GST composition scheme: limits, rates, and when it is worth it

A goods supplier in the scheme may also supply services up to 10 percent of the previous year’s turnover in the state or ₹5 lakh, whichever is higher. Turnover is counted on the PAN across India, and every registration under the same PAN must opt in together.

• Anyone making inter-state outward supplies of goods or services. Inter-state purchases are allowed.
• Manufacturers of ice cream, pan masala, tobacco and tobacco substitutes, aerated waters, and fly ash and clay bricks and tiles.
• Casual taxable persons and non-resident taxable persons.
• Suppliers of services through an e-commerce operator that collects tax at source. Suppliers of goods through such operators have been allowed since October 2023.
• Anyone supplying goods that are not taxable under GST, such as alcohol for human consumption.

No input tax credit. GST paid on purchases, rent and equipment becomes a cost. Opting in also means reversing the credit held on stock and capital goods on the day you switch, through Form ITC-03.

No tax invoice. You issue a bill of supply, marked as issued by a composition taxable person, and cannot charge GST to the customer; the tax comes out of your margin. Your business customers get no credit on what they buy from you, which is why they prefer regular suppliers.

Reverse charge still applies at the normal rates, on items such as goods transport and legal services. Since January 2025 composition taxpayers are, however, kept outside the reverse charge on commercial rent paid to an unregistered landlord.

A signboard. The words “composition taxable person” must be displayed at the place of business.

New businesses choose the scheme in the registration application itself. Late CMP-08 attracts interest at 18 percent; a late GSTR-4 attracts a late fee of ₹50 a day, capped at ₹2,000, and ₹500 where no tax is due.

Take a trader with ₹80 lakh of sales of goods taxed at 18 percent, bought for ₹64 lakh plus GST. As a regular taxpayer selling to consumers at a tax-inclusive price, his output tax is about ₹12.2 lakh and his credit ₹11.5 lakh, so he pays roughly ₹70,000 in cash and files 25 returns. Under composition he pays 1 percent of ₹80 lakh, ₹80,000, but loses ₹11.5 lakh of credit, which is now part of his cost. Composition only wins if he can hold his selling price while no longer adding 18 percent on top, which works where customers are consumers comparing shelf prices and margins are healthy, and fails where margins are thin.

The scheme suits: neighbourhood retailers, small restaurants, and small manufacturers selling to the public, with low taxed inputs and local sales. It does not suit: anyone selling to GST-registered businesses, anyone selling across state lines or planning to, exporters, and businesses with heavy taxed inputs or capital expenditure.

Crossing the limit mid-year moves you to the regular scheme from that day, with credit available on the stock then held. Our GST registration service models both options before you choose, and return filing covers CMP-08 and GSTR-4.