All You Need to Know About the GST Composition Scheme

The GST composition scheme offers simplified compliance and reduced tax liabilities, making it an attractive option for businesses. Read to know more.
Business Loan
2 min read
11 September 2023

Earlier this year, the GST composition scheme limit for manufacturers of goods was raised to Rs. 1.5 crore from the prevailing Rs. 1 crore threshold. Similarly, the GST Council extended the benefits of the composition scheme to service providers on 10th January 2019. This scheme relaxes the tax compliance and payments for individuals having a turnover within the specified limits. As such, this scheme can be a great boon for your venture as it enhances your liquidity. While the scheme benefits B2B businesses greatly, B2C ventures can also profit from it.

To know whether the scheme will help tip the scales in your favour, read on to discover the meaning, advantages, and nuances of the GST composition scheme.

What is the GST composition scheme?

GST composition scheme is a tax-paying mechanism offered to small businesses. Compared to regular GST filing, the composite scheme offers two main benefits: reduced paperwork and compliance and lower tax liability. For instance, normal taxpayers must submit three monthly GST returns (GST-1, GST-2, and GST-3) and one annual return (GST 9). However, if you have applied for the composition scheme GST, filing gets easier as you need to file just one quarterly return (GSTR 4) and one annual return (GSTR 9A).

Upon registering for the composition scheme under GST, you are liable to pay tax at a fixed rate of 1% to 6% of your turnover. For instance, if you are a manufacturer of goods other than tobacco, ice cream or pan masala, then you must pay 1% tax basis your turnover.

GST composition scheme rules

As per the GST act, a range of manufacturing and service businesses and traders can register under the GST composition scheme, excluding the following:

  • Individuals or businesses who supply goods through an e-commerce portal operator that collects tax at the source
  • Non-resident taxable persons or casual taxable persons
  • Ice cream manufacturers or manufacturers of other edible ice without cocoa as additives
  • Manufacturers of pan masala and tobacco products and substitutes
  • Individuals or businesses who have purchased goods from unregistered suppliers
  • Suppliers involved in the supply of goods that are exempt under the GST act
  • Suppliers involved in the supply of goods and services

Who can and cannot avail of the GST composition scheme?

As a taxpayer, you can opt for the GST composition scheme, provided your annual turnover falls within the specified limits. It is important to note that the GST composition limit includes turnover for all businesses registered under a particular PAN. In general, small manufacturers, traders, and service providers can avail of the composite scheme.

What is the GST composition scheme limit?

The composition scheme limit under GST varies depending on the type of business that you have.

  • For manufacturers and traders: As a newly registered business, your turnover should not exceed Rs. 1.5 crore in the current financial year. If you have already registered, your turnover must not exceed Rs. 1.5 crore in the previous financial year.
  • For restaurants not serving alcohol: The above terms apply here as well.
  • For service providers: As a newly registered business, your turnover should not exceed Rs. 50 lakh in the current financial year. If you have already registered, your turnover must not exceed Rs. 50 lakh in the previous financial year.

Additionally, the scheme limits the Rs. 1.5 crore cap to Rs. 75 lakh in the special category states. Suppose that your turnover exceeds the specified composition scheme limit in a financial year. You will have to convert to the regular GST payment mechanism to comply with the GST composition scheme rules.

What are the benefits of the composition scheme in GST?

The salient benefits of the GST composition scheme are significant for businesses. To understand how reduced tax payments, lower compliance requirements, and increased liquidity can impact your business, refer to the GST Calculator.

Are there any drawbacks of opting for a composition scheme under GST?

While GST composition is advantageous, you should be aware of a few pitfalls to the scheme before registering.

  • No input tax credit: B2B businesses do not get the credit of input tax paid from the output liability. The buyer of such goods will not get any credit on tax paid, resulting in price distortion and cascading. A buyer registered as a regular taxpayer will not get any credit when buying from a person registered under a composition scheme, resulting in a loss of business. Eventually, such buyers might avoid purchasing from a taxpayer under the scheme.
  • No collection of tax: Under the scheme, taxpayers cannot recover composition tax from their buyers, as they cannot raise a tax invoice.
  • Restricted geography/ reach for businesses: GST composition restricts businesses geographically, as it does not cover inter-state transactions. They also cannot use the potential of the Internet as a supply of goods via e-commerce portals.

What are the tax rates applicable for the composition scheme in GST?

Upon registering for GST composition, a fixed tax rate applies to your business turnover. The current rates are as follows:

  • For goods manufacturers and traders: 1% GST, divided as 0.5% CGST and 0.5% SGST
  • For restaurants not serving alcohol: 5% GST, divided as 2.5% CGST and 2.5% SGST
  • For service providers: 6% GST, divided as 3% CGST and 3% SGST

The taxes you pay come from your finances as you do not charge any to consumers and include taxes on supplies made and on reverse charge.

How easy is it to file composite GST returns?

As mentioned, the composite GST scheme dramatically reduces the burden of tax filing. With it, you need to file only GSTR 4 every quarter and GSTR 9A annually. You must file GSTR 4 by the 18th of the month succeeding every quarter-end.

How to apply for the GST composition scheme

If you deem the scheme profitable, you can apply for it online via the GST website. Then you need to file GST CMP-02 as this serves as an intimation, indicating your readiness to come under GST composition.

As a whole, the composition scheme greatly simplifies the taxation process and reduces tax liability to a larger extent. This leaves room for better working capital management.

To boost your operations further and amp up your supply chain, you can bolster your finances with the Bajaj Finserv Business Loan. With it, you can get up to Rs. 80 lakh on nominal terms and affordable EMIs.


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Frequently asked questions

What is the GST composition scheme bill?

The GST Composition Scheme Bill enables small businesses to pay a fixed rate based on turnover instead of regular GST. It eases compliance for businesses with a turnover below a specified threshold.

How do I know if my GST is under the composition scheme?

Your GST is under the composition scheme if you opted for it and meet the eligibility criteria defined by the GST Council, primarily based on your turnover and nature of business.

Who is eligible for the composition scheme?

Small businesses with an annual turnover below the specified limit, dealing in goods or services, are eligible for the GST composition scheme.

Who is not eligible for composition under GST?

Businesses engaged in inter-state supplies, making non-taxable supplies, or selling through e-commerce operators are generally not eligible for the composition scheme under GST.

What is the GST limit for composition schemes?

The GST limit for composition schemes in India is Rs. 1.5 crore turnover per annum. Composition schemes are voluntary schemes available for small businesses with annual turnovers up to Rs. 1.5 crore who can opt for fixed tax rates instead of regular GST rates. These schemes have less compliance requirements, making it easier for small businesses to operate.

Can I convert regular GST to the composition scheme?

Yes, as a regular taxpayer, you can choose to convert to the composition scheme by filing the GST CMP-02 form. However, you must meet the eligibility criteria for the scheme, such as having a turnover of less than Rs. 1.5 crore per annum. Once converted, you cannot issue taxable invoices or claim input tax credits.

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