GST Composition Levy: Eligibility, Rates, ITC Limits and Trade-Offs

Summary: The Composition Levy under GST is designed to simplify tax compliance for eligible small taxpayers, but the reduced compliance burden involves important economic and commercial trade-offs. Governed principally by Section 10 of the CGST Act, 2017 and the CGST Rules, the scheme allows qualifying taxpayers to discharge GST at prescribed composition rates subject to turnover thresholds and restrictions concerning the nature and territorial scope of supplies. The notified threshold is generally ₹1.5 crore, with a ₹75 lakh threshold for specified States, while Section 10(2A) provides a separate route for certain taxpayers with aggregate turnover up to ₹50 lakh. The principal economic limitation is the denial of ordinary input tax credit, which can cause GST paid on inputs to become an embedded business cost and may affect B2B competitiveness. Composition taxpayers must also continuously monitor eligibility rather than treating entry into the scheme as a one-time exercise. Legislative and procedural reforms have nevertheless reduced some restrictions. The Finance Act, 2023 enabled eligible composition taxpayers to supply goods through specified electronic commerce operators, while subsequent changes extended the GSTR-4 filing deadline. The scheme therefore presents a continuing policy balance between simplified compliance, input-tax neutrality and the ability of small businesses to expand across markets and distribution channels.

Composition Levy under GST: Simplification or Economic Trade-Off

1. Introduction

When Goods and Services Tax (GST) entered India’s indirect tax landscape, one of its most practical challenges was not simply bringing multiple indirect taxes under a common framework, but making that framework workable for businesses operating at very different scales. A large corporation may have dedicated tax professionals and sophisticated accounting systems; a small trader, manufacturer, restaurant or service provider may not.

The Composition Levy provides an alternative mechanism under which eligible taxpayers can discharge their GST liability at prescribed rates, subject to specified conditions and restrictions. The attraction of the scheme lies in its relative simplicity. But that simplicity is not cost-free.

The economic significance of this trade-off becomes clearer when the scheme is viewed through an actual transaction. Consider a small trader purchasing inventory for ₹10 lakh and paying GST on that purchase. Under the regular GST mechanism, eligible input tax may ordinarily form part of the ITC chain. A composition taxpayer, however, cannot use that mechanism to offset the tax embedded in its inputs.

The relevant question is not only “How much tax is payable?”, but also “What happens to the tax paid on inputs, the selling price, the margin and the customer’s ability to claim credit?” The composition scheme is therefore as much a question of supply-chain economics as it is of tax compliance.

How the Composition Levy came into being?

The origin of the Composition Levy in India can be traced to the pre-GST regime, where several States had already adopted composition and turnover-tax mechanisms for small dealers under their respective sales-tax and VAT laws. The GST Council’s deliberations preceding the introduction of GST specifically examined these existing State-level arrangements, including their turnover thresholds, eligibility conditions, treatment of inter-State purchases and sales, input-tax-credit restrictions and sector-specific coverage.

The 23rd GST Council meeting is particularly instructive, as States were required to furnish details of their prevailing composition practices, including regimes popularly described as “TOT (Turnover Tax) dealers” in certain jurisdictions. The present Composition Levy thus represents an evolution and consolidation of an existing Indian small-taxpayer mechanism within the unified GST framework, rather than the direct adoption of a single foreign model.

2. Statutory Framework of the Composition Levy

The statutory framework of the Composition Levy is primarily contained in Section 10 of the Central Goods and Services Tax Act, 2017 (“CGST Act”), read with the corresponding provisions of the State Goods and Services Tax Acts and Union Territory GST legislation and the relevant provisions of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”). Section 10 establishes the substantive conditions for entering and remaining within the Composition Levy, while the Rules provide the procedural machinery through which the option is exercised, administered and withdrawn.

Section 10(1)

Section 10(1): permits an eligible registered person to opt for payment of tax under the Composition Levy in lieu of tax payable under the normal charging provision in Section 9(1). The provision is subject to the conditions and restrictions prescribed under the Act and the Rules. The Act contains a basic turnover ceiling of ₹50 lakh and empowers the Government, on the recommendation of the GST Council, to increase that ceiling up to ₹1.5 crore.

The operative threshold for most States and Union Territories was raised to ₹1.5 crore with effect from 1 April 2019 through Notification No. 14/2019-Central Tax, while a threshold of ₹75 lakh was prescribed for Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

Illustration: Sharma Textiles, a small apparel retailer with aggregate turnover of ₹1.20 crore in the preceding financial year. Assuming it is registered in a State where the ₹1.5 crore threshold applies, Sharma Textiles satisfies the turnover condition for consideration of the scheme. That fact does not, however, establish final eligibility. The taxpayer must still satisfy the restrictions imposed by Section 10(2), the relevant provisions of the Rules and the other statutory conditions.

Section 10(1) Second Proviso

Section 10(1) Second Proviso: The second proviso to Section 10(1) permits a taxpayer opting under the provision to supply specified services, other than the restaurant services covered by paragraph 6(b) of Schedule II, up to 10% of the turnover in the State or Union Territory in the preceding financial year or ₹5 lakh, whichever is higher. The provision also excludes certain exempt interest or discount-based financial services from the turnover calculation for this limited purpose.

Illustration: Assume Sharama Textile preceding-year turnover in the State was ₹80 lakh. Ten per cent of that amount is ₹8 lakh; because that figure is higher than ₹5 lakh, qualifying services up to ₹8 lakh may be supplied within the statutory ceiling. If the preceding-year turnover were ₹30 lakh, ten per cent would amount to ₹3 lakh. In that situation, the statutory ceiling would be ₹5 lakh because the provision applies whichever amount is higher.

Section 10(2)

Section 10(2): Section 10(2) places substantive restrictions on the taxpayers who may opt under Section 10(1). Subject to the limited-service permission under Section 10(1), the taxpayer cannot be engaged in the supply of services; cannot make specified supplies of goods or services that are not leviable to tax; cannot make inter-State outward supplies of goods or services; and cannot make specified supplies of services through an electronic commerce operator required to collect tax at source under Section 52.

The provision also excludes manufacturers of notified goods and persons who are casual taxable persons or non-resident taxable persons. Where more than one registered person operates under the same Permanent Account Number, the statutory framework also requires all such registered persons to opt for composition before the scheme can be adopted. The importance of Section 10(2) lies in the fact that eligibility depends upon more than the size of the business. The taxpayer’s supply profile and manner of conducting business must also be examined.

Illustration: Gupta Electricals has aggregate turnover of ₹1.10 crore and therefore falls within the applicable turnover ceiling. If Gupta Electricals begins making prohibited inter-State outward supplies, the turnover test alone cannot preserve its composition status. The business may be small in terms of turnover but still be outside the statutory regime because of the character of its outward supplies.

This makes Section 10(2) particularly significant for growing businesses. Expansion into new States, new categories of supply or restricted channels of distribution can alter a taxpayer’s eligibility even when turnover remains comfortably below the prescribed ceiling.

Section 10(2A)

Section 10(2A): Section 10(2A) creates a separate statutory mechanism for a registered person who is not eligible to opt under Section 10(1) and Section 10(2)and whose aggregate turnover in the preceding financial year does not exceed ₹50 lakh, subject to the conditions contained in the provision. The provision permits payment of composition tax at a rate prescribed by the Rules, subject to a statutory ceiling of three per cent of turnover in the State or Union Territory.

This provision should not be described simply as a scheme under which every small service provider below ₹50 lakh may voluntarily choose composition. The statutory test is more specific: the person must first be outside the principal route under Section 10(1) and Section 10(2) and must then satisfy the conditions governing Section 10(2A).

Rule 7 prescribes a 3% CGST component for taxpayers covered by Section 10(2A), resulting in an effective 6% levy for an intra-State supply when the corresponding State GST or Union Territory GST component is taken into account.

Section 10(3)

Section 10(3): Composition is not a status that, once obtained, remains unaffected throughout the financial year. Section 10(3) provides that the option exercised under Section 10(1) or Section 10(2A), as applicable, lapses from the day on which aggregate turnover during the financial year exceeds the prescribed limit.

Rule 6 provides the corresponding procedural mechanism. Once the taxpayer ceases to satisfy the conditions, liability under the regular GST mechanism arises from the relevant date, tax invoices must thereafter be issued for taxable supplies and the prescribed withdrawal procedure must be followed. The Rules also provide for FORM GST CMP-04 and the consequential statement relating to input tax credit in FORM GST ITC-01.

Reverse Charge

Reverse Charge: Section 10 is expressly subject to Section 9(3) and Section 9(4). Composition status therefore does not extinguish liabilities that arise under the reverse-charge mechanism. A composition taxpayer must consequently examine whether its inward supplies attract reverse charge under the applicable notifications and statutory provisions. The tax payable under reverse charge is a separate liability and cannot simply be assumed to be absorbed within the composition payment.

Section 10(5)

Section 10(5): Section 10(5) addresses the situation in which a taxable person has paid tax under Section 10(1) or Section 10(2A) despite not being eligible. In such a case, the taxpayer remains liable for tax payable under other applicable provisions and is also liable to penalty; the statutory machinery under Section 73, Section 74 or, where applicable, Section 74A, applies mutatis mutandisfor determination of tax and penalty.

Illustration: Rajput Trading Co., which undertakes an outward supply that makes it ineligible for composition but nevertheless pays tax at the composition rate. The filing of the composition option cannot cure an underlying statutory prohibition. If the department establishes that Rajput Trading Co. was ineligible, the differential tax consequences and applicable penalty provisions may follow.

Prescribed Rates

Prescribed Rates: Therates applicable to composition taxpayers are prescribed through Rule 7, for the principal composition categories, the effective intra-State levy is generally 1% for manufacturers and other eligible suppliers, comprising 0.5% CGST and the corresponding State GST or Union Territory GST component, while suppliers of restaurant services covered by paragraph 6(b) of Schedule II bear an effective 5%levy. Taxpayers opting under Section 10(2A) are subject to an effective 6% levy for intra-State supplies, comprising 3% CGST and 3% SGST or UTGST.

3. Eligibility: Who Can opt for the Composition Scheme?

The Composition Scheme is available only to a taxpayer who satisfies the prescribed turnover limit as well as the substantive conditions attached to the scheme. The principal route under Section 10(1) is available to a registered person whose aggregate turnover in the preceding financial year does not exceed the notified threshold of ₹1.50 crore in most States and Union Territories. A lower threshold of ₹75 lakh applies in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. A separate mechanism under Section 10(2A) is available to certain registered persons who are not eligible under the principal composition provisions and whose preceding-year aggregate turnover does not exceed ₹50 lakh.

The Threshold is Based on Aggregate Turnover, Not One GST Registration

The Threshold is Based on Aggregate Turnover, Not One GST Registration: For composition purposes, the relevant threshold is tested with reference to aggregate turnover, a PAN-based concept under Section 2(6) of the CGST Act. It takes into account the aggregate value of taxable supplies, exempt supplies, exports and inter-State supplies made by persons having the same PAN, computed on an all-India basis. GST and compensation cess are excluded, as are inward supplies on which tax is payable by the recipient under reverse charge.

Illustration: Kavya Homeware, which has a GST registration in Punjab with turnover of ₹80 lakh and another registration in Delhi with turnover of ₹60 lakh, both under the same PAN. Looking only at the Punjab registration would suggest turnover of ₹80 lakh. For composition eligibility, however, the relevant aggregate turnover is ₹1.40 crore on an all-India PAN basis. The two registrations cannot be treated as independent businesses merely because separate GSTINs have been obtained.

One PAN Cannot Normally Have Both Composition and Regular Registrations

One PAN Cannot Normally Have Both Composition and Regular Registrations: The PAN-level test has a further consequence. Where a taxpayer has multiple GST registrations under the same PAN, the composition option is not designed to be exercised for one registration while the others remain under the regular scheme. Rule 3 provides that an intimation to opt for composition in respect of one place of business is deemed to cover the other places of business registered on the same PAN.

Illustration: Kavya Homeware establishments in Punjab and Delhi together fall within the ₹1.50 crore threshold, but the Delhi registration carries a statutory restriction that makes it ineligible for composition. Kavya cannot simply place Punjab under composition and retain Delhi under the regular scheme while relying on the same PAN. The inability to opt for composition in one registration can prevent the PAN from entering the scheme as contemplated by Section 10 and Rule 3

Commerce Eligibility

Commerce Eligibility: The e-commerce restriction also needs to be applied carefully in light of the 2023 amendment. An eligible composition taxpayer may supply goods through an electronic commerce operator required to collect tax at source under Section 52, subject to the special procedure and the continuing prohibition on inter-State outward supplies. The corresponding restriction remains relevant where the taxpayer supplies servicesthrough such an operator.

Illustration: Sharma Textiles, which sells garments through an eligible online marketplace, does not become ineligible merely because the sale occurs through the platform. The position would require a different analysis where the composition taxpayer is supplying services through an electronic commerce operator covered by Section 52.

The Separate Section 10(2A) Route for Smaller Service and Mixed-Supply Businesses

The Separate Section 10(2A) Route for Smaller Service and Mixed-Supply Businesses: A taxpayer that is not eligible under the principal composition route may have to examine Section 10(2A). The provision applies to a registered person who is not eligible to opt under Section 10(1) and Section 10(2), whose preceding-year aggregate turnover does not exceed ₹50 lakh, and who satisfies the additional statutory conditions.

This provision is particularly relevant to small service-oriented and mixed-supply businesses. It should not, however, be treated as a general choice that a taxpayer may exercise simply because its turnover is below ₹50 lakh. Eligibility under Section 10(2A) depends first upon the taxpayer’s position under the principal composition provisions.

It is pertinent to note that eligibility under composite levy system is a Continuing Condition, NOT a One-Time Declaration

4. Key Recent Amendments to the Composition Levy

Recent reforms have addressed a practical difficulty that was particularly visible in the original design of the scheme: a small taxpayer could qualify for composition yet find the regime difficult to reconcile with digital commerce, changing compliance requirements and an increasingly electronic tax administration.

Finance Act, 2023

Finance Act, 2023: A significant change came through the Finance Act, 2023, which removed the words “goods or”from Section 10(2)(d) and Section 10(2A)(c) of the CGST Act. The amendment removed the earlier restriction that prevented composition taxpayers from supplying goods through an electronic commerce operatorrequired to collect tax under Section 52. The corresponding restrictions continued to apply to specified services. These amendments were brought into force from 1 October 2023 through Notification No. 28/2023-Central Tax dated 31 July 2023.

The amendment was not left without an administrative mechanism. Notification No. 36/2023-Central Tax dated 4 August 2023 prescribed the procedure to be followed by electronic commerce operators in respect of goods supplied through them by composition taxpayers. The framework requires the operator to prevent inter-State supplies of goods through the platform by the composition taxpayer, collect tax at source under Section 52 and report the supplies in FORM GSTR-8. The related changes to the CGST Rules were made through Notification No. 38/2023-Central Tax dated 4 August 2023.

The importance of the 2023 amendment therefore lies in its commercial focus. The law did not abandon the restrictions attached to composition; it removed one barrier that had become difficult to justify when small businesses increasingly depended upon online marketplaces to reach customers.

GSTR-4: The Annual Return Deadline Moves to 30 June

GSTR-4: The Annual Return Deadline Moves to 30 June: A directly relevant compliance reform concern FORM GSTR-4. Before the amendment, a composition taxpayer was required to furnish the annual return by 30 Aprilfollowing the end of the financial year. The GST Council considered representations from trade and industry seeking additional time, particularly because composition taxpayers already discharge their self-assessed liability periodically through CMP-08. The Council agreed to extend the deadline to 30 June for GSTR-4 relating to FY 2024–25 onwards.

The recommendation was implemented through Notification No. 12/2024-Central Tax dated 10 July 2024, which amended Rule 62 and the relevant GSTR-4 instructions. Accordingly, a composition taxpayer filing GSTR-4 for FY 2024–25 and subsequent financial years has until 30 June following the end of the relevant financial year.

Illustration: Verma Retail Mart, whose financial year closes on 31 March 2026, the annual GSTR-4 for FY 2025–26 is therefore due by 30 June 2026. The additional time may assist the taxpayer in reconciling the quarterly CMP-08 payments and finalising the annual figures before filing.

The amendment may appear procedural, but its significance lies in recognising that compliance time is itself a regulatory burden. For small taxpayers, extending a filing deadline can be as practically meaningful as changing a substantive tax provision.

Relief from Annual Return Filing for Smaller Taxpayers

Relief from Annual Return Filing for Smaller Taxpayers: The Government has also used broader GST compliance measures to reduce the reporting burden on smaller registered persons. Notification No. 14/2024-Central Tax dated 10 July 2024exempted registered persons whose aggregate turnover during FY 2023–24 did not exceed ₹2 crorefrom furnishing the annual return for that financial year. The significance of this relief is therefore broader than the individual notification: small-taxpayer compliance is increasingly being addressed through targeted procedural exemptions alongside the Composition Levy itself.

5. Advantages and Limitations of the Composition Levy

Instead of operating within the full mechanics of the regular GST system, an eligible taxpayer follows a simplified method of tax payment and reporting. The benefit, however, is accompanied by restrictions that can become commercially important as the business becomes more input-intensive, more dependent on registered customers or more geographically dispersed.

The Real Compliance Challenge

The Composition Levy is often described as a simplified tax regime, but the real compliance challenge lies not in the frequency of filings alone. A composition taxpayer must continuously ensure that the business remains within the statutory conditions governing turnover, nature of supplies, mode of distribution and other eligibility requirements. The scheme therefore replaces some elements of routine compliance with a continuing obligation to monitor whether the taxpayer is still legally entitled to remain within it. A business may remain below the prescribed turnover threshold and nevertheless lose eligibility because of the character or territorial nature of its outward supplies.

The difficulty becomes more visible when a small business begins to expand. A taxpayer entering the composition regime with a purely local B2C model may later begin selling through an electronic marketplace, serving a registered business customer or making supplies beyond its State. The 2023 amendment has addressed one important digital-commerce barrier by permitting eligible composition taxpayers to supply goods through specified electronic commerce operators, but the continuing restrictions under the scheme mean that commercial expansion can still have direct compliance consequences.

The problem is therefore one of continuous legal compliance rather than simple return filing. CMP-08 and GSTR-4 may reduce the routine reporting burden, and the extension of the GSTR-4 deadline to 30 June from FY 2024–25 onwards provides additional time for annual compliance. Yet these procedural simplifications do not remove the need for regular review of the taxpayer’s turnover, supplies, customer profile and business model.

6. Digital Commerce: Has the Law Caught Up?

The answer is partly.

When the Composition Levy was introduced, the restriction on specified electronic-commerce supplies made the scheme difficult to reconcile with online retail. A small trader could operate a physical store under composition but face a statutory barrier when attempting to sell the same goods through an electronic marketplace.

The Finance Act, 2023 changed that position by removing “goods” from the relevant restriction, with the amendment taking effect from 1 October 2023. A special procedure was subsequently prescribed for composition taxpayers supplying goods through specified electronic commerce operators. The relaxation, however, remains subject to conditions, including the continuing restriction on inter-State outward supplies.

In Del Small Ice Cream Manufacturers Welfare’s Association (Reg.) v. Union of India, W.P.(C) No. 5252/2019, decided on 9 February 2021, the Delhi High Court examined the exclusion of ice-cream manufacturers from composition. The Court did not itself extend the benefit of composition to the petitioners. Instead, it required the GST Council to reconsider the exclusion after examining relevant economic factors, including the GST burden on inputs and comparable goods.

7. Input Tax Credit: The Cost of Choosing Simplicity

The most fundamental trade-off remains the denial of ordinary input tax credit. A composition taxpayer cannot ordinarily recover GST paid on purchases through the regular ITC chain. This is a deliberate feature of the scheme and not a drafting anomaly. Under GST, however, the economic consequence is clear.

Illustration: Aarav Components purchases raw material carrying ₹6 lakh of GST. If Aarav operates under regular GST and satisfies the statutory requirements, eligible credit can enter the GST chain. Under composition, that ₹6 lakh does not become ordinary ITC.

The effect is not uniform. A small retailer with minimal taxable purchases may bear relatively little embedded tax. A manufacturer whose turnover is built upon substantial taxable inputs may bear considerably more. The headline composition rate is identical, but the effective economic incidence differs because input tax is treated differently.

That is the unresolved policy tension within the scheme: composition reduces administrative complexity by moving away from the normal credit chain, but the price of that simplification is a departure from input-tax neutrality.

8. Inter-State Supplies: The Restriction Remains a Growth Constraint

The prohibition on inter-State outward supplies is another restriction whose commercial relevance has survived the evolution of GST. The issue was visible from the early GST Council discussions, which recorded concerns from businesses operating around State borders such as Delhi and Haryana. The concern was that even a relatively small inter-State transaction could make an otherwise small business ineligible for composition.

The problem has not disappeared with digitisation. The Comptroller and Auditor General of India, in its 2025 audit of the E-Way Bill System in Rajasthan, identified 323 composition taxpayers who generated 865 inter-State e-way bills involving assessable value of ₹12.25 crore. The finding relates specifically to the Rajasthan audit and should not be treated as an India-wide estimate. It nevertheless demonstrates that the statutory restriction continues to encounter practical compliance issues.

9. CONCLUSION

The Composition Levy was introduced with a practical objective: to make GST manageable for smaller businesses that may find the full compliance architecture disproportionate to their scale. Over time, the scheme has moved beyond its original form. The extension of the regime to eligible goods supplied through specified electronic commerce operators reflects the changing manner in which small businesses sell, while procedural reforms relating to returns and electronic compliance show a continuing effort to reduce administrative friction.

Yet simplification has come with a defined economic cost. The inability to avail ordinary input tax credit, the prohibition on separately collecting GST from customers, and the restriction on inter-State outward supplies continue to distinguish composition from the regular GST framework. These features may sit comfortably with a small, locally operating, predominantly B2C enterprise, but their commercial significance increases where the business is input-intensive, dependent on registered B2B customers or seeking to expand beyond its State.

The Composition Levy remains an important feature of India’s GST architecture. Its next stage of development, however, may require moving beyond incremental procedural adjustments towards a closer examination of the underlying trade-off between simplicity, input-tax neutrality and the ability of a small business to grow.

References

• The Central Goods and Services Tax Act, 2017, No. 12 of 2017, §§ 2(6), 9, 10, 18, 31, 52, 73, 74 & 74A (India).
• Central Goods and Services Tax Rules, 2017, rr. 3–7, 40 & 62 (India).
• Goods and Services Tax Council, Detailed Agenda Note for the 23rd Meeting of the GST Council(Nov. 10, 2017).
• Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs, Notification No. 36/2023–Central Tax, Aug. 4, 2023.
• Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs, Notification No. 12/2024–Central Tax, July 10, 2024.