The GST Composition Scheme under Section 10 of the CGST Act offers small businesses a simplified compliance framework with lower tax rates and quarterly filing. This guide covers eligibility, key advantages, restrictions, and how the scheme compares to regular GST registration.
What Is the GST Composition Scheme?
Section 10 of the CGST Act provides a simplified registration option for small taxpayers. Instead of the standard GST framework with monthly returns and full ITC claims, composition scheme registrants pay tax at a minimal flat rate on turnover, file quarterly returns instead of monthly, cannot issue tax invoices or charge GST separately, and cannot claim Input Tax Credit.
The CGST (Amendment) Act, 2018 (effective 1 February 2019) also permits composition dealers to provide services up to 10% of their turnover or Rs. 5 lakh, whichever is greater. This expanded the scope of the scheme beyond pure goods suppliers.
Composition Scheme Tax Rates
| Supplier Type | Composition Rate | Standard GST Rate (Comparison) |
| Manufacturers | 1% (0.5% CGST + 0.5% SGST) | 12% to 18% |
| Traders | 1% of the taxable turnover of goods | 12% to 18% |
| Restaurants (not serving alcohol) | 5% (2.5% CGST + 2.5% SGST) | 5% with ITC |
| Other service providers | 6% (3% CGST + 3% SGST) | 18% |
These rates represent a significant reduction compared to standard GST rates, making the scheme financially attractive for eligible small businesses.
Key Advantages of the Composition Scheme
Reduced Compliance Burden
Composition scheme taxpayers file only quarterly returns, eliminating the monthly GSTR-1 and GSTR-3B cycle. The annual return requirement is also simplified. This frees up time and resources for core business operations rather than complex compliance procedures. For a small manufacturer or trader, the reduction from approximately 37 annual filings (under regular GST) to just a handful of quarterly filings is substantial.
Lower Tax Liability
The flat-rate tax structure means that composition dealers pay significantly less tax than regular taxpayers. Consider a trader with Rs. 1,18,000 in total sales (MRP). Under regular GST at 18%, the output tax would be Rs. 18,000 with a net liability of Rs. 5,400 after ITC of Rs. 12,600. Under the composition scheme at 1%, the total tax is just Rs. 1,180. The net profit for the composition dealer is higher despite not being able to claim ITC because the output rate is dramatically lower.
Enhanced Business Liquidity
Regular taxpayers must pay output tax at prevailing rates and wait for ITC reconciliation before recovering input credits. This ties up working capital as input credit remains blocked until the supplier files their return. Composition suppliers face minimal output liability and no dependency on supplier return filings, keeping more cash available for daily operations.
Balanced Competition
Lower operating costs from reduced tax liability and simpler compliance allow composition scheme businesses to offer competitive pricing. This helps small suppliers compete with larger businesses in local intra-state markets. The scheme protects the interests of small suppliers primarily engaged in local transactions, fostering a sustainable competitive environment.
Important Restrictions
The composition scheme is designed for small, intra-state businesses. The following restrictions apply:
• Composition dealers cannot make interstate sales or engage in import/export transactions
• Input Tax Credit cannot be claimed on any purchases
• Tax invoices cannot be issued; composition dealers issue a bill of supply instead, meaning buyers cannot claim ITC on purchases from them
• Goods cannot be supplied through e-commerce operators that are required to collect TCS
• Annual turnover must remain below Rs. 1.5 crore (Rs. 75 lakh for special category states)
• Certain categories of goods and services are excluded from the composition scheme
Businesses engaged in interstate or import-export transactions must register as regular taxpayers regardless of their turnover.
Regular GST vs Composition Scheme
| Feature | Regular Taxpayer | Composition Scheme |
| Tax rate | Standard GST slabs (5%, 12%, 18%, 28%) | Flat 1% to 6%, depending on category |
| Return frequency | Monthly (GSTR-1, GSTR-3B) | Quarterly |
| ITC availability | Full ITC on eligible purchases | No ITC available |
| Invoice type | Tax invoice (GST charged separately) | Bill of supply (no separate GST) |
| Inter-state supply | Permitted | Not permitted |
| E-commerce supply (with TCS) | Permitted | Not permitted |
| Turnover limit | No upper limit | Rs. 1.5 crore (Rs. 75 lakh for special states) |
Key Terms
• Composition Scheme: Simplified GST registration under Section 10 of the CGST Act for small taxpayers
• Bill of Supply: Document issued by composition dealers in place of a tax invoice, without separately charging GST
• CGST: Central Goods and Services Tax, the central government’s share of GST
• SGST: State Goods and Services Tax, the state government’s share of GST
• Section 10: CGST Act provision establishing the composition scheme framework and eligibility rules
| Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional for advice specific to your situation. |
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Frequently Asked Questions
Q1: What is the GST Composition Scheme?
The Composition Scheme under Section 10 of the CGST Act is a simplified GST framework for small taxpayers with a turnover of up to Rs. 1.5 crore, offering lower tax rates and quarterly filing.
Q2: Who is eligible for the Composition Scheme?
Businesses with an annual turnover below Rs. 1.5 crore (Rs. 5 lakh for special category states) that primarily engage in intra-state supply of goods or services.
Q3: Can composition dealers claim Input Tax Credit?
No. Businesses under the Composition Scheme cannot claim ITC on any purchases. This is a key trade-off for the lower tax rates and simplified compliance.
Q4: Can a composition dealer make interstate sales?
No. The Composition Scheme is restricted to intra-state transactions. Businesses involved in interstate or import-export transactions must register as regular taxpayers.
Q5: What is the difference between a tax invoice and a bill of supply?
A tax invoice charges GST separately and allows the buyer to claim ITC. A bill of supply (issued by composition dealers) does not charge GST separately, and the buyer cannot claim ITC.
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