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GST · Registration & returnsGST composition scheme vs regular scheme: tax calculation compared
The composition scheme lets small businesses pay GST at a low flat rate with quarterly payments and an annual return – but without input tax credit and with several restrictions. Here is a clear comparison with the regular scheme and a worked calculation.
The composition scheme (Section 10 of the CGST Act) is an optional simplified scheme for small businesses. Instead of charging GST on each invoice and claiming input tax credit, a composition taxpayer pays a small percentage of turnover from its own pocket.
Eligibility and rates
| Category | Turnover limit (previous year) | Rate (CGST + SGST) |
|---|---|---|
| Manufacturers (other than notified items) | ₹1.5 crore | 1% |
| Traders | ₹1.5 crore | 1% of turnover of taxable supplies |
| Restaurants (not serving alcohol) | ₹1.5 crore | 5% |
| Service providers / mixed suppliers (Notification 2/2019) | ₹50 lakh | 6% |
Who cannot opt
- Suppliers making inter-State outward supplies;
- Non-resident and casual taxable persons;
- Manufacturers of ice cream, pan masala, tobacco and certain other notified goods;
- Suppliers of services (except restaurants) above the ₹50 lakh option;
- Persons supplying exempt-from-composition goods/services as notified.
Compliance
| Composition | Regular | |
|---|---|---|
| Invoice | Bill of supply (no tax charged), with "composition taxable person" | Tax invoice with GST |
| Payment | Quarterly in CMP-08 by the 18th after the quarter | Monthly / quarterly (QRMP) via GSTR-3B |
| Returns | GSTR-4 annual by 30 June (from FY 2024-25) | GSTR-1, GSTR-3B, GSTR-9 |
| ITC | Not available | Available |
| Reverse charge | Pay at normal rates; no ITC | Pay and claim ITC |
| Signboard | "Composition taxable person" displayed | — |
Worked example: trader
Example: Sapna sells household goods in Pitampura to retail customers. Annual turnover ₹1.2 crore (all taxable at 18%), purchases ₹1 crore + GST (ITC ₹18 lakh). Her customers are consumers (B2C).
| Composition | Regular | |
|---|---|---|
| Output tax | 1% × ₹1.2 crore = ₹1,20,000 (paid from own pocket) | 18% × ₹1.2 crore = ₹21,60,000 (collected from customers) |
| ITC | Not available | ₹18,00,000 |
| Net cash GST | ₹1,20,000 | ₹3,60,000 |
| Price to customer | Purchase cost includes ₹18 lakh GST, which becomes cost | Price + 18% GST |
Under composition, the ₹18 lakh GST on purchases becomes cost. Her effective tax burden on value added (₹20 lakh before GST) is: regular – ₹3.6 lakh (18% of value added, passed on to customers); composition – ₹1.2 lakh + ₹18 lakh embedded in cost. Since she sells to consumers who cannot claim ITC anyway, and prices in her market are MRP-based, composition reduces paperwork but may not reduce total cost. The decision depends on margins, customer type and competition.
Worked example: service provider
Example: A tuition centre (non-exempt coaching) in Rohini earns ₹40 lakh a year, with few inputs. Under the 6% composition option, GST = ₹2,40,000. Under regular, GST at 18% = ₹7,20,000 charged to students, with minimal ITC. For a B2C service business with low inputs, composition at 6% can significantly reduce the price burden on customers.
When composition makes sense
- Customers are consumers, not businesses needing ITC.
- Supplies are within the State.
- Inputs are small or mostly from unregistered suppliers.
- You want quarterly payment and annual return only.
When regular is better
- B2B customers who want ITC.
- Inter-State sales or exports.
- High-value inputs with ITC.
- Turnover likely to cross ₹1.5 crore soon.
Opting in and out
- Opt in by CMP-02 before 1 April of the year (and ITC-03 to reverse ITC on stock).
- Opt out anytime by CMP-04; you become a regular taxpayer and can claim ITC on stock (ITC-01) within 30 days.
- Crossing ₹1.5 crore during the year ends eligibility from that day.
Common mistakes
- Charging GST on bills while under composition.
- Making even one inter-State sale.
- Not paying RCM on purchases from unregistered persons where applicable.
- Missing GSTR-4 by 30 June (late fee).
Key takeaway
Composition suits small, local, B2C businesses with low inputs; the regular scheme suits B2B, inter-State and input-heavy businesses. Compare both with actual figures. Our GST team helps small businesses in Delhi choose the right scheme each year.
Official references
Provisions discussed (summaries in our Law Library):
- CGST Act, 2017 – Section 10: Composition levy
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the turnover limit for the composition scheme?
Aggregate turnover up to ₹1.5 crore in the previous year (₹75 lakh in certain special category States). For service providers under the separate composition option, the limit is ₹50 lakh.
What are the composition tax rates?
1% of turnover for manufacturers and traders (on taxable supplies for traders), 5% for restaurants not serving alcohol, and 6% for service providers under the ₹50 lakh option.
Can a composition dealer claim input tax credit?
No. Composition taxpayers cannot claim ITC and cannot collect GST from customers. They issue a bill of supply.
When must I opt for composition?
By filing CMP-02 before the start of the financial year (by 31 March). New registrants can opt at the time of registration.
Can a composition dealer sell to other States?
No. Inter-State outward supplies of goods are not allowed under composition. Intra-State sales through e-commerce operators are allowed since October 2023.
Can a composition dealer purchase from other States?
Yes. Inward inter-State purchases are allowed; only outward inter-State supplies are barred.
Is composition tax payable on exempt supplies?
For traders, composition tax is on turnover of taxable supplies only. Manufacturers and restaurants pay on total turnover as specified.
What happens if turnover crosses ₹1.5 crore during the year?
Composition eligibility ends from the day turnover crosses the limit; file CMP-04 within 7 days and switch to regular returns.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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