Introduction
The composition scheme under Goods and Services tax is a concept to simplify the tax compliances which is specifically designed for small businesses who were involved in selling goods (later on it was also introduced for services). This scheme offers lower tax rates and reduced compliance burdens, making it ideal for businesses with limited turnover.
In this article I tried to cover the eligibility, tax rates, composition scheme for services, way invoice is to be issued, reporting, reverse charge mechanism, and exceptions from the scheme
Let’s first discuss the eligibility for the composition scheme
As per Section 10 of the CGST Act, 2017, businesses with an aggregate turnover of up to ₹1.5 crore (₹75 lakh for specified states) in the preceding financial year can opt for the Composition Scheme. However, for service providers, the limit is ₹50 lakh under the special scheme introduced by Notification No. 2/2019-Central Tax (Rate), dated 7th March 2019.
What is aggregate turnover?
Under the Composition Scheme of GST, Aggregate Turnover is a crucial factor in determining eligibility. As per Section 2(6) of the CGST Act, 2017, aggregate turnover is defined as
“the total value of all taxable supplies, exempt supplies, exports of goods or services, and inter-state supplies of a person having the same PAN, computed on an all-India basis, but excluding CGST, SGST, IGST, UTGST, and cess”
To be eligible for the Composition Scheme under GST, a business must meet certain conditions.
First one is no Inter-State Sales which means the business can only sell goods or services within the same state. If a business sells to other states, it cannot opt for the Composition Scheme.
Second is no supply of non-GST goods or services which means some goods and services are outside the GST system, like alcohol for human consumption, petrol, diesel, and aviation fuel. If a business deals in such products, it cannot register under the Composition Scheme.
Third is one should not be a Casual Taxable Person or Non-Resident Taxable Person, now you might be wondering what does this mean? A casual taxable person is someone who temporarily sets up a business in a state where they don’t usually operate (e.g., a trader selling goods at a festival or exhibition), whereas a non-resident taxable person is a business or individual from outside India who supplies goods or services in India.
Since both these types of taxpayers do not have a fixed place of business, they cannot opt for the Composition Scheme.
Forth is one should not be a manufacturer of certain notified goods including Ice cream and other edible ice, Tobacco and tobacco products, Pan masala, Manufactured tiles and related products etc
These conditions ensure that only small businesses engaged in simple trade and services can benefit from lower tax rates and reduced compliance under the Composition Scheme.
Tax Rates Under the Composition Scheme
The tax rates under the scheme are significantly lower than the standard GST rates:
| Type | Rate |
| Manufacturers & Traders | 1% of turnover (0.5% CGST + 0.5% SGST) |
| Restaurants (not serving alcohol) | 5% of turnover (2.5% CGST + 2.5% SGST) |
| Service Providers (under special composition scheme) | 6% of turnover (3% CGST + 3% SGST) |
Let’s discuss composition scheme for service providers in detail
As we discussed above, the Composition Scheme was only for manufacturers and traders. However, Notification No. 2/2019-Central Tax (Rate) extended it to service providers with an annual turnover of up to ₹50 lakh. Such service providers are subject to a 6% tax rate (3% CGST + 3% SGST).
Exceptions & Restrictions for composition scheme
The Composition Scheme is not available to businesses engaged in inter-state trade, businesses supplying goods through e-commerce operators required to collect TCS, businesses supplying ice cream, tobacco, and pan masala, businesses engaged in non-GST supplies such as petrol and liquor
Invoicing under the Composition Scheme
Taxpayers registered under the Composition Scheme cannot issue a tax invoice. Instead, they must issue a Bill of Supply, stating that they are not eligible to collect tax from customers.
Also, they shall mandatorily mention on Invoice stating “Composition taxable person, not eligible to collect tax on supplies.”
GST Returns & Reporting Requirements
Composition taxpayers benefit from simplified filing requirements:
| Return Form | Purpose | Frequency |
| CMP-02 | Intimation of opting into the Composition Scheme | Once (at the beginning of the financial year) |
| GSTR-4 | Quarterly return for composition dealers (Revised as annual filing from FY 2019-20) | Annually |
| CMP-08 | Quarterly payment of tax | Quarterly |
| GSTR-9A | Annual return (waived off for FY 2017-18 & 2018-19) | Annually (if applicable) |
Reverse Charge Mechanism (RCM) & Composition Dealers
RCM applicability to composition dealers
Composition dealers must pay tax under RCM on specified supplies as per Section 9(3) and 9(4) of the CGST Act. Entry 5AA (Notification No. 13/2017-Central Tax Rate) deals with a composition dealer is liable to pay GST under RCM if they receive services related to the renting of residential dwellings whereas entry 5AB (introduced by Notification No. 09/2024) was Initially made composition dealers liable for RCM on renting of commercial properties by unregistered persons.
GST Council’s 55th Meeting Decision (21st December 2024)
The council in above meeting recommended to exclude composition dealers from Entry 5AB, recognizing the compliance burden it imposed on small businesses.
By the notification No. 07/2025 (Effective 16th January 2025) council officially excluded composition dealers from RCM liability on Entry 5AB, This provided relief to composition taxpayers, ensuring that they were not responsible for paying GST under RCM for renting commercial properties from unregistered persons.
Regularization of RCM Liability from 10th October 2024 to 15th January 2025
Since Notification No. 09/2024 was effective from 10th October 2024, composition dealers were technically liable to pay RCM on commercial property rentals during this period. However, based on GST Council’s recommendation, the government decided not to collect RCM from composition dealers for this period, offering retrospective relief.
Continued RCM Liability under Entry No. 5AA
While composition dealers are now exempt from RCM liability under Entry 5AB, they must still pay GST under RCM on renting residential dwellings under Entry 5AA. This remains a compliance requirement unless further changes are introduced by the GST Council in the future.
Advantages & Disadvantages of the Composition Scheme
The Composition Scheme under GST offers several advantages, making it an attractive option for small businesses. One of the primary benefits is the lower tax rates compared to regular GST, which helps reduce the tax burden on small taxpayers. Additionally, businesses registered under the scheme enjoy simplified compliance with minimal paperwork. Unlike regular taxpayers who must adhere to extensive GST return filing requirements, composition dealers file returns on a quarterly basis instead of monthly, reducing both compliance costs and administrative hassle. The scheme also eliminates the need for complex tax calculations, making it easier for small businesses to focus on their operations rather than tax formalities. Moreover, since tax payments are also made quarterly, businesses benefit from better cash flow management, avoiding the stress of frequent payments.
However, the Composition Scheme also comes with notable disadvantages. One significant drawback is the non-availability of Input Tax Credit (ITC), which means that businesses cannot claim credit for the GST paid on their purchases. This often leads to higher costs, as the tax paid on inputs becomes an added expense rather than a deductible one. Additionally, composition dealers are restricted to intra-state trade, meaning they cannot engage in inter-state transactions, which limits their business expansion opportunities. Another major limitation is that they cannot issue tax invoices, as they are required to pay GST out of their own pocket instead of collecting it from customers. This makes the scheme unattractive to B2B customers who prefer suppliers registered under the regular GST regime to avail of ITC. Furthermore, in some cases, the tax liability under the Composition Scheme may be higher than expected, as tax is paid on the total turnover rather than actual profit. This can be a disadvantage for businesses with low-profit margins, as they may end up paying more tax than they would under the regular GST system.
While the Composition Scheme is beneficial for small businesses seeking ease of compliance and lower tax rates, it comes with trade-offs that may not suit every business model. Businesses need to carefully evaluate their operations, customer base, and cost structures before opting for the scheme.
Conclusion
The GST Composition Scheme is an excellent option for small businesses seeking reduced compliance and lower tax rates. However, businesses must evaluate whether the lack of ITC and interstate restrictions impact their operations.
Recent changes in RCM applicability under Entry 5AB have eased compliance for composition dealers, but RCM liability under Entry 5AA remains unchanged. This raises concerns about whether the government might further amend the rules to provide similar relief for residential dwelling rentals.
Businesses considering the Composition Scheme must weigh its benefits against its limitations before opting in. If in doubt, consulting a tax professional can help determine the best course of action.
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Author can be contacted at aman.rajput@mail.ca.in
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