Composition Scheme under GST: A Simple Tax Option for Small Businesses

For many micro and small businesses, complying with GST can feel overwhelming—multiple returns, monthly deadlines, and strict record-keeping. To simplify this, the Government introduced a concessional tax system known as the Composition Scheme. It is designed for small taxpayers who want reduced compliance, lower tax rates, and minimum paperwork. Here’s a complete and updated guide to help you understand whether this scheme is suitable for your business.

1. What is the Composition Scheme?

The Composition Scheme (Section 10 of CGST Act) is a simplified tax option where small businesses pay GST at a fixed percentage of their turnover instead of calculating tax on each outward supply. However, businesses opting for this scheme cannot collect tax from customers and cannot claim input tax credit (ITC).The scheme encourages ease of doing business by reducing administrative burden for small taxpayers.

2. Eligibility Criteria for Composition Scheme

A business can opt for the scheme if it meets all the following conditions:

• Traders
• Manufacturers (other than those dealing in notified goods such as ice cream, pan masala, tobacco)
• Restaurants not serving alcohol

• Not eligible: – Service providers (except restaurants), inter-state suppliers, e-commerce sellers, and casual/non-resident taxpayers.

c. Interstate Restrictions

d. No Supply Through E-Commerce – Businesses cannot supply goods through platforms like Amazon, Flipkart, Meesho, etc.

e. Mandatory Display – Must display “Composition Taxable Person” on signboards and invoices.

3. Composition Scheme for Service Providers: Section 10(2A)

In 2019, GST introduced a Composition-like Scheme for service providers and mixed suppliers:

• Applicable for turnover up to ₹50 lakh.
• Tax rate: 6% (3% CGST + 3% SGST).
• Conditions similar to normal Composition Scheme (no ITC, no tax collection).

This has given relief to small service-based businesses like beauty parlours, consultants, repair services, etc.

Tax Rates Under Composition Scheme

Category	GST Rate
Manufacturers	1% (0.5% CGST + 0.5% SGST)
Traders	1% of turnover of taxable supplies
Restaurants (not serving alcohol)	5% (2.5% + 2.5%)
Service Providers (10(2A))	6% (3% + 3%)

4. Compliance Requirements

Even though the scheme reduces compliance, there are still some essential filings:

1. Quarterly Return – CMP-08 – A simple quarterly statement to declare turnover and pay tax.
2. Annual Return – GSTR-4 – Filed once every year by 30th April for the previous FY.
3. No E-Way Bill Exemption – Composition taxpayers must generate e-way bills when applicable.
4. No Input Tax Credit
   – ITC on purchases cannot be claimed.
   – Buyers also cannot claim ITC on purchases from composition dealers.

5. Benefits of the Composition Scheme

1. Lower Tax Burden – Tax is charged at a small fixed percentage, benefiting low-margin businesses.
2. Lesser Compliance – Quarterly tax payment instead of monthly returns.
3. Simpler Bookkeeping – No complex input/output reconciliation.
4. Competitive Pricing – Since businesses pay lower tax, they can offer better pricing (though they can’t charge GST separately).

6. Limitations of the Composition Scheme

1. No ITC – Your purchase cost may increase if suppliers charge GST.
2. Restricted to Intrastate Supply – Inter-state sales are not allowed, limiting business expansion.
3. Ineligible for E-Commerce Sellers – If you want to sell online, you must move to the regular scheme.

7. How to Opt for the Composition Scheme?

1. File CMP-02 on GST portal before the beginning of the financial year.
2. File CMP-03 to declare stock details within 90 days.
3. For new registrations, select the option at the time of applying for GSTIN.

If turnover exceeds the limit during the year, you must:

• Switch to regular scheme,
• Start charging normal GST,
• File CMP-04 for withdrawal.

8. Who Should Choose the Composition Scheme?

It is ideal for:

1. Local shops, small manufacturers, and traders
2. Businesses operating only within the state
3. Those with limited ITC requirements
4. Small restaurants
5. Small service providers (using Section 10(2A))

However, businesses with high input tax or inter-state expansion plans may find the regular scheme more beneficial.

9. Conclusion

The Composition Scheme is a powerful relief mechanism for small businesses seeking ease of compliance under GST. By offering lower tax rates, minimal paperwork, and simple returns, it helps small entrepreneurs focus on business growth instead of complex tax procedures. However, it comes with certain restrictions—no inter-state supply, no ITC, and no tax collection—so businesses must evaluate whether the benefits align with their operations.

For many micro and local businesses, though, the Composition Scheme continues to be a simple, affordable, and practical tax option under the GST regime