GST Composition Scheme Eligibility FY 2025-26 — Thresholds, Rates, Restrictions + Common Pitfalls

Why composition scheme matters for Indian SMEs

The standard GST framework is operationally heavy. A regular taxpayer issues tax invoices line-by-line with HSN codes and rates, matches inward supplies against suppliers’ GSTR-1 filings via GSTR-2B, files GSTR-1 + GSTR-3B monthly (or quarterly under QRMP), files GSTR-9 + 9C annually, and tracks ITC eligibility against a multi-layered set of conditions. For a neighbourhood grocer, a local bakery, or a small consultancy, the compliance load is unviable.

The Composition Scheme under Section 10 of the CGST Act offers an alternate, simplified regime — at the cost of significant operational restrictions. Eligible businesses pay a small flat rate on aggregate turnover (1% / 5% / 6% depending on category), file quarterly + annual returns instead of monthly, and skip ITC reconciliation entirely. In return, they lose the ability to collect tax from customers, claim ITC on inputs, sell inter-state, or sell through TCS-mandated e-commerce marketplaces.

Whether composition is the right choice for any specific SME is a mathematical and strategic question — driven by customer mix (B2B vs B2C), input-tax intensity, geographic ambition, and channel strategy. This page covers the eligibility framework, rates, compliance cadence, and the decision criteria.

For the broader GST framework context, see the GST overview pillar. For the regular-scheme registration threshold (which sits separately from composition eligibility), see GST Registration Thresholds.

Who can opt — the eligibility thresholds (FY 2025-26)

The primary gate is aggregate turnover in the preceding financial year. Aggregate turnover here means taxable + exempt + export supplies across all GSTINs under the same PAN, India-wide. The thresholds for FY 2025-26 are unchanged from the Notification 14/2019-Central Tax revision (GST 2.0 did not alter Section 10):

Suppliers of goods + restaurants — Section 10(1)

• Standard limit: ₹1.5 crore aggregate turnover
• Special-category states limit: ₹75 lakh aggregate turnover

The special-category states for composition purposes: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand.

Restaurants serving no alcohol are the only services-providing category with access to this ₹1.5 crore threshold — a historic carveout pre-dating Section 10(2A). Restaurants serving alcohol cannot opt for composition.

Suppliers of services (other than restaurants) — Section 10(2A)

• Limit: ₹50 lakh aggregate turnover

Section 10(2A), introduced after the original composition framework, opened composition to freelance professionals, small consultancies, and standalone service providers. The threshold is lower than the goods-side threshold; the rate is also higher (6% vs 1%).

Who CANNOT opt — disqualifications

Even within the turnover limits, the Composition Scheme is unavailable to:

• Inter-state outward suppliers (Section 10(2)(c)) — a dealer making any inter-state outward supply is disqualified. Inter-state INWARD purchases are permitted; only outward is the bar.
• Suppliers via TCS-mandated e-commerce operators (Section 10(2)(d)) — selling through Amazon, Flipkart, Swiggy, Zomato, or any e-commerce operator required to collect TCS under Section 52 disqualifies the dealer.
• Manufacturers of notified demerit goods — ice cream + edible ice (with or without cocoa), pan masala, aerated water, and all tobacco / tobacco-substitute products per Notification 14/2019-Central Tax. Traders of these items can opt; manufacturers cannot.
• Non-resident taxable persons (NRTPs).
• Casual taxable persons (CTPs).
• Suppliers of non-taxable goods — alcohol for human consumption (a non-taxable good under GST) excludes the dealer from composition; petroleum products outside GST scope similarly.
• Service suppliers other than restaurants opting under Section 10(1) — services can only enter composition via the separate Section 10(2A) at the ₹50 lakh threshold and 6% rate.

Rates under composition scheme

Category	Section	Rate	Calculation basis
Manufacturers	10(1)	1% (0.5% CGST + 0.5% SGST)	Taxable turnover in the state
Traders / dealers of goods	10(1)	1% (0.5% CGST + 0.5% SGST)	Taxable turnover (exempt-goods turnover excluded)
Restaurants (no alcohol)	10(1)	5% (2.5% CGST + 2.5% SGST)	Taxable turnover
Other service providers	10(2A)	6% (3% CGST + 3% SGST)	Taxable turnover

Important calculation note: for traders and Section 10(2A) service providers, the rate applies to taxable turnover (not aggregate turnover). Exempt-goods turnover is excluded from the rate base, even though it counts toward the eligibility threshold. For manufacturers, the change to “taxable turnover” basis came via subsequent notifications aligning the basis with traders.

The dealer cannot collect this tax from the customer — it comes out of the dealer’s gross margin. This is structurally different from the regular scheme, where the tax is collected from the customer and remitted.

For the comparison against the regular-scheme rate structure (which under GST 2.0 has 4 slabs: 0% / 5% / 18% / 40%), see the GST Rates Explained pillar.

How to opt — the operational steps

Opting at registration (new businesses)

When applying for a fresh GSTIN via Form REG-01, select the option to pay tax under Section 10. The composition status is effective from the registration date. See the GST Registration service for end-to-end registration coordination.

Opting at start of FY (existing regular taxpayers switching to composition)

File Form GST CMP-02 on the GST portal before the start of the relevant FY (by 31 March of the preceding FY). The composition status becomes effective from 1 April of the new FY.

Existing regular taxpayers switching to composition also must reverse the ITC on inputs lying in stock as of the date immediately preceding the switchover. This reversal is filed via Form ITC-03 within 60 days of opting in.

Exiting composition (turnover threshold breach or voluntary exit)

If aggregate turnover exceeds the applicable threshold during the FY, the dealer must exit composition immediately on the date of breach and file Form CMP-04 within 7 days. From that date, the dealer becomes a regular taxpayer — must issue tax invoices, collect GST, file GSTR-1 / 3B monthly, and can claim ITC on inputs in stock as of the switchover date (filed via Form ITC-01).

Compliance + returns under composition

No tax invoice — bill of supply instead

A composition dealer cannot issue a “tax invoice” (because no tax is collected from the customer). They must issue a “Bill of Supply” for every taxable outward supply.

Mandatory disclosures on the Bill of Supply per Rule 5 of the CGST Rules:

• Words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill
• Standard bill-of-supply line items (party name, GSTIN if applicable, description, quantity, value)

Mandatory signage at the principal place of business + every additional place of business: “composition taxable person” in a prominent location.

Failure to display the prescribed disclosure attracts a penalty up to ₹10,000 under Section 122.

Quarterly Form CMP-08

A statement of self-assessed tax for the quarter, filed by the 18th of the month following the quarter:

• Q1 (Apr-Jun) → 18 July
• Q2 (Jul-Sep) → 18 October
• Q3 (Oct-Dec) → 18 January
• Q4 (Jan-Mar) → 18 April

The tax shown in CMP-08 is paid via the same form’s electronic challan.

Annual Form GSTR-4

A consolidated annual return summarising the FY’s turnover, tax paid, and inward supplies. Due date: 30 June following the end of the FY (extended from the earlier 30 April due date by Notification 21/2022-Central Tax, applicable from FY 2021-22 onwards).

Composition dealers do NOT file GSTR-9 (the annual return for regular taxpayers); GSTR-4 is the composition-specific equivalent.

Books and records

Composition dealers maintain simplified records — primarily the inward supply register, outward supply register, and stock register at the level of detail required by Rule 56 of the CGST Rules. Detailed ITC-eligibility tracking, which is the main complexity for regular taxpayers, is not required.

What you give up — ITC, inter-state sales, customer tax

The four operational trade-offs to weigh:

1. No tax collection from customers — the 1% / 5% / 6% is paid from the dealer’s gross margin. For a 10% net margin trader, paying 1% out of margin is a ~10% margin compression.
2. No Input Tax Credit on inputs — every rupee of GST on purchased raw materials, capital goods, services becomes a sunk cost added to product cost. For an input-tax-heavy business (where input GST is large relative to output value), this can be more expensive than the regular-scheme rate net of ITC.
3. No inter-state outward supplies — geographic restriction to the state of registration. National scaling requires exiting composition.
4. No e-commerce sales via TCS-mandated platforms — Amazon, Flipkart, Swiggy, Zomato, and similar marketplaces are off-limits. Digital sales must happen via own website or non-TCS channels.

For the ITC mechanics that composition dealers forego, see the GST ITC Rules guide.

When composition is the right choice vs regular scheme

Composition typically wins when

• Customer base is predominantly B2C unregistered (end consumers don’t claim ITC anyway, so the lack of a tax invoice doesn’t matter to them) — neighbourhood grocer, small bakery, local salon, paying-guest accommodation, freelance tutor.
• Input-tax intensity is low — services with minimal input purchases, or trading of low-input-tax-rate goods.
• Geographic ambition is intra-state — no plans for inter-state expansion.
• Compliance bandwidth is constrained — the dealer wants the simplest possible regime and the math works out within ~1% margin compression.

Composition typically loses when

• Customer base is B2B-heavy — business customers want a tax invoice + ITC; a Bill of Supply forces them to absorb the cost of the GST embedded in their purchase. They will either reject the deal or demand a price discount equal to the lost ITC.
• Input-tax intensity is high — input GST builds into product cost, making composition more expensive than regular + ITC offset.
• Inter-state outward supplies are core — geographic restriction is a structural blocker.
• E-commerce-marketplace channels are core — TCS-mandate disqualification is a structural blocker.

The decision is rarely a one-time choice — it should be re-evaluated annually at FY-start, as the business’s customer mix, input profile, and channel strategy evolve.

Common composition scheme mistakes

1. Crossing the threshold mid-year without exiting — once aggregate turnover crosses ₹1.5 crore (or ₹50 lakh for services), the dealer must file CMP-04 within 7 days and switch to regular scheme from the date of breach. Continuing as composition past the threshold breach is a serious non-compliance — entire post-breach turnover becomes liable to normal GST + interest + penalty.
2. Inadvertent inter-state outward supply — selling to an out-of-state customer via marketplace fulfilment, or accepting an inter-state order in person, disqualifies the dealer. The disqualification is from the date of the inter-state supply onwards.
3. Missing the bill-of-supply disclosure — failing to print “composition taxable person, not eligible to collect tax on supplies” attracts a penalty up to ₹10,000 per Section 122.
4. Claiming ITC on inputs — accidentally claiming ITC (often via accounting-software misconfiguration) results in immediate reversal + 18% interest under Section 50 + penalty under Section 122.
5. Late CMP-08 or GSTR-4 filing — late fee of ₹200/day under Section 47 (subject to maximum) + 18% interest on tax payable per Section 50.
6. Mixed regime by entity / segment — composition is PAN-level. A single PAN cannot run one segment under composition and another under regular. Either the entire entity opts for composition (eligibility tested entity-wide) or none of it does.
7. Missing RCM payment — composition dealers are NOT exempt from Reverse Charge Mechanism on notified inward supplies (e.g., GTA services, services from unregistered suppliers in specific categories). RCM tax is paid at regular rates, separately from the composition flat rate. See Reverse Charge Mechanism (RCM) spoke for the mechanics.
8. Forgetting Form ITC-03 on switchover — existing regular taxpayers switching to composition must file ITC-03 within 60 days reversing the ITC on input stock. Missing this filing leaves an open compliance item that surfaces during audit.

For ongoing CMP-08 + GSTR-4 filing and reconciliation, see the GST Return Filing service.