GST Composition Scheme — Eligibility, Rates & Benefits (2026)

What Is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax compliance option designed for small taxpayers under the Goods and Services Tax framework. Instead of filing monthly returns and charging GST on every invoice, composition dealers pay a fixed percentage of their turnover as tax and file only quarterly returns.

This scheme was introduced to reduce the compliance burden on small businesses. Under the regular GST regime, businesses must maintain detailed records of every invoice, file GSTR-1 and GSTR-3B every month, and manage Input Tax Credit (ITC) reconciliation. The composition scheme eliminates most of this complexity.

However, composition dealers cannot charge GST on their invoices, cannot claim ITC on their purchases, and cannot make inter-state supplies. Understanding these trade-offs is essential before opting for the scheme.

Eligibility and Turnover Limits

The composition scheme is available to businesses with aggregate annual turnover up to the prescribed limit:

Special states: For Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand, the turnover limit is Rs 75 Lakh instead of Rs 1.5 Crore.

Aggregate turnover includes the turnover of all businesses registered under the same PAN, across all states. It is calculated on an all-India basis, not state-wise.

Who Cannot Opt for Composition Scheme?

The following businesses are not eligible for the composition scheme even if their turnover is below the limit:

• Inter-state suppliers: Businesses making inter-state supplies of goods cannot opt for composition. All sales must be within the state (intra-state).
• E-commerce sellers: Suppliers who sell through e-commerce operators (Amazon, Flipkart, etc.) are not eligible.
• Manufacturers of certain goods: Manufacturers of ice cream, pan masala, tobacco, and aerated water are excluded.
• Casual taxable persons: Those with temporary GST registration for exhibitions, fairs, etc. cannot opt for composition.
• Non-resident taxable persons: Foreign businesses with temporary GST registration in India are excluded.
• Input Service Distributors (ISD): Businesses registered as ISD cannot be composition dealers.

Important: Service providers were initially excluded from the composition scheme. The option for service providers (with turnover up to Rs 50 lakh) was introduced in April 2019 under Section 10(2A) with a 6% tax rate.

Return Filing Under Composition Scheme

One of the biggest advantages of the composition scheme is the simplified return filing process:

Quarterly Statement: CMP-08

Composition dealers must file a self-assessed quarterly statement in Form CMP-08 by the 18th of the month following each quarter. This statement declares the turnover and tax payable for the quarter. It is a simple one-page form.

Annual Return: GSTR-4

In addition to the quarterly CMP-08, composition dealers must file an annual return in GSTR-4 by 30th April of the following financial year. GSTR-4 summarizes the entire year's transactions including inward supplies, outward supplies, tax paid, and any amendments.

Comparison with regular GST filing: Regular taxpayers file 25+ returns per year (12 GSTR-1 + 12 GSTR-3B + GSTR-9). Composition dealers file only 5 returns per year (4 CMP-08 + 1 GSTR-4) — an 80% reduction in compliance burden.

Advantages and Disadvantages

Advantages

• Lower tax rate: Pay only 1% (manufacturers/traders) or 5% (restaurants) instead of the applicable GST rate (5%/12%/18%/28%).
• Simplified compliance: Only 5 returns per year instead of 25+. No need to maintain detailed invoice-wise records for GST purposes.
• No need to issue tax invoices: Composition dealers issue "Bill of Supply" instead of tax invoices. No GST is shown separately on invoices.
• Lower accounting costs: Reduced need for GST-specific accounting software and CA/tax professional fees.
• Cash flow advantage: Pay tax quarterly instead of monthly, improving working capital management.

Disadvantages

• No ITC: Composition dealers cannot claim Input Tax Credit on their purchases. This means the GST paid on raw materials, inventory, and expenses is a cost, not a credit.
• No inter-state supply: Cannot sell goods or services outside the state. This limits business growth for companies with multi-state customers.
• Cannot collect GST: Must not charge GST on invoices. Business buyers (B2B) cannot claim ITC on purchases from composition dealers, making you less attractive as a supplier.
• No e-commerce sales: Cannot sell through online marketplaces like Amazon, Flipkart, or Swiggy.
• Tax on full turnover: Tax is calculated on total turnover, not on profit or value addition. Even if margins are thin, the full turnover is taxed.

How to Opt In or Out of Composition Scheme

You can opt for the composition scheme at the beginning of a financial year or at the time of new GST registration:

Opting In

1. Log in to the GST Portal (gst.gov.in) and navigate to Services > Registration > Application to Opt for Composition Levy.
2. File Form GST CMP-02 before 31st March of the preceding financial year (for opting from the next FY).
3. File ITC-03 within 60 days of opting in, declaring the reversal of ITC on stock, inputs, and capital goods held on the date of opting in.
4. Start issuing Bill of Supply instead of tax invoices from the effective date.

Opting Out

1. File Form GST CMP-04 to withdraw from the composition scheme.
2. You become eligible to claim ITC on stock and inputs held on the date of withdrawal.
3. Start issuing regular tax invoices and filing monthly GSTR-1 and GSTR-3B.

Automatic exit: If your turnover exceeds the prescribed limit during a financial year, you must exit the composition scheme within 7 days and switch to regular GST compliance for the remaining period.