The composition scheme is a simpler way of paying GST for small businesses. In place of charging tax on every bill and claiming credit on every purchase, you pay a small flat percentage of your turnover each quarter and file one short statement. The catch is that you cannot charge GST to customers and you cannot claim input tax credit.
01Who can opt
You can opt if your aggregate turnover in the previous financial year was up to ₹1.5 crore. In Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand, the limit is ₹75 lakh, as of October 2026.
A composition dealer selling goods may also supply some services, up to 10% of the previous year's turnover or ₹5 lakh, whichever is higher.
Businesses that mainly supply services have a separate option: tax at 6% (3% CGST and 3% SGST) on turnover, for those with turnover up to ₹50 lakh.
Who cannot opt
- Anyone making inter-state outward supplies of goods.
- Suppliers of services through e-commerce operators.
- Casual taxable persons and non-resident taxable persons.
- Manufacturers of ice cream, pan masala and tobacco products.
- Anyone supplying goods that are not taxable under GST.
The choice applies to your whole PAN. If one of your GSTINs is under composition, all GSTINs on the same PAN must be.
02Tax rates
| Type of business | Composition tax on turnover in the state |
|---|---|
| Traders | 1% (0.5% CGST + 0.5% SGST) of turnover of taxable supplies |
| Manufacturers | 1% (0.5% CGST + 0.5% SGST) |
| Restaurants not serving alcohol | 5% (2.5% CGST + 2.5% SGST) |
| Service providers under the 6% option | 6% (3% CGST + 3% SGST) |
You pay this from your own money. You cannot add it to the customer's bill.
03A worked example
A hardware shop in Indore sells locks, hinges, screws and fittings to households and local carpenters. Its turnover last year was ₹1,20,00,000.
Under composition, its tax for the year is 1% of ₹1,20,00,000, which is ₹1,20,000, paid in four quarterly instalments of about ₹30,000. It files four CMP-08 statements and one GSTR-4 a year.
As a regular taxpayer, it would charge 18% on most of these goods, claim credit on its purchases and file monthly or quarterly returns. The GST would be collected from customers.
Which works out better depends on who the customers are. Households cannot claim credit, so for them the composition dealer's price can be lower. Carpenters and contractors who are registered want a tax invoice so they can claim credit, and a composition dealer cannot give them one. If a large share of your buyers are registered businesses, composition usually costs you sales.
04Checking the numbers before you opt
Take a shop that sells only to households, buys goods worth ₹1,00,00,000 a year with ₹18,00,000 of GST on them, and wants to keep a margin of ₹20,00,000.
| Regular scheme | Composition scheme | |
|---|---|---|
| Cost of goods | ₹1,00,00,000, with ₹18,00,000 GST claimed as credit | ₹1,18,00,000, as GST paid becomes cost |
| Price charged to customers in the year | ₹1,20,00,000 plus ₹21,60,000 GST | About ₹1,39,39,400, with no GST shown |
| Tax paid by the shop | ₹3,60,000 in cash after credit | About ₹1,39,400 at 1% of turnover |
| What customers pay in total | ₹1,41,60,000 | About ₹1,39,39,400 |
On the same margin, the composition shop's customers pay about ₹2.2 lakh less across the year, roughly 1.6%. That gap is the case for composition in consumer trade. It disappears once registered buyers who want credit make up a real share of sales.
05Returns and payments
| Form | What it is | Due |
|---|---|---|
| CMP-08 | Quarterly statement and payment of composition tax | 18th of the month after the quarter |
| GSTR-4 | Annual return | 30 June after the financial year |
For example, CMP-08 for July to September 2026 is due on 18 October 2026. GSTR-4 for 2025-26 was due on 30 June 2026.
06Rules you must follow
- Bill of supply only
- Each bill carries the words "COMPOSITION TAXABLE PERSON, NOT ELIGIBLE TO COLLECT TAX ON SUPPLIES" at the top. See the bill of supply guide.
- Signboard
- The words "composition taxable person" must be displayed at your place of business.
- No input tax credit
- GST paid on purchases becomes part of your cost.
- Reverse charge still applies
- If you buy something on which the buyer pays tax under reverse charge, you pay it at the normal rate.
07Opting in and out
An existing registered person opts in by filing CMP-02 on the GST portal before the start of the financial year. A new business can choose composition when it applies for registration.
To leave voluntarily, you file CMP-04. The option also lapses on the day your turnover crosses the limit during the year. You then file CMP-04 within seven days and issue tax invoices from that day. When you leave, you can claim credit on stock in hand on that day, subject to the rules, by filing ITC-01 within 30 days.
08How the choice changes as you grow
A small tiffin service or a village kirana with mostly consumer sales often does well under composition. A Morbi tile trader whose buyers are contractors and builders usually does not, because the buyer loses the credit. And once a business plans to sell to other states, composition is closed to it.
09Records a composition dealer still keeps
Composition is simpler, but records still matter. Keep purchase bills, bills of supply in a series, a stock register and the quarterly turnover working for CMP-08. GSTR-4 asks for purchase details for the year, so a year's bills in one place saves time in June.
This guide is general information as of October 2026 and does not amount to tax advice.