The GST composition scheme lets a small business pay a flat 1% of turnover (5% for restaurants, 6% for service providers) instead of regular GST, if its turnover last year was within the composition scheme limit of ₹1.5 crore, or ₹50 lakh for service providers. This guide covers whether the switch actually saves money, how eligibility is measured, the CMP-02 process and what happens if you outgrow the scheme. To use composition for 2027-28, an existing taxpayer must file FORM GST CMP-02 on or before 31 March 2027.
Is the composition scheme worth it for your business?
Composition usually suits businesses that sell mainly to consumers and pay modest GST on their purchases. It rarely suits businesses selling to other GST-registered businesses, because a composition dealer issues a bill of supply with no tax on it, so the buyer has no input tax credit to claim.
The trade-off comes from section 10(4) of the CGST Act: a composition taxpayer cannot collect tax from customers and cannot claim input tax credit. Two costs therefore come out of your margin: the composition tax itself and the GST you pay on purchases. Under the regular scheme, GST is added to the customer's bill and the GST on purchases comes back as credit. The right comparison is at the price your customers will actually pay.
Worked example: composition vs regular GST at the same shelf price
At the same shelf price, composition is cheaper only while the GST on your purchases stays below the GST hidden inside your selling price minus the 1% composition tax. For a shop selling 18% goods, the break-even comes when purchases (before GST) reach roughly 79% of sales.
Example. A made-up shop in Nashik had turnover of ₹1,20,00,000 last year, sells goods taxed at 18% and buys ₹90,00,000 of stock a year plus 18% GST. The checker shows composition tax of ₹1,20,000, GST on purchases you cannot claim back of ₹16,20,000, and regular GST of ₹5,40,000 after input tax credit (₹21,60,000 on sales less ₹16,20,000).
Those figures are not directly comparable, because regular GST is added to the customer's bill. Suppose instead that customers pay ₹1,20,00,000 in total either way:
| At a shelf price of ₹1,20,00,000 | Regular GST | Composition |
|---|---|---|
| Stock bought, including GST | ₹1,06,20,000 | ₹1,06,20,000 |
| Tax paid to the government | ₹2,10,508 (₹18,30,508 output GST less ₹16,20,000 credit) | ₹1,20,000 |
| Margin left | ₹11,69,492 | ₹12,60,000 |
Composition leaves ₹90,508 more. If purchases rose to about ₹95 lakh, the two would break even, and above that regular GST is cheaper. If most of your buyers are registered businesses, add the credit they lose, which usually tips the answer to regular GST.
How is composition scheme eligibility measured?
Eligibility depends on your aggregate turnover in the preceding financial year: all-India turnover under your PAN, excluding GST. Interest income on deposits, loans or advances is left out (section 10, Explanation 1). The limit is ₹1.5 crore under section 10(1), ₹75 lakh in eight special category states, and ₹50 lakh under section 10(2A) for service providers.
A business on the main scheme may also supply services, other than restaurant service, up to 10% of its turnover in the state last year or ₹5 lakh, whichever is higher. The allowance grows with turnover, which produces a counter-intuitive result:
Example. A made-up hardware dealer with ₹80 lakh turnover last year, all in one state, and ₹7 lakh of repair services stays within its ₹8 lakh allowance and pays 1%, or ₹80,000. A smaller dealer with ₹30 lakh turnover and the same ₹7 lakh of services exceeds its ₹5 lakh allowance, so the checker moves it to section 10(2A) at 6%, or ₹1,80,000.
Buying goods from other states is allowed. Section 10(2)(c) bars only inter-state outward supplies. Since 1 October 2023 you can also sell goods within your state through an e-commerce operator that collects tax at source; selling services that way still rules out composition (section 10(2)(d)).
How to opt in with CMP-02, and what it costs in credit
An existing registered person files FORM GST CMP-02 before the financial year starts, and composition applies from 1 April (rules 3(3) and 4(1) of the CGST Rules). Within 60 days of the year starting, it files FORM GST ITC-03 and pays back the input tax credit on stock and capital goods it holds.
- Check eligibility for every GSTIN under your PAN. An intimation for one place of business counts for all registrations on the same PAN (rule 3(5)).
- File CMP-02 on the GST portal by 31 March for the next financial year.
- File ITC-03 within 60 days of 1 April. Under section 18(4), you repay credit on inputs in stock, semi-finished and finished goods, and capital goods (reduced by prescribed percentage points), and any balance left in your credit ledger lapses.
- From 1 April, issue bills of supply with the words "composition taxable person, not eligible to collect tax on supplies" and display "composition taxable person" on your signboards (rule 5(1)).
You do not refile CMP-02 every year (rule 5(2)). A new applicant chooses composition in Part B of FORM GST REG-01 instead, effective from the date of registration (rules 3(2) and 4(2)).
What happens if your turnover crosses the limit during the year?
The option lapses on the day your aggregate turnover for the year exceeds the limit (section 10(3)). From that day you pay regular GST and issue tax invoices, and you must file FORM GST CMP-04 within 7 days (rule 6(2)).
Example. If a composition trader's turnover for 2026-27 crosses ₹1.5 crore on 20 January 2027, regular GST applies from 20 January 2027 and CMP-04 is due by 27 January 2027.
You can then claim credit on inputs and goods in stock and capital goods held the day before (section 18(1)(c)) by filing FORM GST ITC-01 within 30 days (rule 6(6)). From then on you file GSTR-1 and GSTR-3B; check the new dates in the GST return due date calendar. You can also leave voluntarily by filing CMP-04 before the date of withdrawal (rule 6(3)).
Composition returns, payments and penalties
A composition taxpayer files CMP-08 every quarter by the 18th of the following month and GSTR-4 once a year by 30 June. CMP-08 is mandatory even when nothing is payable, the tax is paid only in cash, and there is no late fee for it, though interest at 18% a year runs on late tax.
- Reverse charge still applies. You pay GST at normal rates on purchases taxed under reverse charge (rule 5(1)(d)).
- GSTR-4 late fee. ₹25 a day under CGST and ₹25 under SGST, capped at ₹1,000 under each Act; for a nil return, ₹10 a day under each, capped at ₹250 under each. The GST late fee calculator works out your figure.
- Wrongly using the scheme. If you were not eligible, you pay the regular tax plus a penalty, decided under section 73, 74 or 74A (section 10(5)). The officer starts with a notice in FORM GST CMP-05.
What changed in 2025 and 2026, and what is only proposed
The composition limits and rates are unchanged as of October 2026; neither the 56th nor the 57th GST Council release changed them. The GSTR-4 due date of 30 June first applied to the 2024-25 return, due 30 June 2025 (Notification 12/2024-Central Tax). The 56th Council's rate changes from 22 September 2025 affect only the regular-scheme side of your comparison.
The 57th GST Council on 8 October 2026 approved in principle a concept note for an optional Annual Return Quarterly Payment (ARQP) scheme for businesses with turnover up to ₹5 crore that sell only to unregistered buyers. It is an in-principle approval of a concept, not law. Until it is notified, the composition scheme and regular returns apply as described here.
Common mistakes with the composition scheme
Most composition problems come from switching without running the numbers, or from missing the paperwork at the switch points: CMP-02 and ITC-03 when you join, CMP-04 and ITC-01 when you leave.
- Switching while most sales are to GST-registered businesses.
- Forgetting the ITC-03 reversal, which can be a large one-time cost for a stock-heavy business.
- Charging GST on a bill of supply. Section 10(4) bars collecting tax.
- Missing CMP-04 after crossing the limit and carrying on with bills of supply when tax invoices are due (rule 6(2)).
- Not checking a supplier's taxpayer type. A composition supplier's bill carries no credit. Check the number with the GSTIN validator, then see the taxpayer type on the GST portal's Search Taxpayer page.
How Ofin Legal can help
If you are not yet registered, the GST registration checker tells you whether you must register, and Ofin Legal can file your GST registration with the composition option from ₹1,499. If you are registered, our professional accounting team can run the comparison on your real figures, file CMP-02 and ITC-03, and keep CMP-08 and GSTR-4 on schedule.
