Meaning and Objective of the Scheme

Under the Goods and Services Tax law the GST Composition Scheme operates as a streamlined taxation system for business owners. It is aimed at small businesses that want relief from the complex GST filing process. Instead of paying tax at regular GST rates and claiming input tax credit (ITC), eligible businesses under this scheme pay a lower, fixed percentage of their turnover.

This scheme exists to lighten the regulatory obligations faced by small trading businesses and production operators and service companies. Under the regular GST system, a registered taxpayer must maintain detailed records, issue tax invoices, and file monthly returns. This is often time-consuming and requires professional assistance. With the composition scheme, businesses can pay tax quarterly and file just one annual return, saving time, effort, and money.

Who Introduced It and Why?

According to Section 10 of the CGST Act 2017 the Composition Scheme exists. The Indian Government established the Composition Scheme together with the GST Council for the purpose of helping small-scale taxpayers. The registration threshold under GST became lower through this initiative to lower the burden of compliance for informal businesses while bringing them under GST regulations.

The government intended to simplify taxes while expanding the number of taxpayers through fewer regulations to encourage voluntary compliance without straining small business compliance requirements.

Key Benefits for Small Businesses

• Cheaper Tax Rates:
  Compared to conventional GST rates, businesses pay tax at a flat rate, which is substantially cheaper.
  
  
• Easy Compliance:
  Fewer returns and simple documentation requirements reduce the need for tax professionals.
  
  
• Better Cash Flow:
  Since ITC is not claimed, businesses don’t have to wait for tax refunds.
  
  
• Predictability:
  Fixed-rate taxation allows for more predictable financial planning.
  
  
• Encouragement for Formalization:
  Helps informal sector businesses to become a part of the formal economy.

Who Can Opt for the GST Composition Scheme?

Eligibility Criteria Under Section 10 of the CGST Act

• Registered under GST
  
  
• The company’s total sales last year should stay under the specified amount:
  • ₹ 1.5 crore for most states
  • ₹ 75 lakh for special category states
    
    
• The taxpayer cannot operate between different states while selling products or services.
  
  
• The taxpayer needs to avoid selling products through online marketplaces.

Categories of Taxpayers Allowed

• Manufacturers (except those producing notified goods such as tobacco, pan masala, ice cream)
  
  
• Traders and retailers dealing in goods
  
  
• Restaurants that do not serve alcohol
  
  
• Small service companies that generate up to ₹ 50 lakh in revenue annually

Ineligibility – Who Cannot Opt?

• Businesses engaged in inter-state supplies
  
  
• E-commerce sellers (e.g., Amazon, Flipkart vendors)
  
  
• The manufacturing sector of notified products such as ice cream and tobacco companies
  
  
• Non-resident taxable persons and casual taxable persons
  
  
• Businesses supplying exempt goods or zero-rated supplies (exports)

Important Forms for Small Businesses under the GST Composition Scheme

Businesses and individuals who joined the composition system are required to fill out different forms for various activities under the current GST legislation. The designated forms enable members to perform activities such as scheme entry and exit as well as stock information sharing and notice response. The correct understanding of each form’s functions enables businesses to maintain compliance while effectively handling their GST duties.

The following table presents all essential forms associated with GST composition scheme operations:

Composition Scheme Limit and Turnover Thresholds: Updated for 2025

Latest Turnover Limit for Goods and Services

The current GST Composition Scheme thresholds stand at this level until 2025:

• ₹ 1.5 crore for goods and manufacturing businesses
  
  
• ₹ 75 lakh for specified hill and North-Eastern states
  
  
• ₹ 50 lakh for service providers under the special scheme

These limits are based on aggregate turnover, which includes taxable, exempt, inter-state, and export supplies (excluding reverse charge transactions).

Separate Limits for States and Union Territories

• Special category states (Arunachal Pradesh, Meghalaya, Mizoram, Sikkim): ₹ 75 lakh limit
  
  
• Union Territories (Delhi, Chandigarh, Puducherry): ₹ 1.5 crore limit

Businesses must carefully check their state-specific rules before applying.

What Happens If You Cross the Limit?

• The taxpayer must migrate to the regular GST system.
  
  
• Start issuing tax invoices instead of bills of supply.
  
  
• File monthly returns and become eligible for ITC.
  
  
• Submit GST CMP-04 notifications to tax authorities.
  
  
• Update records on the GST portal and notify customers.

Tax Rates Under the GST Composition Scheme

Composition Rates for Manufacturers, Traders, and Restaurants

This scheme lets businesses pay a lower, fixed GST rate:

• Manufacturers: 1% of turnover (0.5% CGST + 0.5% SGST) 
  
  
• Traders: 1% of taxable turnover
  
  
• Restaurants (non-alcoholic): 5% (2.5% CGST + 2.5% SGST)

Rates for Service Providers (As per Recent Amendments)

Service companies can use the composition scheme when their annual revenue stays under ₹ 50 lakh. The applicable rate is:

• 6% (3% CGST + 3% SGST) on total turnover. This was introduced via Notification No. 2/2019 to bring more service providers into the fold.

How Rates Are Calculated and Paid?

• The tax amount depends on total business revenue during the quarter.
  
  
• Paid through Form CMP-08
  
  
• The company does not need to charge GST from its customers.
  
  
• The business needs to submit its combined tax report through GSTR-4 annually.

Guidelines and Requirements for Compliance Under the Composition Scheme

Filing Returns – CMP-08 and GSTR-4

• CMP-08: A quarterly statement of self-assessed tax payment
  
  
• GSTR-4: An annual return with a consolidated summary of quarterly filings
  
  
• Monthly GSTR-1 or GSTR-3B filings are not required.
  
  
• Payment of tax must be made even if there is no business activity.

No ITC and Invoice Restrictions

• Cannot collect GST from customers
  
  
• Cannot claim Input Tax Credit (ITC)
  
  
• Must supply customers with a Bill of Supply instead of regular tax invoices
  
  
• Cannot show GST amount separately in invoices

Display of “Composition Taxpayer” on Business Boards

• The law mandates displaying the phrase “Composition Taxpayer” prominently at all business premises
  
  
• Must also be printed on all bills of supply
  
  
• This helps maintain transparency with customers and tax authorities

Pros and Cons of the Composition Scheme

Advantages for Small Businesses

• Reduces tax liability due to fixed lower rates
  
  
• Simplified documentation and return filing
  
  
• No need for ITC matching and reconciliation
  
  
• Frees up time and resources to focus on business operations

Disadvantages You Must Consider

• Ineligibility for ITC can increase input costs
  
  
• The business cannot grow beyond its local area through inter-state or nationwide sales
  
  
• Cannot issue GST invoices, which may affect B2B relationships
  
  
• Not suitable for rapidly growing businesses

Comparison with the Regular GST Scheme

Particulars	Composition Scheme	Regular GST Scheme
Tax Rates	1% to 6%	5% to 28%
Return Filing	Quarterly + Annual	Monthly + Annual
ITC	Not Available	Available
Invoicing	Bill of Supply	Tax Invoice
Suitable For	Local traders, small businesses	Medium to large businesses
Inter-State Supply	Not Allowed	Allowed

How to Register for the Composition Scheme?
Step-by-Step Online Registration Process

• Step 1: Visit the GST Portal
  Go to https://www.gst.gov.in and log in using your GSTIN and password.
  
  For more information refer to: GST registration process , Additional Requirement
  
  
• Step 2: Navigate to the Registration Section
  Once logged in, select Services from the main menu and open the Registration section to find the Application to Opt for Composition Levy option. 
  
• Step 3: Provide the Necessary Data
  You will be directed to a form where you must select the relevant financial year and tick the required declarations regarding eligibility.
  
  
• Step 4: Submit the Application
  Submit the application using a Digital Signature Certificate (DSC) or an Electronic Verification Code (EVC).
  
  
• Step 5: For New Registrants
  If you are applying for GST registration for the first time, select the Composition Scheme option in the GST REG-01 form.
  
  
• Step 6: Acknowledgment Receipt
  After submission, you will receive an acknowledgment with an Application Reference Number (ARN).
  
  
• Step 7: Approval by Department
  The GST officer will verify the application. If all details are correct, approval will be granted. 
  
  Also Visit: Online GST Registration

Important Documents Required

• PAN Card
  
  
• Aadhaar Card
  
  
• Business Address Proof
  
  
• Bank Account Details
  
  
• Photographs of proprietor or partners

Switching Back to the Regular Scheme – How & When?

• File Form CMP-04
  
  
• Update business records
  
  
• Start issuing tax invoices
  
  
• Start filing monthly returns (GSTR-1, GSTR-3B)
  
  
• Ensure compliance from the date of switch

Common Mistakes to Avoid Under Composition Scheme

Charging GST on Invoices

• Composition taxpayers do not have permission to include GST in their sales receipts.
  
  
• Issuing tax invoices is prohibited.
  
  
• Can lead to penalties and disqualification.

Dealing in Inter-State Supplies

• The scheme does not permit moving goods between states.
  
  
• Businesses often make this mistake unknowingly.
  
  
• Misusing composition scheme privileges results in automatic exclusion from the program.

Not Updating Turnover Details

• Failing to track turnover accurately may result in non-compliance.
  
  
• If you cross the limit and do not switch, you may face heavy penalties.

Latest Amendments and Notifications on the Composition Scheme

• GST Council clarified service provider limit as ₹ 50 lakh.
  
  
• Introduced easier filing mechanism for GSTR-4.
  
  
• Mandated improved visibility for turnover slabs.

Impact on Different Business Sectors

• Positive impact on local businesses like kirana stores, medical shops, small restaurants. 
  
  
• Brings parity between small product-based and service-based firms.
  
  
• Enables small-scale freelancers and professionals to join the tax net.

Future Outlook and Upcoming Changes

• Likely increase in turnover limits for inflation adjustment.
  
  
• Possibility of limited e-commerce access for composition taxpayers.
  
  
• AI-based monitoring may be introduced for improved compliance.

FAQs

1. What is composition scheme under GST?
   This tax system helps small companies by setting a set tax rate and uses fewer requirements.
   
   
2. What is composition scheme limit under GST rate?
   The limit is ₹ 1.5 crore for goods and ₹ 50 lakh for services.
   
   
3. What separates composition tax from standard GST?
   Composition scheme offers low tax and simple filing, while regular GST involves full compliance and ITC.
   
   
4. Who is eligible for GST composition scheme?
   Small traders, manufacturers, and service providers within turnover limits.
   
   
5. What sales amount qualifies companies for GST composition scheme tax rates?
   ₹ 1.5 crore for most states, ₹ 75 lakh for special category states.
   
   
6. What amount of income qualifies as a composition service?
   ₹ 50 lakh per year for small service providers.
   
   
7. How much business income does a service provider need to reach before GST applies?
   It is ₹ 50 lakh for availing the special composition scheme. 
   
   
8. Do service providers qualify for GST composition scheme?
   Yes, it was extended to service providers via Notification 2/2019. 
   
   
9. Which provider services need to collect GST payments? 
   GST is applicable if turnover exceeds ₹ 20 lakh (₹ 10 lakh in NE states).
   
   
10. What is the accurate threshold amount needs to be registered under GST? For goods: ₹ 40 lakh; for services: ₹ 20 lakh (varies by state).