GST Composition Scheme: Eligibility, Turnover Limit, Tax Rates and Returns (2026 Guide)

If you run a small shop, a manufacturing unit or a non-AC dhaba, the regular GST system can feel heavy: monthly returns, invoice matching, input tax credit claims and constant reconciliation. The composition scheme in GST exists to make that load lighter. You pay a small, flat percentage of your turnover every quarter, file one annual return, and skip most of the paperwork.

But the scheme is not automatically the cheaper option. It comes with restrictions on who you can sell to, how you bill, and whether you can claim input tax credit. This guide explains the rules as they stand for FY 2026-27, shows the maths with real numbers, and helps you decide whether opting in makes sense for your business.

Quick answer: The GST composition scheme lets businesses with aggregate turnover up to ₹1.5 crore (₹75 lakh in certain special category states) pay GST at a flat 1% (traders and manufacturers), 5% (restaurants without alcohol) or 6% (service providers up to ₹50 lakh). In return, they cannot collect GST from customers, cannot claim input tax credit and cannot make inter-state sales.

What Is the Composition Scheme Under GST?

The composition scheme is an optional, simplified way of paying GST under Section 10 of the CGST Act, 2017. Instead of charging GST on each sale and claiming credit on each purchase, an eligible business pays tax as a fixed percentage of its turnover.

Three features define it:

1. Flat-rate tax on turnover, not on the value added at each stage.
2. Quarterly payment and an annual return, instead of monthly GSTR-1 and GSTR-3B filings.
3. No tax collection from buyers. The composition dealer pays the tax from their own margin.

That last point is the one most people miss. Under composition, GST becomes a cost to your business, not a pass-through. This is why it suits businesses selling to final consumers far better than businesses selling to other GST-registered companies.

Composition Scheme Turnover Limit

Eligibility starts with your aggregate turnover in the previous financial year. Aggregate turnover is calculated at the PAN level, which means all GSTINs registered under the same PAN across India are added together.

The 10% services allowance

A composition dealer of goods can also supply some services, such as repair work or delivery, without losing eligibility. The limit is 10% of the previous year's turnover in the state, or ₹5 lakh, whichever is higher.

Example: A hardware shop in Lucknow had a turnover of ₹80 lakh last year. It can provide installation services worth up to ₹8 lakh this year and still stay in the scheme.

What happens if you cross the limit mid-year

The scheme stops applying from the day your aggregate turnover crosses the threshold. You must file Form GST CMP-04 within 7 days to withdraw and move to the regular scheme. From that date, you charge GST at normal rates and file regular returns.

Composition Scheme Tax Rates

The rates are split equally between CGST and SGST.

Traders get a small advantage here. Exempt goods, such as unbranded fresh vegetables, are excluded when calculating their 1% liability.

Reverse charge is extra

Composition dealers must still pay GST under reverse charge (for example, on legal services from an advocate or on goods transport agency services) at the normal applicable rate, not the composition rate. Input tax credit is not available on this either.

Who Is Not Eligible for the Composition Scheme

Even if your turnover is within the limit, you cannot opt for composition if you are:

1. Making inter-state outward supplies. You can buy from other states, but you cannot sell outside your state.
2. A manufacturer of notified goods: ice cream and edible ice, pan masala, tobacco and tobacco substitutes, and aerated water.
3. Supplying services through an e-commerce operator that is required to collect tax at source (TCS).
4. A casual taxable person or a non-resident taxable person.
5. Supplying goods that are not taxable under GST, such as alcoholic liquor for human consumption.
6. Holding multiple GSTINs under one PAN and opting for some of them only. Composition is all-or-nothing at the PAN level. If one registration opts out, all must.

The e-commerce relaxation for goods

Since 1 October 2023, composition dealers can sell goods through e-commerce platforms such as Amazon, Flipkart or Meesho, as long as the sales are intra-state. Selling services through such platforms remains barred.

Composition vs Regular GST Scheme

When composition saves money: a worked example

Assume a kirana store in Indore, selling only to walk-in customers, with these annual figures:

1. Taxable sales: ₹1,00,00,000
2. Taxable purchases: ₹85,00,000 (average GST rate 5%)

Under composition: 1% × ₹1 crore = ₹1,00,000 paid from the shop's margin.

Under the regular scheme (assuming 5% output GST): Output GST ₹5,00,000 − input credit ₹4,25,000 = ₹75,000 net payable, collected from customers.

On paper, the regular scheme looks cheaper here. But the shopkeeper would need to raise tax invoices for every sale, file monthly or quarterly returns, match purchases with GSTR-2B, and possibly hire an accountant. For many small retailers, the compliance savings outweigh the tax difference. Run this comparison with your own margins before deciding.

Composition usually works out better when:

1. Your customers are final consumers who cannot claim credit anyway.
2. Your purchase costs are low compared with sales (such as in a restaurant or services business).
3. You want to keep compliance costs low.

The regular scheme is usually better when:

1. Most of your buyers are GST-registered businesses that want input tax credit.
2. You buy heavily and pay significant GST on inputs.
3. You sell or plan to sell across state lines.

How to Opt for the Composition Scheme

For a new business

Select the composition option while applying for GST registration in Form GST REG-01. The scheme applies from the date of registration.

For an existing GST-registered business

• File Form GST CMP-02 on the GST portal before the start of the financial year you want to switch for. For FY 2027-28, that means by 31 March 2027.
• File Form GST ITC-03 within 60 days of opting in, to reverse the input tax credit on stock, semi-finished goods and capital goods you hold.
• File Form GST CMP-03 within 90 days, giving details of the stock held on the date of switching.

Billing rules after opting in

1. Issue a Bill of Supply, not a tax invoice.
2. Write "composition taxable person, not eligible to collect tax on supplies" at the top of every bill.
3. Display "composition taxable person" on your signboard at the main place of business and each additional place of business.

CMP-08 and GSTR-4 Filing

The GSTR-4 due date was moved from 30 April to 30 June with effect from FY 2024-25. GSTR-4 for FY 2025-26 was therefore due on 30 June 2026, and the return for FY 2026-27 will be due on 30 June 2027.

Late fees and interest

1. Late fee on GSTR-4: ₹50 per day (₹25 CGST + ₹25 SGST), or ₹20 per day for a nil return, subject to the maximum caps notified by CBIC.
2. Interest on late CMP-08 payment: 18% per annum on the tax paid late.

Missing a few quarterly deadlines adds up fast, so set reminders for the 18th of each quarter-end month.

Common Mistakes Composition Dealers Make

Charging GST on the bill. Some dealers keep showing GST on bills out of habit. That is not allowed and can attract penalties. Your price should be inclusive, and the bill should be a Bill of Supply.

Selling one consignment outside the state. A single inter-state sale breaks eligibility. If a customer in a neighbouring state places an order, take it only after moving to the regular scheme.

Ignoring the PAN-level rule. Opening a second branch in another state with its own GSTIN means both registrations count together. Your combined turnover must stay under the limit, and both must stay in the scheme.

Forgetting reverse charge. Rent paid to an unregistered person in some cases, or legal fees, can attract reverse charge. This is payable at full rates, not 1%.

Not tracking turnover monthly. Waiting until year-end to check turnover is risky. If you cross ₹1.5 crore in January and keep billing as a composition dealer, you will owe tax at regular rates from the date of crossing.

Practical Examples

A bakery in Pune (restaurant service, no alcohol): Turnover of ₹90 lakh last year. It qualifies at 5% and pays ₹4.5 lakh tax for the year if turnover stays the same, filing CMP-08 every quarter. Since its customers are individuals, losing input tax credit hurts little.

A freelance graphic designer in Jaipur: Annual billing of ₹40 lakh, mostly to local small businesses. She can opt for the Section 10(2A) scheme at 6%. If most clients are GST-registered companies wanting credit, the regular scheme at 18% might keep her more competitive, because her clients can claim the 18% back.

A textile trader in Surat selling on Flipkart: Turnover of ₹1.2 crore. Allowed under composition only if all online sales are delivered within Gujarat. If he wants national reach, he must stay in the regular scheme.

Is the Composition Scheme Right for You?

Ask yourself four questions:

• Was my aggregate turnover across all GSTINs under ₹1.5 crore (or ₹50 lakh for services) last year?
• Do I sell only within my state, and do I plan to keep it that way?
• Are most of my customers individuals rather than GST-registered businesses?
• Am I comfortable losing input tax credit on my purchases?

If the answer to all four is yes, the composition scheme in GST is likely to reduce your compliance burden and may also reduce your effective tax cost. If any answer is no, compare both options with actual figures before you file CMP-02.

Frequently Asked Questions

1. What is the turnover limit for the composition scheme in GST? ₹1.5 crore of aggregate turnover in the previous financial year for goods suppliers and restaurants, ₹75 lakh in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand, and ₹50 lakh for service providers under Section 10(2A).

2. Can a composition dealer issue a tax invoice? No. A composition dealer issues a Bill of Supply and cannot charge GST to the customer.

3. Can I claim input tax credit under composition? No. Input tax credit is not available for purchases while you are in the composition scheme.

4. Can a composition dealer buy goods from another state? Yes. Inter-state purchases are allowed. Only inter-state sales are prohibited.

5. Can composition dealers sell on Amazon or Flipkart? Since 1 October 2023, yes, for goods supplied within the same state. Services cannot be supplied through e-commerce operators that collect TCS.

6. When is CMP-08 due? On the 18th of the month following each quarter: 18 July, 18 October, 18 January and 18 April.

7. What is the due date of GSTR-4? 30 June following the end of the financial year, applicable from FY 2024-25 onward.

8. Can I leave the composition scheme voluntarily? Yes. File Form GST CMP-04 to withdraw. You then move to the regular scheme and can claim input tax credit on stock held on the day before withdrawal by filing ITC-01 within 30 days.

9. Is the composition scheme available for services? Yes. Since 1 April 2019, service providers and mixed suppliers with turnover up to ₹50 lakh can pay GST at 6% under Section 10(2A).