GST Composition Scheme: Rules, Rate & Benefits

The GST Composition Scheme is a simplified tax scheme under the Goods and Services Tax (GST) regime in India, designed to reduce the compliance burden for small taxpayers. It allows eligible businesses to pay tax at a fixed rate on their turnover instead of the regular GST rates and file quarterly returns instead of monthly ones.

If you are looking for a hassle-free way to stay GST-compliant, this scheme could be the perfect fit. Let’s explore the rules, rates, and key benefits.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax payment method introduced under the Goods and Services Tax (GST) law. It is specially designed for small taxpayers to reduce the burden of GST compliance.

Businesses under this scheme can pay GST at a fixed percentage of their turnover, instead of filing detailed GST returns every month and calculating tax on every sale and purchase. This can help us save time, effort, and reduce paperwork.

Under this scheme:

• Taxpayers with an annual turnover up to Rs 1.5 crore can apply. This can vary in some states, which will be a turnover of Rs 75 lakh.
• They can pay tax at a lower rate compared to regular taxpayers.
• They are required to file quarterly returns instead of monthly ones.
• Businesses under this scheme cannot collect GST from their customers, as the tax is paid out of their pocket.
• Only applicable to intra-state supplies (no inter-state supply allowed).

This scheme is beneficial for small traders, manufacturers, and service providers who want to focus on their business without worrying too much about complex tax procedures.

Who Cannot Opt for the GST Composition Scheme?

While the GST Composition Scheme offers an easier way to pay taxes, not everyone is allowed to choose this scheme. The law mentions certain types of taxpayers who cannot opt for it:

• Manufacturers of specific goods like ice cream, pan masala, and tobacco products are not eligible.
• You cannot apply if you are involved in the interstate supply of goods.
• Those making exempt supplies (goods or services that are not taxed under GST) are also not allowed.
• Casual taxable persons (who occasionally supply goods or services in a different state) and non-resident taxable persons are excluded.
• Anyone who sells services through an e-commerce platform that collects Tax Collected at Source (TCS) under Section 52 of the CGST Act cannot apply.
• If the Government notifies certain goods or services (based on the GST Council's recommendation), manufacturers or suppliers of those will also be restricted from opting into the scheme.

So, if your business falls under any of these categories, you will need to follow the regular GST rules instead of the Composition Scheme.

What are the Conditions for Availing the GST Composition Scheme?

To use the GST Composition Scheme, a taxpayer must follow a few important conditions set by the government.

1. No Input Tax Credit (ITC):

A taxpayer under this scheme cannot claim ITC on the GST paid on purchases.

2. Restricted Goods:

You cannot sell items that are not taxable under GST, like alcohol for human consumption.

3. Reverse Charge Tax:

If you make purchases that fall under the Reverse Charge Mechanism, you need to pay tax at regular GST rates, even if you are under the composition scheme.

4. Multiple Businesses under One PAN:

If you run more than one business, like selling clothes, electronics, or groceries under the same PAN, you must either register all of them under the scheme or none at all.

5. Business Display Requirement:

You must display the words “composition taxable person” on every bill of supply issued to customers.

6. Supply of Services:

As per an amendment effective from 1^st February 2019, a manufacturer or trader under this scheme can also offer services, but only up to 10% of their total turnover or Rs.5 lakh, whichever is higher.

These rules help ensure the proper and transparent use of the Composition Scheme, which makes GST compliance easier for small taxpayers.

How Can a Taxpayer Opt for the Composition Scheme?

If a taxpayer wants to choose the GST Composition Scheme, they must follow a simple online process. This option needs to be selected at the beginning of every financial year. Here is how you can do it:

1. Login to the GST Portal:

Visit the official GST portal and log in using your valid credentials.

2. Go to the Application:

After you log in, go to ‘Services’ > ‘Registration’ > ‘Application to Opt for Composition Levy (Form CMP-02)’.

3. Fill and Submit Form CMP-02:

Fill out the CMP-02 form carefully with the required details. Make sure all the information is accurate.

4. Declaration:

Tick the declaration confirming that you meet all the eligibility conditions for the scheme.

5. Submit with DSC or EVC:

Submit the form using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

6. Acknowledgement:

Once submitted, an acknowledgement will be generated, which confirms that your application has been received.

Note: This process must be completed before the start of the financial year if you want to avail the scheme for that year.

How Should a Composition Dealer Raise a Bill?

A composition dealer under GST is not allowed to issue tax invoices because they cannot collect GST from their customers. Instead, they have to pay the tax to the government.

So, instead of a tax invoice, a composition dealer must issue a Bill of Supply.

Here are the key things that a composition dealer must follow while raising a bill:

• The dealer must issue a Bill of Supply for every sale.
• The bill should not include any tax amount, as the dealer cannot charge GST to customers.
• At the top of the bill, the following sentence must be mentioned. “Composition taxable person, not eligible to collect tax on supplies.”

This format helps customers to understand that the seller is under the Composition Scheme and is not collecting GST on the sale.

GST Rates under the GST Composition Scheme

Under the GST Composition Scheme, taxpayers pay tax at a fixed rate on their turnover, which makes compliance easier for small businesses. The applicable tax rate depends on the type of business activity.

Here are the current GST rates for composition dealers

Applicable Tax Rates (as of FY 2025):

According to the notification dated 01.01.2018, in the case of traders, the term “turnover” refers only to the turnover of taxable supplies of goods. These fixed rates make it simpler for small businesses to manage taxes without dealing with complex input credit calculations.

How Does a Composition Dealer Pay GST?

A composition dealer is not allowed to collect GST from customers. Instead, they have to pay the tax themselves from their own funds.

The following elements are included in a composition dealer's GST payment:

1. GST on Own Sales:

The dealer must pay GST on the total turnover at the fixed rate prescribed under the composition scheme.

2. Tax under Reverse Charge Mechanism (RCM):

If the dealer receives certain goods or services where GST is applicable under reverse charge, they need to pay the tax accordingly.

3. Purchases from Unregistered Dealers (If Applicable):

As per the rules effective from 1st February 2019, tax on purchases from unregistered dealers is applicable only for specific categories of goods, services, and notified classes of registered persons.

Since the government has not yet notified these categories, this condition is not applicable.

So, in summary, composition dealers must pay GST from their pocket for their sales and apply taxes under reverse charge wherever required.

Returns to be Filed by a Composition Dealer under GST

A composition dealer is a small taxpayer who opts for the Composition Scheme under GST to reduce compliance and tax burden. This scheme is designed for businesses with an annual turnover up to a specified limit.

Here are the returns that a composition dealer needs to file:

1. CMP-08 – Quarterly Statement

Form CMP-08 is used by composition dealers to declare a summary of self-assessed tax payable for a quarter. It must be filed by the 18th of the month after each quarter, along with the due tax payment.

GSTR-4 – Annual Return

Introduced from the financial year 2019–20, GSTR-4 is an annual return filed by composition dealers summarizing all outward supplies, tax paid, and related details for the entire year. It must be submitted by 30th April following the end of the financial year.

2. GSTR-9A – Annual Return (Not Applicable Now)

GSTR-9A, once applicable to composition dealers, was waived off for FY 2017–18 and FY 2019–20. As per recent updates, composition taxpayers are no longer required to file this form. Composition dealers do not need to maintain detailed records like regular taxpayers. They cannot claim the input tax credit (ITC).

Advantages of the Composition Scheme under GST

The Composition Scheme is a simple and stress-free tax option designed especially for small businesses with limited turnover. It helps ease the burden of GST compliance while it offers a range of benefits that make a business run smoother.

Let’s take a closer look at why this scheme is a smart choice for small business owners:

1. Less Compliance to Worry About

One of the biggest advantages of the GST Composition Scheme is the reduced paperwork, as businesses are only required to file a quarterly payment statement (CMP-08) and an annual return (GSTR-4). Unlike regular taxpayers, they are not obligated to maintain detailed books of accounts or issue invoices with separate GST components, which significantly simplifies compliance and saves both time and effort.

2. Lower Tax Rates

Businesses opting for the Composition Scheme pay GST at a fixed, reduced rate based on their category—such as 1% for traders and 5% for restaurants. Hence the tax system makes the overall tax burden lighter and easier to manage.

3. Better Cash Flow

Lower tax means more money stays in your hands. That translates to improved liquidity and gives you more freedom to manage daily operations, pay vendors, or invest back into your business.

4. Simpler Business Operations

With less compliance and easier processes, business owners can spend more time on what matters, growing their business. This scheme is ideal for local shops, service providers, and other small businesses that want to stay focused without getting tangled in tax complications.

5. Cost-Effective

No need to spend big on accountants or tax consultants.
Since the compliance is straightforward, many small businesses can handle it themselves or with minimal help, they can cut down on professional fees.

6. Transparent and Stable Pricing

Under this scheme, you don’t charge GST separately on your invoices.
That means the prices of your goods or services stay steady and predictable, which your customers are likely to appreciate.

7. Peace of Mind

Fewer returns, fewer chances of mistakes, and fewer worries.
With minimal paperwork and easy rules, the risk of penalties or notices is greatly reduced, which gives you some much-needed peace of mind.

Conclusion

The GST Composition Scheme is a great option for small businesses that are looking to reduce tax hassles. With lower tax rates, simple returns, and minimal compliance, it lets you focus more on your business and less on paperwork.

Online Legal India offers quick and reliable support for GSTR-4 filing and full GST compliance. We have experts who can assist you throughout the process. Focus on your business, we will handle the rest with our assistance. Visit Online Legal India today.