Association, Patna High Court. As a Mentor at the Indian Tax Academy and JurisCrack, he guides young lawyers and students in cyber and tax law practice.
Author of several books on Cyber Crimes, Taxation, and GST, Advocate Tabish Ahmad is recognized for his practical insights on digital law, data privacy, and cyber fraud defence.