GST Composition Scheme: Who Qualifies, What It Costs, and What You Give Up

Eligibility and rates

Available to registered persons with aggregate turnover up to one and a half crore rupees in the preceding financial year, reduced to seventy-five lakh in the special category States. A separate scheme under Section 10(2A) allows service providers up to fifty lakh rupees at six per cent.

1. Manufacturers: one per cent of turnover in the State.

2. Traders: one per cent of turnover of taxable supplies.

3. Restaurants not serving alcohol: five per cent.

4. Other service providers under the Section 10(2A) scheme: six per cent.

What you give up

No input tax credit on purchases, so the GST you pay suppliers becomes a cost. No tax invoices — you issue a bill of supply, so your customers claim nothing. No inter-State outward supplies, which caps your market at the State border. No supply through e-commerce operators required to collect tax at source.

The bill of supply must state prominently that you are a composition taxable person not eligible to collect tax on supplies, which signals the position to every customer who reads it.

What you gain

A flat rate paid quarterly in Form CMP-08, an annual return in GSTR-4, and no invoice-level outward reporting. For a business issuing hundreds of small B2C bills a month, the saving in compliance effort is substantial.

The rate is also genuinely low in absolute terms. A trader at one per cent of turnover will usually pay less than the net liability under the regular scheme, provided their value addition is high and their input GST is low.

Reverse charge still applies

Composition dealers remain liable to pay tax under reverse charge on notified inward supplies, at the normal rates rather than the composition rate, and in cash. They also cannot claim credit on that tax.

This catches composition restaurants using goods transport agencies and security services, where the reverse charge liability is real and recurring.

When it stops applying

The option lapses the day turnover exceeds the threshold. You must file Form CMP-04 within seven days and switch to the regular scheme from that date. Supplies made after crossing, while still issuing bills of supply, carry tax you have not collected.

Monitoring turnover monthly rather than at year end is therefore not optional for a business near the limit.

Frequently asked questions

### Can a composition dealer sell to other States?

No. Inter-State outward supplies are not permitted under the composition scheme. Inward inter-State purchases are allowed, but the moment you make an outward inter-State supply the option is lost.

### Can customers claim ITC on a composition dealer's bill?

No. A composition dealer issues a bill of supply carrying no tax, so there is nothing for the customer to claim. This is the main reason the scheme suits B2C businesses and rarely suits B2B ones.

### What return does a composition dealer file?

A quarterly statement in Form CMP-08 by the eighteenth of the month following the quarter, and an annual return in Form GSTR-4 by the thirtieth of June following the financial year.

### Does reverse charge apply to composition dealers?

Yes. Tax under reverse charge on notified inward supplies is payable at the normal rate, not the composition rate, and must be paid in cash. No input credit is available on it.