Composition Scheme: The Simpler GST for Small Business

Composition scheme: turnover <= Rs. 1.5 crore, pay 1% (traders) / 5% (restaurants) / 6% (services) flat GST on turnover, file one quarterly return, no input credit, no interstate sales. It is the simplified GST regime for micro-businesses. And it saves compliance cost that often exceeds the tax differential. A kirana store earning Rs. 80 lakh in-state pays 1% composition (Rs. 80k/year) with one quarterly return; regular GST would cost Rs. 80k in compliance fees alone after input-credit tracking.

By the end, you will know if composition suits your business, the eligibility crosses, and the 4 one-way consequences of opting in that most first-time composition dealers forget.

Who qualifies

Aggregate turnover <= Rs. 1.5 Cr (Rs. 75L for specified hill / special-category states).
Intra-state supplies only; no interstate sales. Out-of-state customers = disqualification.
Not a manufacturer of tobacco, ice cream, pan masala, or aerated water.
Not supplying through e-commerce platform (Amazon, Flipkart, Swiggy, Zomato). Restricts majority of modern D2C sellers.

Rates by type

Traders / retailers

0.5% CGST + 0.5% SGST on turnover

Services (from 2019)

Turnover <= Rs. 50L

Restaurant (non-alcoholic): 5%. Manufacturers: 1%. The lowest rate (1% for traders and manufacturers) reflects the policy goal of easing compliance at the bottom of the supply chain without creating meaningful tax leakage.

Four one-way consequences of opting in

Cannot collect GST from customers. Your invoice shows "composition dealer. GST not collected". Customer gets no tax invoice, no input credit from you.
Cannot claim input credit on your business purchases. You pay GST on your inputs but cannot offset it; it becomes a pure cost.
Cannot make interstate supplies. Even a single out-of-state shipment disqualifies you for the entire year.
B2B customers lose input-credit transferability. If your client is GST-registered, they cannot claim input credit from your invoice, making you ~18% more expensive than a regular-GST competitor.

Composition ideally suits B2C micro-businesses with final consumers: corner grocery stores, small restaurants, hair salons, service providers selling directly to retail customers who do not care about GST input credit. For B2B or mixed models, regular GST usually wins despite higher compliance cost.

No input credit + cannot charge GST to customer

Composition dealers cannot collect GST from customers. Invoice shows "composition dealer. GST not collected". Businesses selling to GST-registered buyers lose those buyers (no input credit transferable). Consider this before opting in. It effectively restricts your customer base to B2C.

No input credit + cannot charge GST to customer

Composition dealers cannot collect GST + no input credit on business purchases. Effective cost ~18% higher than regular GST dealer for input-heavy businesses.

The Rs. 75L service threshold

6% composition for services kicks in below Rs. 50L turnover (added 2019). Above Rs. 50L services to regular GST. For freelancers, composition rarely beats regular GST because input-credit on business tools (cloud, subscriptions) adds up.

Opt-out mechanics

Can opt out of composition at beginning of any quarter by filing CMP-04. Regular GST registration then kicks in with full input-credit regime. No lock-in like 44AD income tax; moving composition to regular is straightforward.

Key Takeaways

Composition: 1% traders, 5% restaurants, 6% services.
Turnover cap Rs. 1.5 Cr for traders/manufacturers; Rs. 50L for services.
Intra-state only, no input credit, no interstate sales.
Ideal for B2C micro-businesses with final consumers.
Quarterly CMP-08 + annual GSTR-4. Much simpler than regular GST.