GST Composition Scheme Explained for Small Businesses and Traders

What is the GST Composition Scheme?

The GST composition scheme is a simple Goods and Services Tax (GST) payment mechanism introduced under the CGST Act, 2017. This scheme is available to small taxpayers who pay GST at a prescribed rate of turnover. It is intended for businesses who primarily sell in their state and want easier compliance.

The composition dealer cannot collect GST separately from the buyer. They pay the tax from their own funds against a bill of supply instead of a tax invoice.

The scheme reduces paperwork but also removes some important benefits of regular GST. Therefore, the decision should be based on turnover, the type of customer, profit margins, purchase costs and the need to sell across state borders.

Composition Scheme Turnover Limit Under GST

For most eligible suppliers of goods, the key limit is the aggregate turnover of ₹1.5 crore. In simple terms, the scheme may generally be considered by a business, if its PAN-based aggregate turnover in the preceding financial year does not exceed ₹1.5 crore (subject to the applicable conditions and state-specific rules).

For some special category states, the applicable limit is up to ₹75 lakh. Businesses should check the GST composition scheme limit for their state before opting in. The term ‘aggregate turnover’ gains significance as it is computed on an all-India basis under the same PAN. It may include taxable supplies, exempt supplies and exports and inter-state supplies, normally excluding GST and certain inward supplies that are taxable under reverse charge.

As per the Section 10 (2A) of the CGST Act, eligible service providers and mixed providers/suppliers with an annual turnover of up to ₹50 Lakhs for the last financial year, can pay GST at a prescribed rate, capped at a maximum of 3% The eligibility conditions and rate are different from the main goods-focused scheme.

The threshold is not a licence to ignore the GST registration rules. The business still has to fulfil the conditions of the relevant composition option, and comply with the registration and invoicing requirements.

GST Composition Scheme Rates: How Much Is Payable?

We saw in the section above that the total GST composition scheme limit is ₹1.5 Cr. for traders, retailers, and manufacturers. For special states, the limit goes down to ₹75 Lakhs. And, up to ₹50 Lakhs annual turnover for eligible service providers and mixed providers/suppliers under Section 10(12A) of CGST Act.

Aggregate turnover means all supplies under one PAN, across all businesses, nation-wide. So, all GSTINs under one PAN will be included in this aggregate turnover. Check the Composition scheme turnover limits in the table below:

These rates are applied subject to the relevant notifications and conditions, and taxpayers should check the current position before filing.

Composition Scheme Tax Rates

The tax rates for composition schemes are flat percentage rates on turnover, divided equally between State and Central GST. There are 4 rates to refer in 2026:

You can check the example below for better understanding.

• Annual Turnover: ₹40 Lakhs
• Total Rate: For eligible traders, the GST composition scheme rate is 1% of turnover
• Total tax to be paid: 40,00,000*1% = ₹40,000
• Tax split: The tax percentage is split between SGST and CGST.
  • CGST of 0.5%
  • SGST of 0.5%
• Split tax calculation:
  • CGST payable: ₹40,00,000 * 0.5% = ₹20,000
  • SGST payable: ₹40,00,000 * 0.5% = ₹20,000

Who is Not Eligible for the GST Composition Scheme?

The GST composition scheme is a good deal for small businesses. However, as per the scheme, there are some businesses who cannot take advantage of this composition scheme.

First of all, if you are any business with turnover more than the predefined threshold annual turnover, you are automatically not eligible in the GST Composition scheme. Beyond that, the following table represents the information with sections under which they are ineligible for the composition scheme. Please take a look.

You can check the details on: https://taxinformation.cbic.gov.in/

A business that wants to sell to customers outside of its state should consider the effect carefully. A composition dealer can buy goods from outside the state, but conditions and restrictions on outward supplies must be examined before entering into such transactions.

What is a Bill of Supply?

A composition dealer cannot issue a normal GST tax invoice as the dealer is not able to collect GST from the customer. The dealer issues a bill of supply in lieu of a tax invoice. The document shall contain the necessary details and clearly state that the supplier is paying tax under the composition scheme and is not required to collect tax from the recipient.

This is important to both the seller and the purchaser. Customers should not consider a bill of supply as a document for availing input tax credit. If a composition dealer collects GST incorrectly, they may have tax and penalty exposure.

Advantages and Disadvantages of GST Composition Scheme

Check out the advantages and disadvantages of the composition scheme mentioned below:

Advantages of Composition Scheme

• Reduced compliance: Businesses fill only one quarterly return (CMP-08) as compared to monthly and quarterly return (GSTR 3B, GSTR 1) filing in regular GST scheme.
• Reduced Tax burden: Taxpayers are liable to pay only a prescribed rate ranging from 1% to 6% depending on the business type, as opposed to standard GST rate percentages (5%, 8%, 12% etc.).
• Better cashflow management: Lower tax burden, leads to taking home more money in profits, which further help in managing day-to-day finances.

Disadvantages of the GST composition scheme

• No Input Tax Credit (ITC): The biggest trade-off or disadvantage of this scheme is they cannot claim any ITC on their own business purchases or raw materials.
• No tax from customers: Businesses cannot collect any tax from the customer, under the composition scheme

Understanding CMP-08

The GST Composition Levy scheme does reduce a big deal of compliance related matters, it does not make it completely go-away. You have to fill a form called CMP-08 every quarter. It is also called Composition Form 08 and legally titled as, “Statement for payment of self-assessed tax.” It is a statement-cum-challan used by small taxpayers to pay their self-assessed tax liability.

Check quarterly deadlines to file CMP-08:

In addition to this, you also file GSTR 4 at the end of the financial year, which summarizes the year's turnover and tax paid.

Returns and Payment: CMP-08 and GSTR-4

The compliance process is easier than regular GST, but it is not zero-compliance. A composition taxpayer usually follows this cycle: pay self-assessed tax through the CMP-08 return every quarter as the quarterly GST return, then file the annual GSTR-4 return summarising the year's turnover and tax paid.

Summary

For a small trader or local business, the GST composition scheme can be a sensible option if they are looking for easier GST compliance. The main benefits are a flat-rate scheme and less detailed filings. The main costs are the inability to recover input tax credit, the inability to collect GST and restrictions on the type and location of supplies. If you are registered under the GST Composition scheme, you should keep an eye on your annual turnover to avoid any hassles in the middle of the year to switch to the regular scheme.

Frequently Asked Questions