Updated: July 2026  |  Section 10, CGST Act 2017

The Composition Scheme is a simplified GST payment mechanism where eligible taxpayers pay GST at a fixed percentage of their aggregate turnover — instead of computing GST on every transaction at normal slab rates.

Think of it as a “flat tax package” — like choosing a fixed-price restaurant menu instead of ordering à la carte. Simple, predictable, and easy to manage.

Under this scheme, the dealer does not collect GST from customers, cannot avail Input Tax Credit (ITC), and files significantly fewer returns compared to a regular GST taxpayer.

💡 Key Concept

Under the Composition Scheme, GST is an expense for the business — not a tax collected from the customer and deposited with the government. This is the most fundamental distinction from the regular scheme.

The Composition Scheme is governed by:

Why was it introduced? The GST Council recognised that a small grocery store cannot be expected to maintain the same compliance rigour as a large manufacturing company. Hence, the scheme was crafted with four clear objectives:

✅ Reduce compliance burden for small taxpayers

✅ Improve ease of doing business at the grassroots level

✅ Encourage voluntary GST registration among small traders

✅ Allow small businesses to focus on growth rather than paperwork

A registered taxpayer can opt for the Composition Scheme if the aggregate turnover in the preceding financial year does not exceed the prescribed limit. The option must be exercised before the commencement of the financial year (or at the time of fresh registration).

Category	Aggregate Turnover Limit	Applicable Provision
Manufacturers (excluding notified goods)	₹1.5 Crore	Section 10(1)(a), CGST Act
Traders (supply of goods)	₹1.5 Crore	Section 10(1)(b), CGST Act
Restaurants (not serving alcohol)	₹1.5 Crore	Section 10(1)(b), CGST Act
Service Providers (mixed or pure)	₹50 Lakhs	Section 10(2A), CGST Act
Special Category States (Goods)	₹75 Lakhs	Proviso to Section 10(1)

⚠️ Critical — Aggregate Turnover Includes

Turnover is calculated across all business verticals under the same PAN, not just one GSTIN. This trips up many business owners running multiple shops.

Includes: Taxable supplies + Exempt supplies + Exports + Inter-State supplies. Excludes: GST charged + Inward supplies under RCM.

In practice: A common trap is a businessman who owns three small shops in different cities, each with turnover below ₹50 lakhs. He assumes all three qualify individually. But since aggregate turnover under the same PAN is ₹1.5 crore, he is ineligible for the composition scheme under Section 10(2A) for services — a costly assumption.

Unlike the regular scheme where you apply 5%, 12%, 18%, or 28% on different goods and services, the composition scheme offers a single flat rate on total turnover. Here’s how it breaks down:

📊 Quick Worked Examples

Example A — Grocery Trader (Mr. Ramesh, Mumbai):
Annual Turnover: ₹90 Lakhs | Rate: 1% | GST Liability: ₹90,000
No monthly returns. No ITC reconciliation. One quarterly CMP-08. Simple.

Example B — Family Restaurant (Priya Dhabha, Pune):
Turnover: ₹80 Lakhs | Rate: 5% | GST Liability: ₹4,00,000
GST cannot be collected separately from guests on the bill.

Example C — IT Freelancer (Service Provider, Sec 10(2A)):
Turnover: ₹45 Lakhs | Rate: 6% | GST Liability: ₹2,70,000
No ITC on laptop, software subscription, or office rent.

“At 1%, even on ₹1.5 crore turnover, your total GST is just ₹1.5 lakhs — compared to possibly ₹15-20 lakhs under the regular scheme on similar goods. The math looks great. Until you lose your biggest client because he can’t claim ITC.”

Section 10 of the CGST Act lays down clear disqualifications. Getting these wrong is a costly mistake — you could be deemed a regular taxpayer from day one, attracting full GST liability, interest, and penalties.

🚫 Not Eligible — Composition Scheme Barred For:

❌ Manufacturers of notified goods — tobacco, pan masala, ice cream [Notification No. 14/2019-CT]; and additionally fly ash bricks, building bricks, earthen/roofing tiles, bricks of fossil meals [Notification No. 15/2022-CT, w.e.f. 18 July 2022]

❌ Casual Taxable Persons (Section 2(20), CGST Act)

❌ Non-Resident Taxable Persons (Section 2(77), CGST Act)

❌ Businesses making inter-State outward taxable supplies of goods or services

❌ Suppliers of services through e-commerce operators liable to collect TCS under Section 52 (restriction on service suppliers remains; goods suppliers now permitted — see amendment box above)

❌ Persons where any other registered person under the same PAN is not opting for the composition scheme

🧱 Special Note — Brick Kiln Manufacturers (w.e.f. 1 April 2022)

Manufacturers of fly ash bricks, building bricks, earthen tiles, and roofing tiles are barred from the standard Section 10 Composition Scheme but have a separate special composition-style scheme at 6% GST (without ITC) available to them under Notification No. 02/2022-CT(Rate) effective 1 April 2022. This was introduced to ease the transition after these goods were moved out of the regular composition scheme.

If you run a brick kiln, you do NOT file CMP-02 — you opt into the special scheme separately. Consult a tax professional before choosing.

⚠️ Practical Alert — E-commerce sellers (updated position): If you sell goods on Amazon, Flipkart, or Meesho, you can now opt for the Composition Scheme (w.e.f. 1 October 2023) — but only for intra-State sales (within your own state). The e-commerce platform will still collect TCS. However, if you supply services through e-commerce platforms (e.g., tutoring on Vedantu, gigs on UrbanClap), the restriction continues and you remain ineligible.

Opting into the scheme is not enough — you must continuously comply with these conditions throughout the year, or the scheme will be cancelled from the date of violation:

Condition	What It Means in Practice	Risk If Violated
No GST collection from customers	GST is your cost — don’t show it separately on bills	Penalty = amount collected + equal penalty (Sec 122)
No ITC claim	All input GST paid is a business expense	Wrongly claimed ITC is recoverable with 24% interest
Issue Bill of Supply only	Must mention “Composition Taxable Person, not eligible to collect GST”	Issuing a Tax Invoice = violation of Section 10 conditions
Display at premises	Composition status to be displayed prominently at all business places	Non-display is a procedural violation
All GSTINs under same PAN	All registrations across states under same PAN must opt together	Selective opting is not permitted
Services allowed up to 10% of turnover (goods dealers)	A composition dealer primarily supplying goods may also supply services — but value of services must not exceed 10% of turnover in the preceding FY or ₹5 lakhs, whichever is higher [Proviso to Section 10(1), CGST Act]	Exceeding the 10% cap disqualifies from the scheme

💡 Practical Example: A hardware trader with annual turnover of ₹80 lakhs can additionally provide installation/repair services up to ₹8 lakhs (10% of ₹80L) and still remain under the Composition Scheme. Beyond that — even ₹1 of extra service — and the eligibility is at risk. Track this separately throughout the year.

Form	Purpose	Frequency	Due Date
GST CMP-02	Intimation to opt into Composition Scheme	One-time per year	By 31 March of preceding FY / at time of fresh registration
GST ITC-03	Declaration of stock held & reversal of ITC on transition to Composition Scheme [Rule 44(4), CGST Rules]	One-time on opting in	Within 60 days of commencement of FY
GST CMP-08	Self-assessed tax payment statement	Quarterly	18th of month following quarter-end
GSTR-4	Annual return for composition taxpayers	Annual	30 April of subsequent financial year
GST CMP-04 + ITC-01	Withdrawal from Composition Scheme (CMP-04) + claim of ITC on stock held on date of withdrawal (ITC-01) [Rule 16(3), CGST Rules]	On opting out / exceeding limit	CMP-04: within 7 days of event | ITC-01: within 30 days of CMP-04

📊 Annual Return Filings: Regular vs Composition

“From 26 returns a year to just 5 — that’s not just compliance relief, it’s hours of productive time handed back to small business owners.”

⭐ Hidden Cost Alert: Many composition dealers forget that the GST they pay on purchases (input GST) is not recoverable. For a manufacturer buying raw material at 18% GST on ₹50 lakhs of purchases — that’s ₹9 lakhs of GST permanently lost. This often makes the regular scheme more economical despite higher compliance costs.

Parameter	Regular Scheme	Composition Scheme
GST Rate	5% / 12% / 18% / 28%	1% / 5% / 6% flat
Input Tax Credit	✅ Available	❌ Not Available
Tax Invoice	✅ Issued	❌ Not permitted
Bill of Supply	❌	✅ Mandatory
Annual Returns	~26 filings	5 filings
Inter-State Outward Supply	✅ Allowed	❌ Not Allowed
B2B Suitability	Excellent	Limited
Compliance Burden	High	Low

❌ Common Mistake	Legal Reference	Consequence
Collecting GST separately from customers	Sec 10(4) + Sec 76 + Sec 122	Deposit + equal penalty
Claiming Input Tax Credit (ITC)	Sec 16 r/w Sec 10(4)	Recovery + 24% interest + penalty
Issuing Tax Invoice instead of Bill of Supply	Rule 49, CGST Rules 2017	Scheme cancellation + penalty
Crossing turnover limit without switching	Sec 10(3), CGST Act	Liable as regular taxpayer from date of excess
Missing CMP-08 quarterly payment	Sec 47, CGST Act	Late fee ₹50/day (max ₹2,000)
Making inter-State outward taxable supply	Sec 10(2)(c), CGST Act	Disqualification from scheme, demand of IGST

Before you click “opt in” on the GST portal, run through this checklist. A wrong decision can haunt you for an entire financial year:

✅ PRE-COMPOSITION DECISION CHECKLIST

☐ Aggregate turnover (all PANs) in preceding FY is within the prescribed limit

☐ Business is primarily local / intra-State — no significant inter-State outward sales

☐ Customer base is mostly B2C — buyers who don’t need ITC

☐ Goods/services are not in the notified restricted categories (tobacco, ice cream, etc.)

☐ If selling goods through e-commerce (Amazon/Flipkart), confirmed sales will be intra-State only — inter-State goods sales through e-commerce remain impermissible for composition dealers

☐ Not supplying services through e-commerce operators (that restriction continues even after the 2023 amendment)

☐ All GSTINs under same PAN are also opting for Composition Scheme

☐ Business can absorb input GST as a cost (no ITC advantage expected)

☐ No export plans (exports are inter-State supplies)

☐ Billing staff trained on Bill of Supply format and GST collection prohibition

☐ CMP-02 will be filed before start of financial year on GST portal

☐ Reviewed with your tax professional — not just based on lower rate

The GST Composition Scheme is a genuine relief measure for eligible small businesses — but only when it fits your business profile. A lower tax rate is seductive, but the real test is: does this scheme support the way your business actually works?

If you’re a local kirana, a neighbourhood pharmacy, or a family restaurant serving walk-in customers — the composition scheme can be a genuine game-changer, saving you time, money, and compliance headaches.

But if you’re a manufacturer with B2B clients, a trader planning inter-State expansion, or a professional building a national client base — the regular scheme may serve you far better despite its higher compliance burden.

The decision is not about which scheme pays less tax in isolation. It’s about which scheme allows your business to grow sustainably while remaining fully compliant.

Evaluate annually. Review your customer profile. Monitor your turnover monthly. And always check in with your tax professional before each financial year begins.

“The best tax strategy is not always the one that pays the least tax — it is the one that supports sustainable business growth while staying fully compliant.”

With over a decade of hands-on experience in GST (Goods & Services Tax), Income Tax, and financial compliance, Abhilash founded Tax & Finance Hub with one mission: to make taxation simple, practical, and accessible for every Indian. His articles cut through legal jargon to deliver clear, real-world guidance — verified against the latest laws, circulars, and notifications.