What is the GST composition scheme and who can opt for it?

By the India Law Simplified editorial team · Verified against the bare Acts & official portals · Updated 2026-07-28 · ~4 min read

⚡ Quick answer

The GST composition scheme lets small businesses pay GST at a low flat rate on their turnover instead of the regular rates, with much simpler quarterly compliance. The flat rates are 1% for traders and manufacturers, 5% for restaurants (not serving alcohol), and 6% for eligible service providers. It's open to businesses with turnover up to ₹1.5 crore (₹75 lakh in special-category states), and a separate ₹50 lakh limit for service providers — but you can't claim input tax credit, charge GST separately, or make inter-state sales.

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If you run a small shop, restaurant or local service business, the regular GST regime — with monthly returns and ITC matching — can feel like a heavy burden. The composition scheme is the government's answer: pay a small flat percentage of your turnover and file far less often. But it comes with real trade-offs. This guide explains who qualifies, the rates, the compliance, and when the scheme actually makes sense.

1How the scheme works

Instead of charging GST on each sale and claiming credit on purchases, a composition dealer simply pays a flat percentage of their total turnover as tax — out of their own pocket — and files quarterly. It trades a slightly higher effective tax for dramatically simpler compliance.

2The flat rates

The composition rate depends on what you do:

Traders and manufacturers: 1% of turnover
Restaurants (not serving alcohol): 5% of turnover
Other eligible service providers: 6% of turnover

⚠️ ImportantThese are flat rates on turnover, paid by you — you cannot add GST on top of your prices to recover it from customers.

3Who can opt in

Eligibility is mainly about turnover and the nature of your business:

Goods (traders/manufacturers) and restaurants: aggregate turnover up to ₹1.5 crore (₹75 lakh in special-category states)
Service providers: a separate scheme with a ₹50 lakh turnover limit
You opt in by filing Form CMP-02 at the start of the financial year

💡 ExampleA grocery shop with ₹80 lakh annual turnover opts for composition. It pays 1% of ₹80 lakh = ₹80,000 GST for the year, files a simple quarterly statement, and skips invoice-level ITC matching — far less work than the regular regime.

4The trade-offs (and who should avoid it)

The simplicity comes at a cost. Under composition you:

Cannot claim input tax credit on your purchases
Cannot charge GST separately to customers (it comes out of your margin)
Cannot make inter-state outward supplies — only sell within your state
Cannot supply through e-commerce operators
Cannot supply non-taxable goods like alcohol

✅ TipIf your customers are businesses who want a tax invoice with ITC, the composition scheme will cost you sales — they'll prefer a regular GST supplier. Composition suits businesses selling mostly to end consumers.

5Compliance under composition

The reduced compliance is the main draw: you file a simple quarterly payment statement in Form CMP-08, and an annual return in GSTR-4. You also can't issue a regular tax invoice — instead you issue a 'bill of supply' and must mention that you're a composition taxable person.

Key takeaways

Pay a low flat rate on turnover: 1% (traders/manufacturers), 5% (restaurants), 6% (services).
Eligible up to ₹1.5 crore turnover (₹75 lakh special-category); ₹50 lakh for the services scheme.
Opt in via Form CMP-02; file CMP-08 quarterly and GSTR-4 annually.
You cannot claim ITC, charge GST separately, sell inter-state, or use e-commerce operators.
Best for small businesses selling to end consumers, not to ITC-seeking businesses.

Frequently asked questions

Can a composition dealer claim input tax credit?

No — composition taxpayers cannot claim ITC, and they cannot charge GST separately on their invoices. They pay tax out of their own margin at the flat composition rate.

What is the turnover limit for the composition scheme?

Up to ₹1.5 crore aggregate turnover for traders, manufacturers and restaurants (₹75 lakh in special-category states). Service providers have a separate composition scheme with a ₹50 lakh limit.

Can a composition dealer sell in other states?

No — composition taxpayers can only make intra-state (within-state) outward supplies. The moment you need to sell to other states, you must move to the regular GST scheme.

What returns does a composition taxpayer file?

A quarterly payment statement in Form CMP-08 and an annual return in GSTR-4 — much lighter than the regular GSTR-1 and GSTR-3B every month.