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• January 03, 2026 |

GST Composition Scheme Explained: Eligibility, Benefits, Tax Rates & Difference from Regular GST

Enter the GST Composition Scheme—a government initiative designed specifically to lower the burden on small businesses.

Think of it as a "simplified track" for GST. Instead of complex calculations, you pay a fixed, low rate on your turnover and file fewer returns. But is it right for you? While the lower tax rate is attractive, it comes with specific restrictions that might limit your growth if you aren't careful.

In this guide, we’ll break down everything you need to know about the Composition Scheme, from eligibility and tax rates to the latest 2025 rules regarding e-commerce.

What is the GST Composition Scheme?

The GST Composition Scheme is an alternative method of tax levy under the GST Act designed for small taxpayers. The core idea is simple: simplicity and reduced compliance costs.

If you opt for this scheme, you cannot collect GST from your customers. Instead, you pay a small, fixed percentage of your turnover to the government from your own pocket. In exchange, you are relieved from the tedious formalities of the regular GST regime.

Key Features at a Glance:

• Fixed Tax Rate: Pay a flat rate (1% to 6%) on turnover.
• No Input Tax Credit: You cannot claim credit for tax paid on purchases.
• Quarterly Payments: No monthly tax payments; pay quarterly.
• Bill of Supply: You issue a 'Bill of Supply' instead of a 'Tax Invoice'.

Eligibility for the Composition Scheme

Not everyone can join this simplified scheme. It is strictly for small businesses with a turnover within specific limits.

Who Can Opt In?

You are eligible if you are a:

• Manufacturer
• Trader (Wholesaler/Retailer)
• Restaurant Service Provider (Not serving alcohol)
• Service Provider (Other than restaurants, within specific limits)

Who Cannot Opt In?

You cannot opt for the Composition Scheme if you:

• Supply goods inter-state (selling outside your home state).
• Supply non-taxable goods (e.g., alcohol, petrol).
• Manufacture notified goods like ice cream, pan masala, or tobacco.
• Are a Casual Taxable Person or a Non-Resident Taxable Person.
• Are an Input Service Distributor (ISD).

Turnover Limits (Current Rules)

The turnover limit is the primary filter for eligibility. As of the latest updates for FY 2025-26, the limits are:

> Note: Special Category States include Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.

Tax Rates under the Composition Scheme

One of the biggest attractions of this scheme is the low tax rate. Here is the current rate card:

Example: If you are a trader with a quarterly turnover of ₹10 Lakhs, you simply pay ₹10,000 (1%) as tax.

Benefits of the Composition Scheme

Why do millions of Indian businesses choose this option?

• ** reduced Compliance:** You only need to file one quarterly statement (CMP-08) and one annual return (GSTR-4). Regular dealers often file 2 monthly returns (GSTR-1 & GSTR-3B).
• Lower Tax Liability: For many small retailers, paying 1% is significantly lower than the standard 5%, 12%, or 18% rates.
• High Liquidity: Since you pay a lower rate of tax, less working capital is tied up in tax payments.
• Simple Record Keeping: You don't need to maintain detailed records of every single invoice for Input Tax Credit matching.

Drawbacks / Cons of the Composition Scheme

Before you rush to opt in, consider the "cons." These are deal-breakers for many growing businesses.

• No Input Tax Credit (ITC): This is the biggest disadvantage. You cannot claim the GST you paid on your purchases (stock, rent, etc.). It becomes a cost to you.
• Cannot Collect Tax: You cannot charge GST to your customers. If you sell B2B (to other businesses), they will likely avoid buying from you because they can't claim ITC on your invoice.
• Geographical Restriction: You are strictly prohibited from selling goods outside your state (Inter-state sales). This limits your market reach.
• E-Commerce Restrictions: While recent rules have relaxed this slightly (see "Latest Updates" below), selling online still comes with heavy compliance conditions compared to regular dealers.

Composition vs Regular GST (Comparison)

Here is a quick comparison to help you decide.

Latest GST Council Updates (Important News)

1. Selling on E-Commerce Platforms (The Big Change) Historically, Composition Dealers were banned from selling online. However, a major update (Notification No. 36/2023) changed this.

• Update: Composition dealers CAN now sell goods through e-commerce operators (like Amazon, Flipkart, or Meesho).
• Condition: You can only sell within your state (Intra-state). If you receive an order from another state, you cannot fulfill it under this scheme.

2. Annual Returns The deadline for filing GSTR-4 (the annual return for composition dealers) is usually April 30th of the following financial year. Always keep an eye on extension notifications around March.

Conclusion: Who Should Choose It?

The GST Composition Scheme is excellent, but only for a specific type of business.

Choose it if:

• You are a B2C business (selling directly to consumers like a grocery store, bakery, or salon).
• Your profit margins are thin, and compliance costs matter to you.
• You have no plans to sell outside your state.
• Your purchase checks (input costs) have very low GST rates, so losing ITC isn't a huge loss.

Avoid it if:

• You are a B2B business (your clients need GST invoices).
• You plan to expand your sales across India.
• You have high operational costs where claiming Input Tax Credit would save you significant money.

Frequently Asked Questions (FAQ)

1. Can I switch from the Regular Scheme to the Composition Scheme? Yes, you can switch at the beginning of a financial year. You must file Form GST CMP-02 on the GST portal before March 31st to opt in for the upcoming year (starting April 1st).

2. Do I need to file a return if I have zero sales in a quarter? Yes, filing is mandatory even if you have no business activity. You must file a 'Nil' return in Form CMP-08.

3. What happens if my turnover crosses ₹1.5 Crore during the year? You will automatically cease to be eligible for the scheme on the day your turnover crosses the limit. You must then inform the authorities (file CMP-04) within 7 days and start paying taxes as a Regular Dealer.

4. Can I opt for the Composition Scheme for one business vertical and Regular GST for another under the same PAN? No. All businesses registered under the same PAN must collectively opt for either the Composition Scheme or the Regular Scheme. You cannot mix them.

5. How do I bill my customers under this scheme? You must issue a Bill of Supply. It must mention the words: "Composition taxable person, not eligible to collect tax on supplies" at the top. You cannot list a separate GST amount on the bill.

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