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 2026-08-18 · ~8 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.

6The limits differ by what you supply and where

There is no single composition threshold, and quoting one figure is where most summaries go wrong.

Goods, in most states: aggregate turnover up to ₹1.5 crore in the preceding financial year
Goods, in the special category states: ₹75 lakh
Services, under the separate scheme in section 10(2A): ₹50 lakh, available across the country

⚠️ ImportantThe services scheme at 10(2A) is a distinct provision with its own limit and its own 6% rate. It is not an extension of the goods scheme, and a supplier can fall inside one and outside the other.

7The rates, and what they are charged on

Composition tax is paid out of your own pocket on turnover, not collected from the customer. That is the structural difference from the regular scheme and it determines who the scheme suits.

Manufacturers and traders pay 1% of turnover. Restaurants not serving alcohol pay 5%. Service providers under section 10(2A) pay 6%.

Because it cannot be collected from the customer and no input credit is available, the scheme suits a business selling to end consumers with low input costs — and suits almost nobody selling to GST-registered buyers, who lose the credit they would otherwise take.

✅ TipModel it before opting in. A trader with thin margins and heavy input tax can pay more under a 1% turnover levy than under regular GST with credit.

8The filings, and the invoice you must issue

Compliance is genuinely lighter but it is not absent.

Tax is paid quarterly in Form CMP-08, due by the 18th of the month following each quarter, and an annual return is filed in Form GSTR-4, due by 30 June following the financial year.

A composition dealer cannot issue a tax invoice and cannot show GST separately. The document issued is a bill of supply, and every invoice and signboard must carry the words 'composition taxable person, not eligible to collect tax on supplies'.

⚠️ ImportantCharging GST separately while under composition is a common and expensive error — the tax is recoverable from you along with penalty, and the customer never had a valid credit.

9Who is barred from the scheme entirely

Eligibility is not only about turnover. Several categories cannot opt in at any level of turnover.

Anyone making inter-state outward supplies of goods
Anyone supplying through an e-commerce operator required to collect tax at source
Manufacturers of notified goods, which include ice cream, pan masala and tobacco
Casual taxable persons and non-resident taxable persons
Anyone supplying goods that are not taxable under the Act

⚠️ ImportantThe inter-state and e-commerce bars are the ones that catch growing businesses. Selling on a marketplace platform is enough on its own to make the scheme unavailable.

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.

What happens if I cross the turnover limit during the year?

The scheme stops applying from the day you cross, not at the year end. You file an intimation of withdrawal in Form CMP-04 within seven days, move to regular GST from that date, and may claim input tax credit on stock held on that date by filing Form ITC-01. Continuing to pay at the composition rate after crossing is a shortfall the department will recover.

What rate will I actually pay?

1% of turnover for manufacturers and traders, 5% for restaurants not serving alcohol, and 6% for service providers under section 10(2A). It is paid out of your own margin on turnover, not collected from the customer.

Do I still pay reverse charge under the composition scheme?

Yes. Composition does not exempt you from reverse charge. Where RCM applies — on notified supplies, or on purchases from an unregistered supplier where the provision is in force — you pay at the normal rate applicable to that supply, not at your composition rate, and you cannot take credit for it. It is a genuine additional cost of the scheme.

Can I show GST separately on my invoice under composition?

No. You issue a bill of supply, not a tax invoice, and cannot show GST separately. Every invoice and signboard must state 'composition taxable person, not eligible to collect tax on supplies'. Charging GST anyway is recoverable from you with penalty, and gave your customer no valid credit.

Can I use the composition scheme if I sell on Amazon or Flipkart?

No. Supplying through an e-commerce operator required to collect tax at source disqualifies you outright, whatever your turnover. The same applies to any inter-state outward supply of goods, to casual and non-resident taxable persons, and to manufacturers of notified goods such as ice cream, pan masala and tobacco.

Do I pay composition tax on exempt sales too?

The levy is on turnover in the state, and the scheme is designed as a flat charge on that turnover rather than a transaction-level tax. Because you cannot collect it from customers and take no input credit, model the effective cost against regular GST before opting in — a low-margin trader with heavy input tax often pays more under a 1% turnover levy.

How do I opt in or out of the scheme?

Opting in is done in Form CMP-02 before the start of the financial year, and a new registrant may choose it at registration. Withdrawal is filed in Form CMP-04, and it becomes compulsory the moment you cross the turnover limit or fall into any disqualifying category, with effect from that date rather than the year end.