The GST Composition Scheme: Who It Suits, and Who It Traps
Short answer: The GST composition scheme suits businesses that sell to consumers within one state, such as local retailers, restaurants and small workshops. It is usually a mistake for a business that sells to GST-registered buyers, because a composition dealer cannot pass on input tax credit, cannot sell to other states, and cannot sell through marketplaces that collect TCS.
Key takeaways
- The rate is broadly 1% of turnover for traders and manufacturers, 5% for restaurants not serving alcohol, and 6% under the separate scheme for service providers.
- Tax is paid quarterly through CMP-08, with a single annual return in GSTR-4.
- You cannot claim input tax credit, and your customers cannot claim credit on what they buy from you.
- Inter-state sales and selling through e-commerce operators that collect TCS are not allowed.
- The turnover limit is broadly ₹1.5 crore for goods and ₹50 lakh for the service providers' scheme, and you opt in at the start of a financial year.
The composition scheme offers a lower rate of tax and far less filing. It is genuinely good for the right business and genuinely damaging for the wrong one, and the difference comes down to a single question: who buys from you?
What You Get
- A low rate on turnover: broadly 1% for traders and manufacturers, and 5% for restaurants not serving alcohol. A separate scheme for service providers runs at 6%.
- Quarterly payment through CMP-08 and a single annual return in GSTR-4, instead of a monthly filing cycle.
- Far less record-keeping than a regular registration demands.
What You Give Up
This is the part that gets skimmed:
- You cannot claim input tax credit. The GST you pay on purchases becomes a cost, not a credit.
- Your customers cannot claim credit either. You issue a bill of supply, not a tax invoice, and there is no tax on it for them to reclaim.
- No inter-state outward supplies. You can sell within your state only.
- No selling through e-commerce operators that collect TCS. That rules out the major marketplaces.
Side by side, the two options look like this:
| What changes | Composition scheme | Regular registration |
|---|---|---|
| Tax you pay | 1%, 5% or 6% of turnover, depending on the business | Tax charged on each invoice, which registered customers reclaim |
| Filing | Quarterly payment in CMP-08 and one annual return in GSTR-4 | A monthly filing cycle |
| Input tax credit on your purchases | Not available | Available |
| What you issue | A bill of supply, with no tax for the customer to reclaim | A tax invoice, which gives the customer credit |
| Sales to other states | Not allowed | Allowed |
| Selling through marketplaces that collect TCS | Not allowed | Allowed |
The Eligibility Limits
Broadly, turnover up to ₹1.5 crore for goods, lower in some special category states, and ₹50 lakh for the service providers' scheme. You also have to opt in at the start of the financial year rather than switching mid-stream.
The Test That Actually Decides It
Ask what your customers do with your invoice.
Sell to consumers? The scheme is often excellent. A neighbourhood retailer, a local restaurant, a small workshop selling to walk-in customers, none of their buyers care about input tax credit, so giving it up costs nothing and the lower rate is real money.
Sell to businesses? It is usually a mistake. A GST-registered buyer comparing two suppliers will prefer the one whose invoice gives them credit. You are effectively asking them to absorb tax they could otherwise reclaim, so you have to be cheaper by roughly the tax amount just to stay level.
A Worked Comparison
You are a trader with ₹80 lakh turnover selling to registered businesses. Under composition you pay 1%, so ₹80,000, and cannot pass on any credit. Under a regular registration you charge tax your customers reclaim in full, and you recover credit on your own purchases.
The composition figure looks smaller in isolation. Once your customers price in the credit they lose, it usually is not.
Where People Get Caught
The most common trap is growth. A business joins the scheme selling locally, then wins a customer in the next state or lists on a marketplace, and discovers it is not allowed to do either without leaving the scheme first.
Not sure which side you fall on? Talk to a GST expert and we'll work it through against your actual customer mix.
Official sources
The rules, rates and deadlines described here are set by the government and do change. This is where they are officially published:
- GST Acts, rules and notifications, Central Board of Indirect Taxes and Customs (CBIC)
- GST Portal, Goods and Services Tax Network (GSTN)
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