GST Composition Scheme: Eligibility, Rates & Restrictions

Key Takeaways

• The Composition Scheme under Section 10 of the CGST Act allows small taxpayers to pay tax at reduced flat rates on turnover with simplified compliance.
• Eligible for taxpayers with aggregate turnover up to Rs. 1.5 crore (Rs. 75 lakh for Special Category States) for goods; Rs. 50 lakh for service providers under Section 10(2A).
• Composition dealers cannot collect tax from customers, cannot claim ITC, and cannot make inter-state supplies.
• Returns are simplified: CMP-08 quarterly statement and GSTR-4 annual return.
• The scheme is ideal for small retailers, manufacturers and restaurants serving end-consumers.

Eligibility Criteria -- Section 10(1)

A registered person may opt for composition if:

1. Aggregate turnover in the preceding financial year did not exceed Rs. 1.5 crore (Rs. 75 lakh for Special Category States)
2. The person is not engaged in inter-state outward supplies
3. The person is not a casual taxable person or non-resident taxable person
4. The person does not supply goods through an e-commerce operator required to collect TCS under Section 52
5. The person is not a manufacturer of notified goods (ice cream, pan masala, tobacco)

Section 10(2A) -- Service Providers

Service providers or mixed suppliers (goods + services) with turnover up to Rs. 50 lakh can opt for composition at a flat 6% rate, subject to similar restrictions.

Tax Rates Under Composition

| Category | CGST Rate | SGST Rate | Total Rate | |----------|-----------|-----------|------------| | Manufacturers | 0.5% | 0.5% | 1% | | Traders (goods) | 0.5% | 0.5% | 1% | | Restaurants (not serving alcohol) | 2.5% | 2.5% | 5% | | Service providers (Section 10(2A)) | 3% | 3% | 6% |

Important: Tax is calculated on turnover in the state, not on individual transaction values.

Key Restrictions

• No ITC: Composition dealers cannot claim input tax credit on purchases (Section 10(4))
• No tax collection: Cannot mention tax on the invoice; must print "Composition taxable person, not eligible to collect tax on supplies" (Rule 46A)
• No inter-state supply: All outward supplies must be intra-state
• No e-commerce: Cannot supply through operators liable to TCS
• No export: Cannot make zero-rated supplies or exports

Filing Requirements

| Return/Statement | Frequency | Due Date | |-----------------|-----------|----------| | CMP-08 | Quarterly | 18th of the month following the quarter | | GSTR-4 | Annual | 30th April of the following financial year |

CMP-08 is a simple self-assessed statement of tax payment. GSTR-4 is the annual return consolidating all quarterly data.

Worked Example -- Composition vs. Regular Scheme

Scenario: A small retailer in Rajasthan has annual turnover of Rs. 90 lakh and purchases goods worth Rs. 60 lakh (inclusive of 5% GST).

| Parameter | Composition Scheme | Regular Scheme | |-----------|-------------------|----------------| | Turnover | Rs. 90,00,000 | Rs. 90,00,000 | | Tax rate | 1% (CGST 0.5% + SGST 0.5%) | 5% (CGST 2.5% + SGST 2.5%) | | Output tax liability | Rs. 90,000 | Rs. 4,50,000 | | ITC on purchases | Nil (not eligible) | Rs. 2,85,714 (5/105 x 60,00,000) | | Net tax payable | Rs. 90,000 | Rs. 1,64,286 | | Compliance cost | Lower (quarterly + annual) | Higher (monthly returns, reconciliation) |

In this scenario, the composition scheme results in lower net tax outflow (Rs. 90,000 vs. Rs. 1,64,286) and significantly lower compliance costs. However, if the margin were lower or purchases carried higher GST rates, the ITC benefit under the regular scheme could tip the balance.

Landmark Judgement

Case: K.P. Sugandhi v. Union of India Court: Kerala High Court Year: 2020 Ruling: The Court held that the restriction on composition dealers from making inter-state supplies under Section 10(2)(a) is constitutionally valid and does not violate Article 19(1)(g) (right to trade) as it is a reasonable restriction. The scheme is voluntary and optional, and taxpayers choosing it must accept its conditions. Impact: Settled the constitutional validity of composition scheme restrictions, confirming that the scheme's limitations are a trade-off for simplified compliance and lower tax rates.

Expert Tip

Before opting for composition, calculate the effective tax cost including the ITC you would forgo. If your suppliers charge 12-18% GST on inputs and you cannot pass this cost to customers, the lost ITC may exceed the saving from lower composition rates. Our qualified CAs recommend composition primarily for businesses with low input costs, high margins, and predominantly B2C customer bases.

Section Interconnect

• Previous: Chapter 6 -- E-Invoicing & E-Way Bill covers compliance requirements that do not apply to composition dealers.
• Next: Chapter 8 -- Penalties & Offences details penalties for non-compliance by all taxpayers including composition dealers.
• Related: Chapter 2 -- GST Registration explains the registration process and how to opt for composition at the time of registration.

Frequently Asked Questions

Q1: Can a composition dealer make inter-state purchases? Yes. The restriction under Section 10(2)(a) applies only to outward supplies. A composition dealer can freely purchase goods or services from other states. They simply cannot claim ITC on such purchases.

Q2: What happens if my turnover crosses Rs. 1.5 crore mid-year? You must exit the composition scheme from the first day of the month following the quarter in which the threshold is crossed. You must file ITC-01 within 30 days to claim credit on inputs held in stock on the transition date and switch to the regular return filing regime.

Q3: Can a composition dealer issue a tax invoice? No. A composition dealer must issue a Bill of Supply (not a tax invoice) as they cannot collect tax from customers. The Bill of Supply must bear the words "Composition taxable person, not eligible to collect tax on supplies."

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Disclaimer: This article is for educational purposes only and does not constitute legal or professional advice. GST laws are subject to frequent amendments. Readers should consult qualified CAs or tax professionals before acting on any information provided here.