GST Composition Scheme – (Eligibility, Rates & Benefits)

1. Introduction

When GST was introduced in India in July 2017, it completely transformed how businesses paid taxes. It simplified the old system, brought everyone under one tax, and aimed for a transparent, easy-to-manage structure.

But let’s be honest — for small businesses, GST compliance felt a bit too heavy. Filing returns every month, maintaining detailed records, and matching invoices weren’t easy for small traders and shop owners.

To make life easier for them, the government came up with something known as the Composition Scheme under GST.

It’s a simpler way to pay tax — less paperwork, fewer returns, and fixed tax rates based on turnover. In this guide, we’ll explain what it is, who can join, how it works, and why it can be a smart choice for small businesses.

2. What Is the GST Composition Scheme?

The Composition Scheme is a simple tax payment system under GST designed especially for small taxpayers.

Instead of paying tax at regular rates (like 5%, 12%, 18%, or 28%) and filing monthly returns, businesses under this scheme:

• Pay tax at a fixed, lower rate of their turnover, and
• File only one return per quarter instead of every month.

In short, it’s a relief mechanism for small traders and service providers to reduce compliance burden.

3. Legal Basis

The Composition Scheme is governed by:

• Section 10 of the CGST Act, 2017, and
• Rule 3 to Rule 7 of the CGST Rules, 2017.

These sections lay down who can opt for it, how much tax they must pay, and what conditions apply.

4. Who Can Opt for the Composition Scheme?

The scheme is meant for small taxpayers, and the eligibility depends on aggregate turnover in the previous financial year.

Here’s a quick summary:

So, if your business turnover in the previous financial year is below ₹1.5 crore, you can apply for this scheme (subject to some exclusions).

5. Who Cannot Opt for the Composition Scheme?

Not every business can join the composition scheme. The law clearly excludes certain types of businesses.

You cannot opt if you:

• Supply goods not taxable under GST (like alcohol).
• Make inter-State outward supplies of goods or services.
• Supply goods through e-commerce operators (like Amazon, Flipkart).
• Are a casual taxable person or non-resident taxable person.
• Manufacture certain notified goods (like ice cream, pan masala, tobacco).

Example: A shop in Delhi selling groceries locally can opt for composition. But a manufacturer exporting goods or selling through Flipkart cannot.

6. GST Composition Scheme Rates

The tax rates under the scheme are fixed and much lower than regular GST rates.

Here’s the current rate chart:

Example: If a trader’s annual turnover is ₹80 lakh, GST payable = ₹80,00,000 × 1% = ₹80,000 only.

7. Key Features of the Composition Scheme

Let’s look at what makes this scheme attractive:

• Low tax rates – between 1% and 6%.
• Quarterly returns – no monthly hassle.
• No need to issue tax invoices – only bill of supply.
• Limited compliance – fewer forms and records.
• Ideal for small and local businesses.

But it also comes with a few restrictions — let’s talk about that next.

8. Conditions for Availing the Scheme

To remain eligible, a composition taxpayer must follow these conditions:

• Cannot collect tax from customers (i.e., can’t show GST on bills).
• Cannot claim Input Tax Credit (ITC).
• Must mention “composition taxable person, not eligible to collect tax” on every bill of supply.
• Must display the words “Composition taxable person” at their place of business.
• Must file quarterly return in Form GSTR-4 and an annual return in GSTR-9A.

If any condition is violated, the taxpayer will be removed from the scheme and treated as a regular taxpayer.

9. How to Apply for the Composition Scheme

If you’re a new GST registrant or an existing taxpayer, the process is quite simple.

For New Taxpayers:

• Choose the option for “Composition Scheme” while filling GST REG-01 at the time of registration.

For Existing Taxpayers:

• File GST CMP-02 online before the beginning of the financial year.
• Also file GST ITC-03 to reverse any previously claimed input tax credit.

Once approved, you’ll start paying tax under composition from the next tax period.

10. Filing Returns under the Scheme

The compliance requirement is minimal — that’s the biggest relief.

So instead of filing 37 returns a year like regular taxpayers, composition dealers file only 4 returns + 1 annual return.

11. Example – How It Works

Let’s take a simple example to understand the math.

A shopkeeper named Ravi runs a clothing store in Gujarat. His annual turnover is ₹90 lakh. He opts for the composition scheme.

Tax Rate (trader): 1%

GST payable: ₹90,00,000 × 1% = ₹90,000

He files CMP-08 quarterly and pays ₹22,500 each quarter. He cannot collect GST from customers and cannot claim ITC.

But his compliance burden is reduced drastically — fewer forms, no monthly filings, and no detailed input matching.

12. Advantages of Composition Scheme

Let’s look at why many small businesses prefer it:

• Simplified Compliance - No need for detailed invoice matching or monthly returns.
• Lower Tax Rate - Pay only 1% to 6% depending on business type.
• Ease of Doing Business - Perfect for local traders, restaurants, and service providers.
• Better Cash Flow - No ITC complications or large tax payments every month.
• Legal Peace of Mind - Less chance of errors, notices, or penalties.

13. Limitations of Composition Scheme

But it’s not all perfect — there are trade-offs.

• No Input Tax Credit (ITC): - You can’t claim ITC on purchases.
• No Inter-State Supplies: - Can sell only within the same State.
• No E-Commerce Sales: - Can’t sell through platforms like Amazon or Flipkart.
• No Tax Invoice: - You can’t collect GST from customers.
• Turnover Cap: - If turnover exceeds ₹1.5 crore (₹75 lakh for NE States), you must switch to regular GST.

Example: If a trader under composition suddenly crosses ₹1.6 crore turnover, they must switch to the regular GST scheme from the next day.

14. Comparison: Regular GST vs Composition Scheme

15. Should You Opt for the Composition Scheme?

It depends on your business model.

If you’re a small retailer or local trader who deals mostly with consumers and doesn’t need to claim ITC — it’s a great choice.

But if you buy from GST-registered suppliers and sell to other businesses (B2B), then a regular GST registration might be better since your buyers might want ITC.

Think of it like this — the composition scheme is about simplicity, not savings.

16. Recent Updates and Amendments

Some recent changes make the scheme even more flexible:

• Service providers (like beauty parlors, consultants, etc.) can now opt for composition under Section 10(2A) up to ₹50 lakh turnover.
• CMP-08 replaced earlier quarterly GSTR-4 for easier payment reporting.
• Businesses crossing the limit mid-year must switch to regular GST immediately and start filing normal returns.

17. Final Thoughts

The GST Composition Scheme is one of the best things the government introduced for small businesses. It keeps compliance simple and allows entrepreneurs to focus on running their business instead of worrying about forms and deadlines.

If you run a local shop, small manufacturing unit, or restaurant — this scheme is worth considering. Just remember:

• Don’t make inter-State sales,
• Don’t sell through e-commerce,
• Keep turnover under ₹1.5 crore, and
• File returns regularly.

GST can look complex from the outside, but schemes like this prove that it can also be flexible, supportive, and business-friendly.

Also Read: GST on Director Remuneration–Clarified Circular 140/10/2020