GST Composition Scheme — Eligibility, Rates & Returns
The GST composition scheme is a simplified route for small taxpayers who would rather pay a flat percentage of turnover than run full input-credit accounting every month. It trades a lower compliance burden for a set of restrictions — no input tax credit, no interstate outward supplies, and no tax collection from customers. This guide explains who qualifies, how the scheme works in practice, what returns are due and when opting in is genuinely a good idea.
What the composition scheme actually does
A registered person under the composition scheme pays GST at a prescribed flat rate on turnover instead of the normal rate on each supply. In exchange, the taxpayer files a simple quarterly statement and one annual return rather than the regular monthly cycle. The tax is paid out of the taxpayer’s own pocket — it cannot be collected from the customer — and no input tax credit is available on purchases.
The practical effect: composition suits businesses selling to end consumers with low input costs, and suits nobody selling to GST-registered buyers who need credit.
Who is eligible
Eligibility turns on aggregate turnover in the preceding financial year staying within a prescribed limit, with a separate and lower limit for service providers under the alternative composition route for services. The turnover limits differ for special category states, and they have been revised more than once since GST began. Rather than working from a figure you read somewhere, check your position against the current limits when you register — the GST registration service page carries the position applicable now.
Beyond turnover, the person must be registered under GST, must not be making any of the excluded supplies below, and must apply the scheme uniformly across all registrations held under the same PAN. You cannot run one GSTIN under composition and another under the regular scheme.
Who cannot opt in
- Suppliers making interstate outward supplies of goods
- Casual taxable persons and non-resident taxable persons
- Suppliers of goods that are not taxable under GST
- Persons supplying through an e-commerce operator required to collect tax at source
- Manufacturers of certain notified goods — the notified list includes items such as tobacco, pan masala and ice cream
- Input service distributors
Note the asymmetry that trips people up: interstate outward supply disqualifies you, but interstate purchases do not. A shop in Bengaluru buying stock from Mumbai and selling locally can still be under composition.
The rates
Composition rates are prescribed separately for manufacturers, for traders, for restaurants not serving alcohol, and for the services route. Each is a flat percentage of turnover in the state, split between CGST and SGST. Because these percentages are set by notification and have been amended, do not commit to a number from an article — model your actual liability with the GST calculator using the rate applicable to your category, and compare it against what you would pay under the regular scheme after credit.
How to opt in and opt out
- At the time of registration: indicate the choice in the registration application itself, and the scheme applies from the effective date of registration.
- For an existing regular taxpayer: file the prescribed intimation on the GST portal before the start of the financial year. The scheme then applies for the whole of that year — you cannot switch mid-year by choice.
- Stock declaration: a taxpayer moving from regular to composition must file a statement of inputs held in stock and reverse the input tax credit attributable to that stock. Skipping this step is the most common reason a composition application is later questioned.
- Opting out voluntarily: file the withdrawal intimation on the portal; the regular scheme applies from the date specified.
- Compulsory exit: if turnover crosses the limit, or if you make a disqualifying supply, the scheme ceases immediately from that date — not from the next year. You must file the intimation and start charging tax normally straight away.
Returns and payments
A composition taxpayer files a quarterly statement of self-assessed tax along with the payment, and one annual return for the financial year. That is the entire cycle — there is no monthly outward supply statement and no monthly summary return. It is a genuine reduction in workload compared with the regular scheme, where the monthly rhythm and its penalties are covered in the GST return filing service.
Two obligations remain regardless. First, tax under reverse charge on notified inward supplies must still be paid, and it is paid at the normal rate, not the composition rate. Second, records of purchases and stock must be maintained even though credit is not claimed.
Invoicing and disclosure rules
- Issue a bill of supply, not a tax invoice — a composition dealer has no tax to show separately.
- State on every bill of supply that you are a composition taxable person and not eligible to collect tax on supplies.
- Display the same declaration on a signboard at the principal place of business and at every additional place of business.
Omitting these disclosures is a straightforward penalty exposure and is exactly what a departmental visit checks first.
When composition makes sense — and when it does not
It works well for a retailer, restaurant or small manufacturer whose customers are individuals rather than businesses, whose input tax credit would be small anyway, and who values not running monthly filings. It works badly for anyone selling B2B, because your buyer gets no credit and will simply price you against a regular-scheme competitor. It is also unavailable the moment you want to sell outside your state or list on a marketplace — which is why many growing sellers exit within a year or two.
Run the comparison numerically before deciding. If you are still choosing your structure and registrations more broadly, the GST registration guide and service covers thresholds, documents and the application process.
Frequently asked questions
Can a composition dealer claim input tax credit?
No. That is the core trade-off of the scheme. Tax paid on purchases becomes a cost and should be built into your pricing. If your input tax is a meaningful share of your cost base, the regular scheme will usually leave you better off despite the extra filings.
Can a service provider opt for composition?
Yes, through a separate composition route available to service providers and to mixed suppliers, which carries its own lower turnover limit and its own flat rate. It is a different provision from the composition scheme for goods, so make sure you are applying under the right one.
What happens if my turnover crosses the limit mid-year?
The scheme stops applying from the date the limit is crossed. From that date you must issue tax invoices, charge tax at normal rates and move to the regular return cycle, and you must file the prescribed intimation on the portal. You can also claim credit on inputs held in stock on the transition date by filing the relevant declaration within the prescribed period.
Do I still need to pay tax under reverse charge?
Yes. Reverse charge liability applies to composition taxpayers exactly as it does to regular taxpayers, and it is paid at the normal applicable rate rather than the composition rate. No credit is available for it either.
Not sure which side of the line your business falls on? TAXAJ reviews turnover, customer mix and input profile before recommending a scheme — start with the GST registration service.
