Composition Scheme under GST

The Composition Scheme under the GST is a simplified tax option for small businesses in India such as small traders, manufacturers, restaurants, and certain service providers. Businesses with turnover below ₹1.5 crore in the previous financial year are eligible for this scheme. The taxpayer must file the returns on a quarterly basis and pay GST at a reduced fixed rate on total sales.

This blog will help you make an informed decision by outlining how the scheme works, who can opt for it, and its key benefits and drawbacks.

In this guide:

• What Is the Composition Scheme Under GST?
• Eligibility Criteria
• Types of Business under the Composition Scheme
• Advantages of the Composition Scheme under GST
• Disadvantages of the Composition Scheme under GST
• Returns and Reports for Composition Scheme
• Key Differences Between a Regular and a Composition Dealer
• Composition Scheme at a Glance
• Frequently Asked Questions about Composition Scheme

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What Is the Composition Scheme Under GST?

The Composition Scheme under GST is a tax scheme designed for small businesses in India. Under this scheme, eligible taxpayers are required to pay GST at a fixed and lower rate on their overall sales. Tax compliance is much easier, as businesses must file returns on a quarterly basis instead of monthly.

The limitations of this scheme are that businesses are not allowed to claim Input Tax Credit (ITC) or to collect GST from customers. It is best suited for small traders, manufacturers, and restaurants whose turnover has not exceeded ₹1.5 crore in the preceding financial year.

Eligibility Criteria

• Turnover Limit: A business must register under the composition scheme if their AATO (Annual Aggregate Turnover) is below ₹1.5 crore in the previous financial year.
• Special Category States: For the listed 11 special category states, the turnover threshold is reduced to ₹75 lakh.
• Service Providers: GST has a special Composition Scheme designed for service providers as well. Businesses whose turnover in the last financial year was up to ₹50 lakh can opt for this scheme, making tax filing easier even if they offer both services and a small supply of goods.
• All PAN-Based Units: If a taxpayer uses the same PAN for several business branches or segments, the scheme must be opted for collectively by all units registered under the same PAN.

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Types of Business under the Composition Scheme

Manufacturers of Goods

• Small manufacturers of goods that are produced within the state.
• Manufacturers of goods like ice cream, pan masala, and tobacco are not eligible.

Traders (Retailers & Wholesalers)

Shopkeepers, traders, and small retail business owners whose business is carried on within the state.

Restaurants (Non-Alcoholic)

Restaurants and food service units that do not serve alcoholic beverages.

Service Providers (Limited Eligibility)

• Dated from 2019, service providers with a turnover up to ₹50 lakh can opt for a special composition scheme.
• This focuses on small service sector units like repair shops, tailors, and salons.

Brick Manufacturers

A separate composition rate is available for manufacturers of bricks, roofing tiles, and fly ash bricks.

Business Category	Turnover Limit	Composition Tax Rate
Manufacturers	Up to ₹1.5 crore (₹75 lakh for North-Eastern states and Himachal Pradesh)	1% of turnover (0.5% CGST + 0.5% SGST)
Traders (Goods)	Up to ₹1.5 crore (₹75 lakh for special category states)	1% of turnover (0.5% CGST + 0.5% SGST)
Restaurants (Not Serving Alcohol)	Up to ₹1.5 crore	5% of turnover (2.5% CGST + 2.5% SGST)
Service Providers (Other than Restaurants)	Up to ₹50 lakh	6% of turnover (3% CGST + 3% SGST)
Brick Manufacturers (Specific Category)	Up to ₹20 lakh (₹10 lakh for special category states)	6% without ITC for manufacturers of building bricks, fossil meal bricks, and earthen/roofing tiles

Advantages of the Composition Scheme under GST

• Lower Tax Rates: Under the Composition Scheme, eligible businesses can pay GST on their total sales at lower fixed rates compared to standard GST rates, lessening the overall tax burden on small firms.
• Simplified Compliance: Unlike regular dealers, composite dealers are required to file fewer returns and maintain simpler records, making it easier for small taxpayers to manage GST obligations.
• Less Administrative Burden: Businesses can skip the hassle of maintaining complicated invoices and records, saving time and letting them focus more on running their business.
• Better Cash Flow Management: As taxes are paid at a fixed rate on turnover, businesses can estimate their tax liability, enabling them to plan their finances more effectively.
• Suitable for Small Businesses: The Composition Scheme simplifies GST compliance for small businesses, allowing them to concentrate more on their core operations and productivity.
• Reduced Cost of Compliance: The filing process and record-keeping requirements are much simpler, so businesses can save on accounting and professional fees.
• Easy Tax Calculation: Tax is calculated on overall sales for a quarter, making it easy for a business to determine the amount of tax to be paid.

Disadvantages of the Composition Scheme under GST

• No Input Tax Credit (ITC) Allowed: Composition dealers cannot claim credit for the GST paid on purchases of raw materials, goods, or services. This tax becomes an additional cost, increasing overall operating costs.
• Restricted Interstate Sales and Exports: Businesses under this scheme cannot make interstate sales or export goods — they are permitted to sell only within their state of registration, limiting market expansion.
• Cannot Issue Tax Invoices: A composition dealer must issue a “Bill of Supply” instead of a “Tax Invoice,” so they cannot charge and collect GST from customers — the tax must be paid by the dealer himself.
• B2B Disadvantage: Regular dealers often prefer not to purchase from composite dealers since they cannot claim ITC, making composite dealers less competitive in the B2B market.
• No E-commerce Sales: Suppliers who sell goods through e-commerce operators (e.g., Amazon, Flipkart) are not eligible to opt for the composition scheme.
• Exclusion of Non-Taxable Goods: The supply of non-taxable goods, such as alcohol for human consumption, is excluded from this scheme.
• Applicability of Reverse Charge Mechanism: Composite dealers must pay GST under the Reverse Charge Mechanism (RCM) on specified purchases on behalf of the supplier.

Returns and Reports for Composition Scheme

Taxpayers registered under the composition scheme have simplified return filing requirements compared to regular GST taxpayers.

• GSTR-4 (Annual Return): Composition taxpayers must file GSTR-4 annually, which contains the business’s total turnover, inward supplies, and tax paid during the financial year. The due date for filing GSTR-4 is 30th April of the following financial year. Filing returns on time is important to avoid penalties and interest charges under GST.
• CMP-08 (Quarterly Statement): Composition taxpayers must file CMP-08 every quarter, which includes a summary of overall sales, tax payable, and tax payment details.

• April – June: 18 July
• July – September: 18 October
• October – December: 18 January
• January – March: 18 April

Key Differences Between a Regular and a Composition Dealer

Basis	Regular Dealer	Composition Dealer
Tax Rate	Pays GST at normal rates applicable to goods or services.	Pays tax at a fixed lower rate on total turnover.
Input Tax Credit (ITC)	Can claim Input Tax Credit on purchases.	Cannot claim Input Tax Credit.
Collection of GST	Can collect GST from customers and show it separately on invoices.	Cannot collect GST separately from customers.
Type of Invoice	Issues a Tax Invoice.	Issues a Bill of Supply instead of a tax invoice.
Compliance Requirements	Requires detailed records and multiple return filings.	Compliance is simpler, with fewer returns and less documentation.
Inter-State Sales	Can sell goods or services across states.	Not allowed to make inter-state outward supplies.
Eligibility	Available to all eligible GST-registered businesses.	Available only to small businesses within specified turnover limits.
Suitability	Suitable for medium and large businesses or B2B transactions.	Suitable for small businesses dealing mainly with end consumers.

Composition Scheme at a Glance

The Composition Scheme under the Goods and Services Tax is one of the best tax options for small businesses in India. This scheme allows eligible businesses to pay GST at a fixed and lower rate on their overall sales, with filing done once every quarter.

The scheme is helpful for small traders, manufacturers, and restaurant-based businesses. It reduces paperwork and makes tax filing easier. However, the scheme has its own limitations, where no Input Tax Credit can be claimed, and interstate sales are not permitted.

All things considered, the Composition Scheme is a reasonable choice for small firms seeking less complicated taxation and easier GST compliance.

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Frequently Asked Questions about Composition Scheme

What is the Composition Scheme under GST?

The Composition Scheme under GST is a simplified tax scheme built exclusively for small businesses, where taxpayers pay GST at a fixed lower rate on overall sales and file returns quarterly.

Who is eligible for the Composition Scheme under GST?

Small businesses with turnover up to ₹1.5 crore in the previous financial year can opt for the Composition Scheme under GST. For certain special category states, the turnover limit is ₹75 lakh.

Can service providers opt for the Composition Scheme under GST?

Yes, service providers with turnover up to ₹50 lakh can opt for a special Composition Scheme and pay GST at a concessional rate, subject to prescribed conditions.

What are the benefits of the Composition Scheme under GST?

The Composition Scheme offers lower GST rates, simplified compliance, quarterly return filing, reduced paperwork, and easier tax calculation for small businesses.

Can composition dealers claim Input Tax Credit (ITC)?

No, taxpayers registered under the Composition Scheme cannot claim Input Tax Credit (ITC) on purchases made for business purposes.

What is the difference between a regular dealer and a composition dealer under GST?

Regular Dealer	Composition Dealer
Can claim Input Tax Credit (ITC)	Cannot claim Input Tax Credit (ITC)
Can make inter-state sales	Restricted from making inter-state sales
Can collect GST from customers	Cannot collect GST from customers
Issues a Tax Invoice	Issues a Bill of Supply

Which returns are filed under the Composition Scheme?

Composition taxpayers are required to file CMP-08 quarterly and GSTR-4 annually under the GST Composition Scheme.