GST Composition Scheme: Who Should Opt In, Rates, Limits and the Catches

The composition scheme trades input tax credit and inter-State sales for a low flat tax and minimal compliance. For a kirana store or a small manufacturer selling locally to consumers, it is often the right call. For a business selling to other businesses, it usually is not.

Who can opt in

Two separate schemes exist under section 10 of the CGST Act:

	Section 10(1) — goods and restaurants	Section 10(2A) — services
Turnover limit (preceding FY)	₹1.5 crore (₹75 lakh in certain NE and hill States)	₹50 lakh
Who	Manufacturers, traders, restaurants (not serving alcohol)	Service providers and mixed suppliers not covered by 10(1)
Rate on turnover	Manufacturers and traders 1%; restaurants 5%	6%

A section 10(1) dealer may also supply services up to 10% of turnover or ₹5 lakh, whichever is higher, without losing eligibility.

Note on the rates: the trader's 1% is charged on turnover of taxable supplies only; the manufacturer's and restaurant's rate is on total turnover in the State.

Who cannot

• Anyone making inter-State outward supplies of goods.
• Suppliers of goods through an e-commerce operator that collects TCS.
• Manufacturers of ice cream, pan masala, tobacco and a few other notified goods.
• Casual taxable persons and non-resident taxable persons.
• Suppliers of goods that are not taxable under GST (e.g. petrol, alcohol for human consumption).

Eligibility is per PAN: if one branch opts in, all registrations under that PAN must.

How the compliance works

• Opting in: Form CMP-02 at registration, or before the start of a financial year for an existing registration. Reverse ITC on stock in ITC-03 within 60 days.
• Quarterly payment: Form CMP-08 by the 18th of the month after each quarter.
• Annual return: Form GSTR-4 by 30 June following the financial year.
• Invoices: issue a bill of supply marked "composition taxable person, not eligible to collect tax on supplies", and display the same on your signboard.
• Reverse charge still applies on notified inward supplies — you pay it at normal rates, and cannot claim it back.

When composition helps

• Your customers are consumers who cannot use input tax credit anyway.
• Your inputs carry little GST (fresh produce, low-rate inputs, labour), so giving up ITC costs little.
• You value four payments and one return a year over the monthly cycle.

A trader with ₹1 crore turnover and a 15% margin pays ₹1 lakh a year under composition (1% of taxable turnover). Under the regular scheme they would collect and pay tax on the full sale price but recover the tax on purchases — the net cash cost depends entirely on the margin and the rate.

When composition hurts

• B2B customers. They lose ITC on what they buy from you, so they either pay you less or buy elsewhere.
• Inter-State sales, including online marketplaces — barred outright.
• High-GST inputs with thin margins. Under composition you pay 18% on inputs and cannot recover it; the 1% on output is the smaller problem.
• Exports — composition dealers cannot make zero-rated exports with refund.

Leaving the scheme

You can withdraw voluntarily any time in CMP-04. You must withdraw within seven days of crossing the limit or becoming ineligible. If the officer finds you were ineligible, a CMP-05 show cause gives you 15 days to reply; an adverse CMP-07 order can apply the regular rate to your past turnover and add penalty. On leaving, you can claim ITC on stock in ITC-01 within 30 days.

The decision in one line

Sell locally to consumers with low-GST inputs → composition is worth a close look. Sell to businesses, online or across State lines → stay regular.

Unsure which is cheaper for your numbers? Our GST services include a composition-versus-regular comparison on your actual purchase and sales mix.