GST Composition Scheme: Eligibility, Tax Rates, Limits, Benefits and Restrictions
Manish Sahu
GST Compliance & Accounting Specialist
GST Composition Scheme: Eligibility, Tax Rates, Limits, Benefits and Restrictions
The GST Composition Scheme is a simplified compliance option for eligible small businesses. Instead of calculating GST separately on every taxable sale, a taxpayer pays tax at a prescribed rate based mainly on turnover and follows simpler return procedures.
The scheme can reduce compliance work, but it also has important restrictions. A composition taxpayer generally cannot collect GST from customers, cannot claim regular input tax credit and cannot issue a normal tax invoice. This guide explains the eligibility rules, rates, benefits and limitations of the GST Composition Scheme.
What is the GST Composition Scheme?
The GST Composition Scheme is provided under Section 10 of the Central Goods and Services Tax Act. It is designed for eligible small taxpayers who want a simpler method of paying GST and maintaining compliance.
A taxpayer choosing this scheme pays tax at the rate applicable to the type of business. The taxpayer generally issues a bill of supply instead of a tax invoice and must mention that tax cannot be collected from the recipient.
Turnover limit for the scheme
For many businesses supplying goods, the general annual turnover limit for opting for composition is ₹1.5 crore. A lower limit may apply in certain special-category States.
A separate composition option is available for eligible service providers and mixed suppliers, generally up to an annual turnover of ₹50 lakh, subject to the conditions and rate prescribed for that option.
Turnover limits and State-wise applicability are governed by the CGST Act, notifications and applicable rules. Businesses should confirm the current limit before selecting the scheme.
Who can opt for the GST Composition Scheme?
Subject to the prescribed conditions, the scheme may be available to:
Small traders
Manufacturers of eligible goods
Restaurants that do not serve alcohol from the permitted category
Eligible service providers under the separate service composition option
Businesses making eligible intra-State supplies
The option is not granted automatically. The taxpayer must satisfy the legal conditions and apply through the GST Portal in the prescribed manner.
Who cannot choose the scheme?
The following categories are generally excluded or restricted:
Inter-State outward suppliers, subject to specific statutory exceptions
Casual taxable persons
Non-resident taxable persons
Persons supplying non-eligible goods or services under notified restrictions
Manufacturers of certain notified goods
Persons dealing in supplies on which tax is not payable under the normal GST mechanism
Persons who are not eligible under the conditions of Section 10 and the applicable rules
A business should review its complete supply pattern before opting in. Selling one restricted product or making an ineligible supply can affect eligibility.
Composition tax rates
The rate depends on the category of taxpayer and the applicable notification. Commonly used rates include:
Business category | Commonly applied rate |
|---|---|
Traders and eligible manufacturers | 1% of turnover in the State or Union Territory |
Eligible restaurants | 5% of turnover in the State or Union Territory |
Eligible service providers under the separate option | 6% of turnover, subject to the prescribed conditions |
These rates are a general summary. The taxpayer should verify the current notification, business category and calculation method before preparing a return.
Main benefits of the scheme
Reduced return-filing complexity
Simpler calculation of tax liability
Lower record-keeping burden for eligible small businesses
More predictable tax calculation based on turnover
Less detailed invoice-level reporting than regular taxpayers
The scheme may be useful where customers do not require input tax credit and the business mainly makes eligible intra-State supplies.
Important restrictions
A composition taxpayer cannot collect GST separately from the customer. The tax paid under the scheme is normally a business cost and should be included in the selling price.
The taxpayer also cannot claim regular input tax credit on purchases. GST paid to suppliers, on rent, services or other business expenses cannot normally be used as ITC while the taxpayer remains under composition.
A composition taxpayer cannot issue a regular tax invoice. Instead, the taxpayer issues a bill of supply containing the prescribed particulars and the required composition declaration.
How to opt for the scheme
Log in to the official GST Portal.
Open the registration or services section applicable to opting for composition.
Review the eligibility conditions and declarations.
Submit the prescribed option form electronically.
Update billing records and accounting software after approval or effective selection.
Issue bills of supply instead of normal tax invoices.
Existing registered taxpayers generally opt in from the beginning of a financial year within the prescribed time. A new applicant may select the option during registration if eligible.
Returns and payment under composition
Composition taxpayers generally pay tax through the prescribed quarterly statement and file the annual return applicable to the scheme. The GST Portal displays the forms and periods applicable to the taxpayer.
Turnover should be calculated carefully, including the supplies required under the law. Keep sales summaries, purchase records, bills of supply, payment challans and annual return workings for future verification.
Example of composition tax
Suppose an eligible trader has turnover of ₹20,00,000 in a State during a quarter and the applicable composition rate is 1%. The composition tax calculated on that turnover would be ₹20,000, subject to the applicable rules and adjustments.
The trader cannot show this amount separately as GST on the customer’s bill and cannot claim regular ITC on purchases during the composition period.
Switching from composition to regular GST
A taxpayer may need to leave the scheme when turnover crosses the prescribed limit, an eligibility condition is no longer satisfied or the taxpayer voluntarily chooses regular GST.
After moving to regular registration, the taxpayer may issue tax invoices, collect GST and claim eligible ITC subject to the law. The change should be reflected in the GST Portal, billing system, invoice series and accounting records.
Common mistakes to avoid
Collecting GST separately from customers
Issuing a tax invoice instead of a bill of supply
Claiming ITC while under composition
Making restricted inter-State supplies
Ignoring turnover from all businesses under the same PAN
Using the wrong composition rate
Failing to change invoice wording after leaving the scheme
Missing quarterly payment or annual return requirements
Conclusion
The GST Composition Scheme can make GST compliance easier for eligible small businesses, but it is not suitable for every taxpayer. Before choosing it, compare the benefits of simpler compliance with the restrictions on ITC, tax collection, invoice type and inter-State supplies.
Always confirm the latest rules, limits and rates through the official GST Portal, CBIC notifications and the applicable provisions of the CGST Act.