The GST composition scheme is designed to make life easier for small businesses — less paperwork, fewer returns, and a low flat tax rate. But it comes with trade-offs. This guide explains who it’s for, the rates, and whether it fits your business.
What is the composition scheme?
The composition scheme is a simplified way to pay GST for small taxpayers. Instead of charging GST on every sale and filing detailed monthly returns, you:
- Pay GST at a low flat rate on your total turnover.
- File returns quarterly (payment) and annually, not monthly.
The catch: you cannot collect GST from your customers, and you cannot claim input tax credit.
Who is eligible?
Eligibility depends on your annual turnover:
| Business type | Turnover limit |
|---|---|
| Goods (traders, manufacturers) | Up to ₹1.5 crore |
| Special-category states | Up to ₹75 lakh |
| Service providers (separate option) | Up to ₹50 lakh |
Composition scheme tax rates
You pay a small flat percentage of your turnover:
| Business type | GST rate |
|---|---|
| Traders | 1% (0.5% CGST + 0.5% SGST) |
| Manufacturers | 1% |
| Restaurants (no alcohol) | 5% |
| Eligible service providers | 6% |
Compared to the regular slabs, this is much simpler — but remember, you pay it out of your own pocket since you can’t charge it to customers.
Benefits vs limitations
| Benefits | Limitations |
|---|---|
| Low, flat tax rate | Can’t collect GST from customers |
| Much less compliance | No input tax credit |
| Quarterly payment, annual return | No inter-state outward sales |
| Simpler record-keeping | Can’t sell via e-commerce operators |
| Ideal for small, local B2C shops | Must issue a bill of supply, not a tax invoice |
Who cannot opt in?
The scheme is not available to everyone. You can’t opt in if you:
- Make inter-state outward supplies,
- Sell through an e-commerce operator that collects TCS,
- Supply exempt goods, or
- Manufacture certain notified goods (like ice cream, pan masala or tobacco).
How to join and what to file
- Opt in: file Form CMP-02 on the GST portal.
- Pay: file CMP-08 each quarter.
- Annual return: file GSTR-4 once a year.
Composition dealers issue a bill of supply (not a tax invoice) and must mention “composition taxable person, not eligible to collect tax on supplies.”
Is it right for you?
The composition scheme suits small, local businesses selling to consumers (B2C) who value simplicity over input tax credit. It’s usually not a good fit if you:
- Sell mostly to other businesses (they’ll want ITC, which you can’t pass on), or
- Sell inter-state or online.
If simplicity is your priority and you sell locally to end customers, it can save you a lot of time. KhataBuddy supports composition-scheme billing, so your bills of supply and records stay compliant either way. Try KhataBuddy free.