Composition Scheme
Under GST
The Composition Scheme is GST’s biggest relief for small businesses and service providers — pay less tax, file fewer returns, and skip the ITC complexity. Here’s everything you need to know.
Watch Day 16 — Composition Scheme Under GST
What is the Composition Scheme?
The Composition Scheme is a simplified GST compliance option designed for small businesses and service providers (w.e.f. Notification 2/2019-CT dated 7.3.19). Instead of the regular GST regime with its monthly returns, invoice-level matching, and ITC complications — composition dealers pay a flat rate on turnover and file minimal returns.
Who Can Opt? — Turnover Limits
Any registered person whose aggregate turnover in the preceding financial year (PFY) did not exceed the prescribed limits can opt for the Composition Scheme. There is no turnover limit for opting in the current year — only the PFY turnover is checked.
| Category | Turnover Limit (Aggregate PFY) | Eligible For |
|---|---|---|
| Manufacturers & Traders (Goods) | ₹ 1.5 Crore | Composition Scheme for Goods |
| Service Providers | ₹ 50 Lakh | Composition Scheme for Services (NIN 2/2019-CT) |
| NE States & Uttarakhand | ₹ 75 Lakh | Special limit for North-Eastern States & Uttarakhand |
📌 Must Be a Registered Person
Only a registered GST person can opt for the Composition Scheme. New registrants can opt at the time of registration itself. The dealer must display “Composition Taxable Person” prominently at their place of business and on every Bill of Supply.
Eligibility Conditions
Opting for Composition Scheme comes with a clear list of what’s allowed and what’s not. Violating any condition leads to cancellation of the scheme and penalties.
Can only make supplies within the same state
Cannot make inter-state supplies or exports
Cannot supply through e-commerce operators (e.g. Amazon, Flipkart)
Tax is paid from own pocket — not recovered from customer
Cannot claim ITC on purchases — biggest trade-off of the scheme
Must issue Bill of Supply instead of a Tax Invoice
Correct document to issue to customers — clearly marked “Composition Taxable Person”
Must be displayed at every place of business and on all Bills of Supply
Tax Rates — Composition Scheme
The tax under Composition Scheme is paid as a percentage of turnover. CGST and SGST are equal — so the total rate is double the individual rate. No IGST is charged since only intra-state supplies are allowed.
| Category | CGST | SGST | Total Rate |
|---|---|---|---|
| Manufacturer / Trader (Goods) | 0.5% | 0.5% | 1% |
| Trader (Goods only) | 0.5% | 0.5% | 1% |
| Restaurant Services (Food) | 2.5% | 2.5% | 5% |
| Other Service Providers | 3% | 3% | 6% |
⚡ Key Rate Points
- Tax is on turnover (total sales), not on profit or value-added
- Composition dealers pay tax from their own pocket — they cannot charge it to customers
- Rates for manufacturers and traders (goods) are the same: 1% total
- Restaurant services: 5% total | Other services: 6% total
Returns & Compliance
One of the biggest advantages of the Composition Scheme is the dramatically reduced compliance burden. Regular taxpayers file GSTR-1 + GSTR-3B monthly — composition dealers file just two forms per year.
- Filed 4 times a year (once per quarter)
- Due by 18th of the month following the quarter
- Contains: self-assessed tax liability on outward supplies
- This is a challan-cum-statement — both return and payment
- Filed once a year
- Due by 30th April of the following financial year (or extended date)
- Consolidated annual summary of all transactions
- Exempt suppliers under Composition: option to file or be exempt
📊 Compliance Comparison
- Regular Taxpayer: GSTR-1 (monthly) + GSTR-3B (monthly) = 24 returns/year
- Composition Dealer: CMP-08 (quarterly ×4) + GSTR-4 (annual ×1) = 5 forms/year
- That’s a ~80% reduction in compliance filings!
If Conditions are Violated
If a composition dealer violates any condition of the scheme, the GST department initiates proceedings. The process is structured and gives the dealer an opportunity to respond before any order is passed.
by Dealer
Show Cause Notice
via CMP-05
CMP-07
Order by Officer
In case of Deny →
Stock Summary
+ Penalty
On wrongly opted period
🔴 Violation Consequences — Step by Step
- SCN (Show Cause Notice) via CMP-05: Department issues notice to the dealer explaining the violation
- PO → Reasons: Proper Officer records reasons — typically that dealer wrongly opted for the scheme
- CMP-07 (Accept/Deny): Officer passes order — if accepted by dealer, scheme is regularised; if denied, proceedings continue
- ITC-01: In case of denial/cancellation — dealer files ITC-01 with stock summary to claim transition ITC on closing stock
- Pay Tax + Penalty: Dealer must pay the differential tax (difference between regular GST and composition tax already paid) plus applicable penalty for the period of violation
Master Summary — Exam Ready
🎯 Composition Scheme — Quick-Fire Points
- Who: Small businesses + Service Providers (NIN 2/2019-CT, w.e.f. 7.3.19)
- Limits: ₹1.5 Cr (Goods) | ₹50 L (Services) | ₹75 L (NE States / Uttarakhand)
- Check year: Preceding Financial Year (PFY) turnover — no limit in current year
- Must be: Registered person | Only intra-state | Issue Bill of Supply | Display “Composition Taxable Person”
- Cannot: Inter-state / export | E-commerce | Collect GST from buyer | Claim ITC | Issue Tax Invoice
- Rates: Mfr/Trader 1% | Restaurant 5% | Other Services 6% (CGST + SGST equal split)
- Returns: CMP-08 quarterly (by 18th of next month) | GSTR-4 annual (by 30th April)
- Violation: SCN (CMP-05) → CMP-07 order → ITC-01 + Stock Summary → Pay tax + penalty
💡 Composition vs Regular — When to Choose?
- Choose Composition if: mostly B2C sales, small turnover, no significant ITC on purchases, want simplicity
- Choose Regular if: B2B sales (customers need ITC), significant input purchases (ITC benefit outweighs compliance), inter-state sales, or using e-commerce platforms
