Composition scheme
What Composition scheme means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionThe composition scheme is a simplified GST option for small businesses with turnover up to ₹1.5 crore (₹50 lakh for services), paying 1% to 6% of turnover with quarterly filing and no input credit.
Under composition, a trader or manufacturer pays 1% of turnover, a restaurant 5% and a service provider 6%, out of their own margin, instead of charging GST to customers. There is no input tax credit, no inter-state sale, and no tax invoice, only a bill of supply. Filing is light: CMP-08 each quarter and GSTR-4 each year by 30 June. You meet the scheme at GST registration or by opting in with CMP-02 before a financial year starts. What it means for you: if your customers are consumers in your own state and your purchases carry little GST, composition saves effort and some money. If you sell to businesses, across states or through marketplaces to other states, it does not work, and you must exit with CMP-04 the day turnover crosses the limit.
How Composition scheme works
The composition scheme trades input credit and interstate trade for a tiny flat tax and almost no paperwork. A manufacturer or trader with aggregate turnover up to ₹1.5 crore (₹75 lakh in the special category States) pays 1% of turnover (0.5% CGST and 0.5% SGST); a restaurant not serving alcohol pays 5%; and under the separate Section 10(2A) scheme a service provider or mixed supplier with turnover up to ₹50 lakh pays 6%.
The conditions are strict. No interstate outward supplies, no sales through an e-commerce platform that collects tax at source, no supply of goods not taxable under GST, no input tax credit, and the words 'composition taxable person, not eligible to collect tax on supplies' on every bill of supply. Tax is paid quarterly on CMP-08 by the 18th of the month after the quarter and the annual return GSTR-4 is filed by 30 June.
The option is exercised on CMP-02 before the financial year begins, or at registration, and lapses the day turnover crosses the limit, from which date regular returns apply. A composition dealer who buys from unregistered suppliers also pays reverse charge like any other registered person.
A Jaipur handicrafts shop with ₹90 lakh of in-State sales opts for composition. It issues bills of supply without tax, pays 1% on each quarter's sales through CMP-08 (₹22,500 on a ₹22.5 lakh quarter) and files GSTR-4 in June. When a Delhi buyer asks for a bulk order, the shop declines to ship interstate; doing so would end its composition status that day.
Mistakes we see with Composition scheme
- Selling on a marketplace that collects TCS, which disqualifies the dealer from the first such sale.
- Collecting GST from customers on a composition bill, which is an offence and the amount must be deposited in any case.
- Staying in composition when most customers are registered businesses who would rather have credit than a 1% price advantage.
Last updated 19 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
Where you will meet this term
Questions founders ask about Composition scheme
Who can opt for the GST composition scheme?
Manufacturers, traders and restaurants with aggregate turnover up to ₹1.5 crore (₹75 lakh in the special category States), and under the separate scheme for services, suppliers with turnover up to ₹50 lakh. Not available for interstate sellers, e-commerce sellers on TCS platforms, or suppliers of ice cream, pan masala and tobacco.
What are the composition tax rates?
1% of turnover for manufacturers and traders (on taxable turnover for traders), 5% for restaurants, and 6% under the services scheme. No input tax credit is available.
What returns does a composition dealer file?
A quarterly statement with payment on CMP-08 by the 18th of the month after each quarter, and the annual return GSTR-4 by 30 June of the following year.