The GST Composition Scheme under Section 10 of the CGST Act lets small businesses pay tax at a fixed, lower rate on turnover instead of standard rates, with fewer returns and less paperwork. Traders and manufacturers pay 1%, restaurants 5%, and eligible service providers 6%, but they cannot claim input tax credit (ITC), collect GST from customers, or make interstate supplies.
The GST Composition Scheme under Chapter 2 of the Central Goods and Services Tax (CGST) Rules provides a simplified compliance framework for small businesses. It offers lower tax rates, less frequent return filings, and reduced paperwork compared to the regular GST regime, making it an attractive option for eligible taxpayers with turnover below the prescribed threshold limits.
What Is the GST Composition Scheme?
The GST Composition Scheme is a simplified taxation option under Section 10 of the CGST Act designed for small businesses. Instead of paying GST at standard rates and filing monthly returns, composition taxpayers pay a fixed, lower rate on their turnover. This scheme significantly reduces the compliance burden for eligible businesses, allowing them to focus more on operations rather than complex GST compliance requirements.
However, the scheme comes with certain restrictions. Composition taxpayers cannot collect GST from their customers, cannot claim Input Tax Credit (ITC) on purchases, and cannot engage in inter-state supply of goods. They must also display the words ‘composition taxable person’ on all notices, signboards, and bills of supply.
Registration and Opting Into the Scheme
The process for opting into the Composition Scheme varies depending on the taxpayer’s current registration status. The CGST Rules prescribe specific forms and timelines for each scenario.
- Existing registered persons – Must file FORM GST CMP-02 electronically on the common portal before the start of the financial year for which they wish to opt in. They must also furnish FORM GST ITC-03 (stock declaration) within sixty days.
- Persons with provisional registration – Must submit FORM GST CMP-01 on the common portal before the appointed day or within thirty days thereafter.
- New GST registrants – Can indicate their choice to pay tax under Section 10 in Part B of FORM GST REG-01 during the registration application itself.
After filing the intimation, the taxpayer must electronically provide details of stock, including inward supplies from unregistered persons held on the day before opting into the scheme. This is done via FORM GST CMP-03 within sixty days of exercising the option. An intimation filed for any place of business in a State or Union Territory is valid for all other businesses registered under the same PAN.
Eligibility Conditions and Restrictions
The Composition Scheme has specific eligibility requirements and restrictions that businesses must carefully evaluate before opting in.
- The person must not be a casual taxable person or a non-resident taxable person.
- Goods in stock on the appointed day must not have been acquired through interstate trade, imported, or received from a branch or agent outside the state.
- Goods held in stock must not have been purchased from an unregistered supplier unless tax under Section 9(4) has been paid on such purchases.
- The person must pay tax under Section 9(3) or Section 9(4) on inward supplies under the reverse charge mechanism.
- The person must not have manufactured certain notified goods during the previous financial year as per Section 10(2)(e).
- Bills of supply must clearly state ‘composition taxable person, not eligible to collect tax on supplies’ at the top.
- All notices and signboards at business locations must prominently display ‘composition taxable person.’
Composition Scheme Tax Rates
Composition taxpayers pay tax at lower rates compared to the regular GST regime. The rates shown below are for CGST only and are effectively doubled when SGST is included.
| Category of Taxpayer | CGST Rate | Effective Rate (CGST + SGST) |
| Manufacturers | 0.5% | 1% of turnover |
| Traders (suppliers of goods) | 0.5% | 1% of turnover |
| Restaurant services (not serving alcohol) | 2.5% | 5% of turnover |
| Other service providers (Notification 2/2019) | 3% | 6% of turnover |
These rates are calculated on the turnover in the state or union territory. Since composition taxpayers cannot collect GST separately from customers, the tax is paid from their margins. This makes the scheme particularly attractive to businesses with higher profit margins or those that primarily deal in intra-state transactions.
Withdrawal and Denial of Composition Levy
The option to pay tax under the Composition Scheme remains valid as long as all conditions are fulfilled. However, there are specific circumstances in which a taxpayer may need to withdraw from, or may be denied, the composition option.
Voluntary Withdrawal: A registered person wishing to withdraw must file FORM GST CMP-04 electronically before the withdrawal date. They must then furnish FORM GST ITC-01 detailing stock of inputs and semi-finished or finished goods within thirty days.
Mandatory Withdrawal: If a person ceases to meet any eligibility condition, they become liable to pay tax under Section 9(1) from that day. They must file FORM GST CMP-04 within seven days and begin issuing tax invoices for all subsequent supplies.
Denial by Officer: If a proper officer suspects ineligibility, they may issue a show cause notice in FORM GST CMP-05. The taxpayer must reply within fifteen days. The officer then issues an order in FORM GST CMP-07 within thirty days, either accepting the reply or denying the composition option.
Key Forms Under the Composition Scheme
| Form | Purpose | Filing Timeline |
| GST CMP-01 | Intimation by provisional registrants to opt in | Before the appointed day or within 30 days |
| GST CMP-02 | Intimation by existing registrants to opt in | Before the start of financial year |
| GST CMP-03 | Stock details on the date of opting in | Within 60 days of opting in |
| GST CMP-04 | Intimation for withdrawal from the scheme | Within 7 days of the event or before the withdrawal date |
| GST CMP-05 | Show cause notice for denial | Issued by a proper officer |
| GST CMP-06 | Reply to the show cause notice | Within 15 days of notice |
| GST CMP-07 | Order accepting or denying the composition option | Within 30 days of reply |
| GST ITC-01 | Stock details on withdrawal or denial | Within 30 days of withdrawal |
| GST ITC-03 | Stock details when opting into the scheme | Within 60 days of the start of the financial year |
| GSTR-4 | Annual return for composition taxpayers | By 30 Apr of the succeeding year |
| CMP-08 | Quarterly statement of self-assessed tax | Within 18 days of quarter end |
| Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. The Composition Scheme rules and rates are subject to amendment by the GST Council. Consult a qualified tax professional for advice specific to your situation. |
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Frequently Asked Questions
Q1: What is the primary benefit of the GST Composition Scheme?
The main benefits are a simplified compliance process, lower tax rates (1-6 per cent of turnover), less frequent return filings (quarterly instead of monthly), and reduced paperwork compared to regular GST taxpayers.
Q2: Who is eligible for the GST Composition Scheme?
Generally, businesses with an annual turnover below Rs. 1.5 crore (Rs. 75 lakhs for special category states) are eligible, provided they do not engage in inter-state supply, manufacture specific notified goods, or supply services beyond prescribed limits.
Q3: Can a composition taxpayer claim Input Tax Credit?
No. Composition taxpayers cannot claim Input Tax Credit (ITC) on their purchases. They also cannot collect GST from customers and must issue bills of supply instead of tax invoices.
Q4: How does a registered person opt into the Composition Scheme?
An existing registered person must file FORM GST CMP-02 on the GST portal before the start of the financial year. They must also furnish FORM GST ITC-03 with stock details within sixty days from the start of the financial year.
Q5: What happens if a composition taxpayer exceeds the turnover limit?
If the taxpayer’s turnover exceeds the prescribed limit or they cease to meet any eligibility condition, they must file FORM GST CMP-04 within seven days. From that date, they become liable to pay regular GST under Section 9(1) and must issue tax invoices for all subsequent supplies.
Q6: Can a service provider opt for the Composition Scheme?
Yes, service providers can opt for the Composition Scheme under Notification 2/2019, subject to turnover limits. They pay an effective rate of 6 per cent (3 percent CGST + 3 percent SGST) on their turnover. However, restaurant service providers pay 5 per cent (2.5 per cent CGST + 2.5 percent SGST).
Frequently Asked Questions (FAQ)
What is the GST Composition Scheme?
It is a simplified tax option under Section 10 of the CGST Act where eligible small businesses pay GST at a fixed, lower rate on their turnover and file fewer returns, instead of paying standard rates and filing monthly returns.
Who is eligible for the GST Composition Scheme?
Businesses with turnover up to Rs 1.5 crore (Rs 75 lakh in some special-category states) for goods, and up to Rs 50 lakh for services under Section 10(2A), can opt in, subject to conditions.
What are the tax rates under the Composition Scheme?
Traders and manufacturers pay 1%, restaurants (not serving alcohol) pay 5%, and eligible service providers pay 6% on turnover.
What returns does a composition dealer file?
A composition taxpayer pays tax quarterly through CMP-08 and files an annual return in GSTR-4.
