Introduction
Running a small business comes with enough on your plate already — the last thing you need is to get buried under monthly tax paperwork. That's exactly the problem the GST composition scheme was designed to solve.
Instead of calculating tax on every single sale and filing detailed monthly returns, eligible small businesses can pay tax at a flat, pre-decided rate on their total turnover, once every quarter. It's simpler, it's cheaper to comply with, and it's entirely optional — you choose whether or not you want to be part of it.
This guide breaks down everything you need to know about the composition scheme: who qualifies, what rate you'll pay, how to apply, and the rules you need to follow once you're in.
What Is the GST Composition Scheme?
The composition scheme is a simplified tax payment option built specifically for small taxpayers. Rather than tracking and paying GST transaction-by-transaction at standard rates, a business under this scheme pays a fixed percentage of its total quarterly turnover as tax.
It's available to businesses with an annual turnover of up to ₹75 lakh (or ₹50 lakh in select states). The core idea is to cut down on compliance work and paperwork for small enterprises so they can focus on actually running their business instead of managing tax filings every month.
What Are the Tax Rates Under the Composition Scheme?
The rate you pay depends on the nature of your business:
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Type of Business
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Applicable Tax Rate
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Manufacturers (excluding notified goods like ice cream, pan masala, and tobacco products)
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2% of turnover (1% Central + 1% State tax)
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Restaurant service providers
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5% of turnover (2.5% Central + 2.5% State tax)
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Traders and other eligible suppliers
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1% of turnover (0.5% Central + 0.5% State tax)
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Frequently Asked Questions
1. Who is eligible to opt for the GST composition scheme?
Any business with an aggregate turnover of up to ₹75 lakh in the previous financial year can opt for this scheme. However, in a handful of states — Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Himachal Pradesh — this limit is capped lower, at ₹50 lakh.
2. Who cannot opt for the composition scheme?
Certain businesses are excluded from this scheme, including casual or non-resident taxable persons, businesses that crossed the ₹75 lakh turnover threshold in the previous year, those who've bought goods or services from unregistered suppliers without paying reverse charge GST, service providers (except restaurants), suppliers of non-taxable goods, businesses making inter-state sales, sellers operating through e-commerce platforms that collect tax at source, and manufacturers of specific items like ice cream, pan masala, and tobacco products. Interestingly, there's no restriction on purchasing goods from inter-state suppliers — the restriction only applies to selling across state lines.
3. How often does a composition dealer need to pay tax?
Tax under this scheme is paid quarterly, and the payment deadline is the 18th of the month right after the quarter ends.
4. What happens if my turnover crosses the limit partway through the year?
The moment your turnover crosses ₹75 lakh (or ₹50 lakh, depending on your state) during the financial year, your eligibility for the composition scheme ends immediately — not at the end of the year. You're required to file a withdrawal intimation in Form GST CMP-04 within seven days of crossing that limit. That said, you'll still be allowed to claim input tax credit on your existing stock, semi-finished goods, and capital goods as on the date of withdrawal, by submitting Form GST ITC-01 within 30 days.
5. How is turnover calculated for composition scheme eligibility?
Turnover is calculated on an all-India basis, meaning it includes every taxable supply, exempt supply, and export made under the same PAN across all your registrations. It does not include reverse charge inward supplies or the various GST components (CGST, SGST, IGST, and cess).
6. Can a business under the composition scheme claim input tax credit?
No. Once you opt into the composition scheme, you step outside the input tax credit chain entirely — you cannot claim ITC on your purchases. If you later switch back to the regular scheme, you become eligible to claim credit from that transition date onward.
7. If I buy goods from a composition dealer, can I claim ITC on that purchase?
No. Since a composition dealer isn't permitted to charge GST separately to customers, there's no tax component for the buyer to claim credit on.
8. Can a composition dealer issue a regular tax invoice?
No. Composition dealers issue a bill of supply instead of a standard tax invoice, since they aren't authorized to collect GST from their customers.
9. Do composition dealers need to file monthly returns?
No, that's actually one of the biggest advantages of this scheme. Composition taxpayers file a quarterly return using Form GSTR-4, due by the 18th of the month following the quarter. So, for instance, a return covering July to September would be due by 18th October.
10. What does the GSTR-4 return actually include?
It captures your turnover within the state or union territory, details of your inward supplies (purchases), and the total tax payable for that quarter.
11. If I buy goods or services from an unregistered supplier, do I owe GST under reverse charge?
Yes. As a composition taxpayer, you're still liable to pay GST on such purchases under the reverse charge mechanism. This payment is due by the 18th of the month following the relevant quarter, and these transactions need to be reported in Table 4 of your GSTR-4 return.
12. How does a taxpayer formally opt into the composition scheme?
The intimation is filed electronically through either Form GST CMP-01 (for those transitioning from an earlier tax regime) or Form GST CMP-02 (for those already registered under GST who wish to switch in). New applicants can also opt in directly at the time of registration through Part B of Form GST REG-01.
13. Can I switch to the composition scheme at any point during the year?
No — this is a common misconception. The option has to be exercised electronically through Form GST CMP-02 before the start of the relevant financial year. You can't switch mid-year just because it seems beneficial at that moment.
14. What ITC-related compliance is required when switching to the composition scheme?
When you move from the regular scheme into composition, you're required to pay back an amount equal to the input tax credit already claimed on your existing stock, semi-finished goods, and finished goods. For capital goods, the reversal is calculated proportionately based on their remaining useful life, assuming a total useful life of 5 years. This entire reversal needs to be reported in Form GST ITC-03 within 60 days of the financial year's start.
15. Can I withdraw from the composition scheme voluntarily, and what happens next?
Yes, withdrawal is entirely voluntary and can be done anytime by filing Form GST CMP-04. Once you've filed for withdrawal, you can also furnish Form GST ITC-01 within 30 days, listing your stock details, in order to claim back eligible input tax credit as you transition to the regular scheme.