GST Composition Scheme — simplified tax for small businesses

What is the GST Composition Scheme?

The GST Composition Scheme (also called the Composition Levy) is an optional, simplified tax scheme available to small businesses under Section 10 of the CGST Act 2017. Instead of maintaining detailed transaction-wise records and filing returns every month, a composition dealer pays GST at a fixed, low rate on total turnover and files only a minimal set of returns.

The scheme is designed to reduce the compliance burden on small manufacturers, traders, and restaurants who find the regular GST framework cumbersome and costly. The trade-off is that composition dealers operate under several restrictions that do not apply to regular taxpayers.

Eligibility and turnover limits

The main eligibility conditions are:

• The business must be registered under GST as a supplier of goods (manufacturer or trader), or as a restaurant service provider.
• Aggregate annual turnover in the preceding financial year must not exceed the prescribed threshold.
• The business must operate within a single state (no inter-state outward supplies).
• The business must not be engaged in supplying goods not leviable to GST, making inter-state outward supplies, or supplying through an e-commerce operator collecting TCS.

The service-provider variant (introduced via Central Tax (Rate) Notification 2/2019) extends a composition-like benefit to small service businesses (excluding those supplying certain notified services). The rate of 6% applies to total turnover.

Key restrictions on composition dealers

Opting into the Composition Scheme comes with significant restrictions. Before opting in, ensure none of these are deal-breakers for your business:

1. No Input Tax Credit

A composition dealer cannot claim ITC on any purchases — raw materials, capital goods, or services. The GST paid on inputs becomes a cost. For businesses with high input costs and large ITC entitlements, this can make the composition scheme more expensive overall than the regular scheme. See our Input Tax Credit guide to understand how much ITC you might be forfeiting.

2. No inter-state outward supplies (goods)

Composition dealers dealing in goods cannot make outward inter-state supplies. If you sell to customers in other states, you must register as a regular taxpayer. Note: inter-state purchases are permitted.

3. Bill of Supply, not a Tax Invoice

A composition dealer cannot charge GST separately from the customer and therefore cannot issue a tax invoice. They must issue a Bill of Supply instead, which must bear the words "Composition taxable person, not eligible to collect tax on supplies." This means their B2B customers cannot claim ITC on purchases from a composition dealer — a significant deterrent for business-to-business sales.

4. No supply of non-taxable goods

A business that supplies any goods exempted from GST cannot opt for the composition scheme for its taxable supplies. The scheme applies to the business as a whole, not supply by supply.

Returns and compliance under the Composition Scheme

The reduced filing requirement is one of the scheme's biggest advantages:

Compare this to regular taxpayers who must file GSTR-1 (monthly or quarterly) plus GSTR-3B (monthly), adding up to 24 returns per year. Composition dealers file CMP-08 four times and GSTR-4 once — just 5 filings per year.

How to opt into the Composition Scheme

1. File Form CMP-02 on the GST portal (Services → Registration → Application to opt for Composition Levy). This must be done at the beginning of the financial year (before the start of the year you wish to be treated as a composition dealer).
2. File ITC-3 within 60 days of opting in, declaring the ITC on stock held as on the date of opting in. This ITC is reversed and added to the output tax liability.
3. Stop issuing tax invoices and switch to Bills of Supply for all outward supplies from the date of opting in.
4. Display the composition status prominently at your place of business and on your Bills of Supply.

When should you opt for the Composition Scheme?

The Composition Scheme makes most sense if:

• Your turnover is well within the threshold and is likely to stay there.
• Your customers are primarily end consumers (B2C), who do not need to claim ITC from you.
• You have low input costs relative to sales (so the loss of ITC is small).
• You operate in a single state with no plans to sell inter-state.
• You want to reduce paperwork and accounting costs.

Conversely, if most of your buyers are registered businesses who need ITC, you have significant purchase costs, or you are growing quickly towards the ₹1.5 crore threshold, the regular scheme is likely more advantageous.

Billing for composition dealers

Since composition dealers issue Bills of Supply rather than tax invoices, your billing software must support both document types. BillRaja generates correctly labelled Bills of Supply for composition dealers and tax invoices for regular taxpayers, and automatically tracks quarterly turnover to help you stay within the scheme's limits. Use the GST calculator to model whether the composition rate results in lower tax than the standard rate before you decide to opt in.