GST Composition Scheme Sec 10 — 1% / 5% / 6% decision
Section 10 of the CGST Act lets small businesses pay flat GST at 1%, 5%, or 6% of turnover instead of standard rates with ITC. Quarterly returns, simpler accounting, no ITC headache. But the no-ITC trade-off and the inter-state-supply ban mean composition is the wrong choice for many. Here's the decision tree.
The three composition rates
| Business type | Rate (CGST + SGST) | Turnover cap |
|---|---|---|
| Manufacturer / trader (non-restaurant) | 1% (0.5% + 0.5%) | ₹1.5 Cr (₹75 L specified states) |
| Restaurant / catering | 5% (2.5% + 2.5%) | ₹1.5 Cr |
| Other services / mixed | 6% (3% + 3%) | ₹50 L |
"Specified states" with reduced cap: same 11 states as registration thresholds (north-east + Uttarakhand + Puducherry + Telangana). FA 2019 introduced the 6% / ₹50 L services-composition scheme; before that, services were excluded from composition entirely.
Who's eligible
- Registered GST taxpayer
- Turnover within the cap (₹1.5 Cr / ₹50 L based on type)
- Not engaged in inter-state outward supplies (composition is intra-state only)
- Not supplying through e-commerce operators required to collect TCS
- Not engaged in supply of goods that aren't liable to GST (e.g., petroleum, alcoholic liquor)
- Not a casual taxable person or non-resident taxable person
- Not engaged in supply of services other than restaurant (for the 1% goods scheme); or supplying only services for the 6% services scheme
The four trade-offs
1. No ITC — input GST is a sunk cost
Composition dealers pay GST at flat rate on outward supply but cannot claim ITC on any input. So if you buy ₹10 L of inputs with ₹1.8 L GST, the ₹1.8 L is a permanent cost. For B2B-heavy businesses with significant input ITC, this can be more expensive than regular GST.
2. Cannot collect GST from customers
Composition dealers cannot charge GST on their invoices — they pay composition tax out of their own margin. So selling to a B2B customer who would have claimed ITC, you can't pass the cost through. Your customer effectively pays your full price (no ITC recovery), making you less price-competitive vs regular suppliers.
3. Inter-state supply ban
The moment you make even one inter-state outward supply, composition eligibility ends. You must opt out for that year and pay regular tax on all supplies (including past ones in the same FY).
4. Mandatory disclosure on every invoice
Invoices must mention "Composition taxable person, not eligible to collect tax on supplies". This is a clear signal to B2B customers that the supplier is composition — and many B2B customers refuse to deal with composition suppliers because of the ITC issue.
When composition works well
- Small B2C retailer / trader with low input costs (e.g., service-heavy work, kirana, jewellery)
- Restaurant / catering — almost universally composition because customers are B2C
- Small service provider (consultants, photographers) under ₹50 L with mostly individual clients
- Local-only businesses with zero inter-state outflow
When composition is wrong
- Manufacturing / trading with material input ITC (high working-capital efficiency lost)
- B2B businesses where customers need ITC
- Any inter-state supply (the rule is absolute)
- Online sales via Amazon / Flipkart / Myntra (TCS-required platforms excluded)
- Growing business expected to cross threshold mid-year (transition is painful)
Returns under composition
- CMP-08 — quarterly statement of payment of tax. Due 18th of month after quarter-end
- GSTR-4 — annual return summarising the year. Due 30 April of the next FY
No monthly GSTR-1 / 3B. No e-invoice. No QRMP separately. Much simpler compliance.
Reverse charge mechanism still applies
Composition doesn't exempt you from RCM. You still owe RCM on inward supplies under Sec 9(3) (e.g., GTA, advocate fees, director sitting fees). See our RCM brief. And — important — RCM is paid at standard rate, not composition rate. So a composition restaurant paying ₹50K to an advocate owes ₹9K (18% IGST under RCM), not ₹3K (6%).
Opting in / opting out
Opting in: file Form CMP-02 at the start of the FY (by 31 March of preceding year for the next FY's intent). Once registered as composition, valid for the entire FY.
Opting out: automatic if you exceed the turnover cap mid-year. Voluntary opt-out via Form CMP-04. From that quarter onwards, regular GST mechanics kick in.
📌 The "growing business" trap: Most composition opt-outs are unplanned. The business crosses ₹1.5 Cr in November of the FY. From the next invoice, regular GST applies. But all the inputs purchased earlier (during composition phase) have no ITC. Result: 6 months of stuck input GST that's a permanent cost. Plan the transition — if you're projecting ₹1.4 Cr by year-end, opt out at the start of the year.
The Finclar take
Composition is genuinely useful for two categories: pure B2C retailers / restaurants below ₹1.5 Cr, and service-only providers below ₹50 L. For everyone else — especially anyone with B2B supplies, inter-state ambition, or material input GST — it's a false economy. The compliance saving (12 monthly returns → 4 quarterly statements + 1 annual return) is real but small. The cost — lost ITC, customer rejection, transition pain — is large. Choose deliberately.
Ishaq Aqeel · Team Member · GST · Audit · Tally Expert
Leads Finclar's GST and indirect-tax practice. Drafts 200+ notice responses a year for TN textiles, IT services and manufacturing clients. View full bio & archive →