Composition scheme vs regular GST: which is right for you?
The composition scheme lets small businesses pay a flat tax and file less, but they give up ITC and cannot sell inter-state. Here is how to decide which option suits your business.
Updated 2026-05-30 · A reference guide from Ledgester
Key facts
- The composition scheme is available to businesses with aggregate turnover up to ₹1.5 crore (₹75 lakh in special-category states; ₹50 lakh for service providers).
- Composition dealers pay a flat rate: 1% for manufacturers and traders, 5% for restaurant services, 6% for other services.
- Composition dealers cannot claim Input Tax Credit and cannot charge GST on their invoices.
- Inter-state supply of goods is not allowed under the composition scheme.
What is the composition scheme?
The GST composition scheme is a simplified option for small businesses. Instead of charging GST on each sale and claiming ITC on each purchase, composition dealers pay a fixed percentage of their aggregate turnover as tax, with far less paperwork.
Eligibility and turnover limits
| Category | Turnover limit |
|---|---|
| Manufacturers and traders (goods) | Up to ₹1.5 crore (₹75 lakh in special-category states) |
| Restaurant services | Up to ₹1.5 crore |
| Other service providers | Up to ₹50 lakh |
Turnover is calculated at PAN level across all businesses. If any one business crosses the limit, all linked businesses must exit the scheme.
Tax rates under composition
| Type of business | Composition rate |
|---|---|
| Manufacturers (excluding ice cream, pan masala, tobacco) | 1% of turnover (0.5% CGST + 0.5% SGST) |
| Traders (buying and selling goods) | 1% of turnover |
| Restaurants not serving alcohol | 5% of turnover |
| Other service providers | 6% of turnover (3% CGST + 3% SGST) |
The tax is paid from the dealer's own pocket. It cannot be collected from customers, and no tax invoice can be issued. A Bill of Supply is issued instead.
What you give up under composition
- Input Tax Credit: not available. GST paid on purchases is a cost, not a credit.
- Inter-state supply of goods: not permitted (inter-state services are allowed for service providers).
- Tax invoice: cannot be issued, so your B2B buyers cannot claim ITC, which can make you less attractive to GST-registered customers.
- E-commerce sales: goods cannot be sold through e-commerce operators under composition.
Compliance: returns and payments
Composition dealers file:
- CMP-08: quarterly self-assessment statement with tax payment, due by the 18th of the month following the quarter.
- GSTR-4: annual return due by 30 June of the following financial year.
This is far simpler than the monthly GSTR-1 + GSTR-3B filing cycle for regular taxpayers.
When to choose composition vs regular
| Choose composition if... | Stay regular if... | |
|---|---|---|
| Your buyers | Mostly end consumers (B2C) | Mostly GST-registered businesses (B2B) who need ITC |
| Your purchases | Small relative to turnover | Large, so ITC significantly reduces your net tax |
| Sales geography | Mostly within your state | Inter-state sales are common |
| Compliance burden | Want to minimise filing effort | Fine with monthly returns for the benefits |
Frequently asked questions
- What is the turnover limit for the composition scheme?
- Up to ₹1.5 crore for manufacturers and traders (₹75 lakh in special-category states), and up to ₹50 lakh for service providers other than restaurants.
- Can a composition dealer issue a GST invoice?
- No. Composition dealers cannot issue a tax invoice or collect GST from customers. They issue a Bill of Supply instead.
- Can a composition dealer claim Input Tax Credit?
- No. ITC is not available under the composition scheme. GST paid on all purchases becomes a business cost.
- Can I switch from composition to regular GST?
- Yes. You can voluntarily opt out of the composition scheme at the start of any financial year. You must also opt out if your turnover crosses the threshold.
This guide is general information, not professional tax advice, and GST rules change through CBIC notifications. Verify the current position for your situation or consult a qualified professional before acting.