Many small business owners inevitably think of the GST Composition Scheme as the first solution when GST compliance starts feeling overwhelming.
Yes, running a small business under the regular GST system can quickly become exhausting. Do you agree to this? Has multiple returns, invoice matching,reconciling ITC, and constantly ensuring compliance got the better of you? We thought so! Traders, manufacturers, and local eateries, whose administrative capacity is limited, often find that this complexity consumes time that should ideally be spent on business growth. Besides, the worry about penalties due to minor mistakes in filling up the forms adds to their stress levels.
The solution lies in a simplified alternative designed specifically for small taxpayers.
The GST Composition Scheme lowers tax rates and return filing requirements and makes record keeping easier. If your business is within the turnover limits set by the scheme, it can drastically reduce the compliance burden and at the same time, keep you fully compliant with GST regulations.
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Key Takeaways:
- Simplified GST option for small businesses with turnover up to ₹1.5 crore (₹50 lakh for service providers under special scheme).
- Pay fixed lower rates (1%, 5% or 6%) on total turnover instead of regular GST slabs.
- No Input Tax Credit (ITC) and cannot collect GST separately from customers.
- Limited compliance: Quarterly tax payment (CMP-08) and annual return (GSTR-4).
- Not allowed to make inter-state outward supplies or sell via TCS-collecting e-commerce platforms.
- Best suited for small B2C businesses seeking lower compliance burden and predictable tax liability.
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What is GST Composition Scheme?
This composition scheme GST is a simple method of taxation under the GST law. It was introduced to lessen the compliance burden of small taxpayers. Hence, businesses that qualify are not required to pay the GST at the standard slab rates (5%,18% or 40%). Rather, under the composition scheme gst, they simply need to pay a fixed percentage of their turnover.
Under the composition scheme in gst:
- Tax is calculated on total turnover.
- Businesses cannot collect GST separately from customers.
- Input Tax Credit (ITC) is not available.
- Compliance requirements are significantly reduced.
The objective behind the composition scheme under GST is straightforward — ease of doing business for small traders, manufacturers, and certain service providers. It is particularly beneficial for B2C businesses where customers are not concerned about claiming ITC.
GST Composition Scheme Turnover Limit (Latest Thresholds)
One of the most critical aspects of this composition scheme GST is the turnover threshold.
As per current provisions:
- For manufacturers and traders: Aggregate turnover must not exceed ₹1.5 crore in the preceding financial year (₹75 lakh in special category states).
- For restaurants (not serving alcohol): Same threshold of ₹1.5 crore.
- For service providers under the special composition scheme: Turnover limit is ₹50 lakh.
Understanding “aggregate turnover” is crucial. It includes:
- Taxable supplies
- Exempt supplies
- Exports
- Inter-state supplies (though composition dealers cannot make inter-state outward supplies)
If a business crosses the GST Composition Scheme turnover limit during the year, it must mandatorily switch to the regular scheme. The transition is not optional once the threshold is breached.
Who is Eligible for GST Composition Scheme? ( Who can Opt for Composition Scheme)
Not every business can opt for the composition scheme in GST. The law specifies clear eligibility conditions.
A business can opt if:
- It is a registered taxpayer under GST.
- It is a resident taxable person.
- Aggregate turnover is within prescribed limits.
- It does not make inter-state outward supplies.
- It does not supply goods through an e-commerce operator required to collect TCS.
Additionally, service providers are generally excluded except for those covered under the special 6% scheme (3% CGST + 3% SGST), subject to turnover restrictions.
The gst composition scheme rules also restrict manufacturers of certain notified goods, such as ice cream, pan masala, and tobacco products, from opting for this scheme.
Who Cannot opt for Composition Scheme
Understanding disqualifications is as important as understanding eligibility.
A business cannot opt for the composition scheme under GST if it:
- Makes inter-state outward supplies.
- Is a casual taxable person.
- Is a non-resident taxable person.
- Supplies goods via e-commerce platforms collecting TCS.
- Manufactures notified restricted goods.
These gst composition scheme rules ensure that only genuinely small and localized businesses benefit from simplified compliance.
GST Composition Scheme Rates (Category-wise)
A significant reason for the popularity of the composition scheme GST is its low tax rates. The gst composition scheme rates are much less than the regular GST slabs.
Presently, the composition rates are:
- Manufacturers: 1% of turnover (0.5% CGST + 0.5% SGST)
- Traders: 1% of turnover (0.5% CGST + 0.5% SGST)
- Restaurants (not serving alcohol): 5% of turnover (2.5% CGST + 2.5% SGST)
- Service providers (special scheme): 6% of turnover (3% CGST + 3% SGST)
These gst composition scheme rates are levied on the total turnover, not the profit. Hence, the businesses with low margins should do the calculation cautiously before opting for composition scheme gst.
One should note that under the composition scheme gst, businesses cannot issue tax invoices. Instead, they will need to issue a “Bill of Supply” and must mention that the tax is being paid under the composition scheme.
Compliance Requirements Under Composition Scheme GST
Under this composition scheme in GST, compliance is simplified but not eliminated.
Businesses must:
- File Form CMP-02 to opt in.
- Pay tax quarterly using CMP-08.
- File annual return in Form GSTR-4.
- Display “Composition Taxable Person” at the place of business.
- Issue Bill of Supply instead of tax invoice.
This framework significantly cuts down the administrative work compared to the monthly GSTR 1 and GSTR 3B filings under the regular scheme.
However, even if one operates under the composition scheme in GST, it is still a must to have proper bookkeeping for audit and turnover verification.
What are the Advantages of GST Composition Scheme?
The composition scheme in GST is not only about reducing tax rates. It also aims at giving structural relief to small businesses.
Some of the major benefits are:
- Lower tax liability : Small traders and manufacturers generally only have to pay 1% on turnover, which is significantly lower than the standard GST rates.
- Reduced compliance burden : One only has to pay his/her tax quarterly and file an annual return,thus reducing a lot of paperwork.
- Simplified accounting : No ITC reconciliation, no invoice matching, no complex credit tracking.
- Better cash flow predictability : Tax is paid as a fixed percentage of turnover.
- Ease of doing business : Micro enterprises that do not have a dedicated tax team can still manage compliance.
For kirana stores, small wholesalers, and neighborhood restaurants, the composition scheme under GST makes operational sense.
What are the Disadvantages of Composition Scheme Under GST?
Despite its simplicity, this composition scheme in GST has structural limitations.
- No Input Tax Credit : Businesses cannot claim ITC on purchases. This increases procurement costs.
- No tax collection from customers : Since tax cannot be charged separately, it becomes embedded in pricing.
- Inter-state supply restriction : Businesses cannot expand beyond state boundaries easily.
- Limited B2B competitiveness : Corporate buyers prefer vendors who provide ITC. Composition dealers may lose B2B clients.
- Turnover cap restricts growth : Once turnover exceeds the gst composition scheme turnover limit, transition to regular scheme is mandatory.
Therefore, while composition scheme GST is beneficial for B2C micro enterprises, it may not suit scaling or export-oriented businesses.
How to Opt Composition Scheme in GST
The process is procedural but straightforward.
Existing taxpayers must file Form CMP-02 before the beginning of the financial year. New taxpayers can select the composition option at the time of GST registration.
Additionally:
- ITC on stock must be reversed while switching.
- Intimation must be given through GST portal.
- Effective date is generally the start of the financial year.
Businesses must carefully evaluate inventory and credit implications before migrating to composition scheme GST.
How Should a Composition Dealer Raise Bill?
Under this composition scheme in GST , a composition dealer is not allowed to issue a tax invoice to their customers because they are not permitted to collect GST separately from customers. Instead, they must issue a Bill of Supply for every outward transaction. The bill should state that the supplier is paying tax under the composition scheme in GST and should also include the declaration: “Composition Taxable Person, not eligible to collect tax on supplies.” Unlike regular GST invoices, no tax breakup (CGST/SGST) should be shown. Proper serial numbering, customer details (where applicable), and accurate turnover reporting remain essential to ensure compliance with gst composition scheme rules.
How Should GST Payment be Made by a Composition Dealer?
Under this scheme, tax payment is not done on the basis of invoices but as a fixed percentage of total turnover for the quarter. A composition dealer has to find out the tax liability based on the GST composition scheme rates (1%, 5%, or 6%, depending on category) and discharge the applicable liability from their electronic cash ledger. Since input tax credit is not available under the composition scheme under GST, the entire amount of tax has to be paid in cash.
Key compliance points include:
- Tax must be paid quarterly using Form CMP-08 through the GST portal.
- Payment is due by the 18th of the month following the end of the quarter.
- An annual return in Form GSTR-4 must be filed after the financial year ends.
Timely payment is critical to avoid interest and penalties under composition scheme rules.
Practical Examples for Better Understanding
Example 1: Small Retailer
A grocery store with annual turnover of ₹80 lakh opts for composition scheme in GST. At 1%, tax payable is ₹80,000 annually. Compliance is limited to quarterly payments and annual return.
Example 2: Restaurant
A local restaurant with turnover of ₹1.2 crore pays 5% under gst composition scheme rates. Since customers are mostly end consumers, ITC loss does not significantly affect business.
Example 3: Service Provider
A small consultancy firm earning ₹40 lakh annually opts for 6% special composition scheme under GST. Tax payable is ₹2.4 lakh annually. Compliance remains simplified compared to regular 18% GST structure.
These instances illustrate how the composition scheme under GST is implemented in different real-world situations.
Final Thoughts
GST Composition Scheme is an excellent compliance simplification tool for small businesses in India. It cuts down on administrative friction, decreases tax rates, and enables a more predictable cash flow management. Nevertheless, it also brings along some limitations that might hamper the growth of a business in the long run.
Understanding the rules, eligibility criteria, turnover limit, and tax rates of composition scheme under GST is very important to make an informed decision. The composition scheme in gst is not beneficial to anyone and everyone. Rather, it is situation-based.
For micro and small enterprises working locally and having limited compliance infrastructure, gst composition scheme can be a strategic advantage. But for businesses that are growing, targeting B2B markets or planning for interstate expansion, the regular GST route might be more viable.
Just like most tax decisions, the correct decision depends on your business model, revenue pattern, and future growth plans. Assess thoroughly, calculate accurately, and keep your GST structure in line with your long term business vision.
