Composition Scheme Registration Under GST
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Composition Scheme Registration Under GST

What is Composition Scheme Registration Under GST ?

The Goods and Services Tax (GST) framework in India offers a specialized “Composition Scheme” designed to provide administrative and financial relief to small taxpayers. By opting for this scheme, eligible businesses can bypass the complexities of the regular GST regime, substituting intricate record-keeping with a simplified, fixed-rate tax structure.

As we navigate the fiscal year 2025-26, understanding the nuances of this scheme is crucial for maintaining lean operations and ensuring statutory compliance.

The Composition Scheme is an alternative method of levy under Section 10 of the CGST Act, 2017. It is tailored for small businesses whose turnover remains below a prescribed threshold. Instead of the standard “Value Added” tax mechanism where Input Tax Credit (ITC) is adjusted against output liability, composition dealers pay a nominal percentage of their total turnover directly to the government.

Eligibility and Turnover Limits

The eligibility for the Composition Scheme is primarily determined by the Aggregate Annual Turnover of the previous financial year.

Category of Taxpayer Turnover Limit (Rest of India) Turnover Limit (Special Category States*)
Manufacturers & Traders Up to ₹1.5 Crore Up to ₹75 Lakh
Restaurants (Non-Alcoholic) Up to ₹1.5 Crore Up to ₹75 Lakh
Service Providers Up to ₹50 Lakh Up to ₹50 Lakh

Note: *Special Category States include Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand

Key Benefits of Composition Scheme Registration

  1. Reduced Compliance:
    Forget monthly returns; the scheme primarily requires one quarterly statement (CMP-08) and one annual return (GSTR-4).
  2. Lower Tax Rates:
     Tax liability is capped at significantly lower rates compared to standard GST slabs.
  3. High Liquidity:
    With lower tax outflows and simplified filing, businesses can maintain better cash flow for daily operations.
  4. Ease of Invoicing:
    Instead of a complex “Tax Invoice,” dealers issue a simplified “Bill of Supply.”

Ineligibility Criteria for Composition Scheme Registration

You cannot opt for the Composition Scheme if you are:

    1. A manufacturer of Ice cream, Pan Masala, or Tobacco products.
    2. Making Inter-state outward supplies of goods.
    3. Supplying goods through an E-commerce operator (where TCS is applicable).
    4. A Casual Taxable Person or a Non-Resident Taxable Person.

How to Opt-In under the Composition Scheme Registration

For the current financial year (2025-26), the window to opt into the scheme typically closes on March 31st of the preceding year.

For Existing Taxpayers

  1. Log in to the GST Common Portal.
  2. Navigate to Services > Registration > Application to Opt for Composition Levy.
  3. File Form GST CMP-02 before the commencement of the financial year.
  4. Submit Form GST ITC-03 within 60 days to reverse any Input Tax Credit held in stock.

For New Registrants

New businesses can opt for the scheme directly while filing the initial registration form (GST REG-01)

Critical Compliance  under Composition Scheme Registration 

  1. Mandatory Mention:
    The words “Composition taxable person, not eligible to collect tax on supplies” must be mentioned at the top of every Bill of Supply.
  2. Signage:
    You must display “Composition Taxable Person” on every notice or signboard at your principal place of business.

Can a composition dealer supply services?

For Manufacturers and Traders

If your primary business is selling goods, you are permitted to supply services as well, provided they are “incidental” or marginal. Under the second proviso to Section 10(1), the limit for supplying services is:

  • 10% of your turnover in the State/UT in the preceding financial year,
    OR
  • ₹5 Lakh
    Whichever is higher.

Example: If a trader’s turnover was ₹80 Lakh last year, they can provide services (like repairs or installations) up to ₹8 Lakh (10% of ₹80 Lakh) in the current year.

For Pure Service Providers

If you are primarily a service provider (like a consultant, tailor, or dry cleaner) and do not qualify under the regular composition scheme, you can opt for the Special Composition Scheme (introduced via Notification No. 2/2019).

  • Turnover Limit: Up to ₹50 Lakh in the preceding financial year.
  • Tax Rate: 6% (3% CGST + 3% SGST).

For Restaurant Service Providers

Restaurants are a special category under the composition scheme.

  • Turnover Limit: Up to ₹1.5 Crore (₹75 Lakh in special category states).
  • Tax Rate: 5% (2.5% CGST + 2.5% SGST).

Note: This does not apply to restaurants serving alcohol

Key Restrictions under the Composition scheme Registration :

  1. No Inter-State Services:
     You cannot provide services to a client located in a different state.
  2. No ITC:
    You cannot claim Input Tax Credit on any service-related expenses (like rent or professional software).
  3. No Tax Collection:
     You cannot collect GST from your customers.
  4. No E-commerce:
    You cannot provide services through e-commerce operators like Amazon or Zomato if they are required to collect TCS.

The Composition Scheme Registration is not ideal if:

  1. You are in B2B:
    Your business customers cannot claim credit for the tax you pay, making your products “effectively” more expensive for them.
  2. You sell outside your state:
     Inter-state sales are strictly prohibited.
  3. You have high input costs:
     Since you can’t claim ITC, the 18% GST you pay on your rent or raw materials becomes a “dead cost.”

What happens if the conditions of the scheme are violated?

Cancellation of Composition Scheme

  1. The composition option becomes void ab initio from the date of violation.
  2. The taxpayer is treated as a regular taxable person.

Tax Liability at Normal Rates

  1. GST payable at regular rates, not composition rates.
  2. Differential tax payable from the date of contravention, along with interest.

Interest and Penalty

  1. Interest @ 18% p.a. on tax short-paid.
  2. Penalty under Section 73 or 74 (depending on intent), up to 100% of tax.

Denial of Composition Benefits

  1. Ineligible ITC claimed must be reversed with interest.
  2. Supply made without tax invoice becomes non-compliant

Frequently Asked Questions (FAQs)

Q1. What is the GST Composition Scheme?
It is a simplified GST scheme for small taxpayers allowing payment of tax at a fixed rate on turnover, with reduced compliance and limited procedural requirements.
Q2. Can a composition dealer supply services?
Yes. Manufacturers and traders can provide services up to 10% of their turnover or ₹5 Lakh, whichever is higher. Pure service providers have a separate limit of ₹50 Lakh.
Q3. Who is eligible to opt for the Composition Scheme?
Manufacturers, traders, and eligible restaurants with aggregate turnover up to ₹1.5 crore (₹75 lakh for special category states) in the preceding financial year.
Q4. What happens if I exceed the ₹1.5 Crore turnover limit mid-year?
The moment you cross the threshold, the option to pay tax under the Composition Scheme lapses. You must file Form GST CMP-04 within 7 days and switch to the regular scheme.
Q5. Can I buy goods from another state?
Yes. There is no restriction on inward inter-state supplies. However, you cannot make outward (sales) inter-state supplies.
Q6. Is Input Tax Credit (ITC) available under the Composition Scheme?
No. Composition dealers are not eligible to claim ITC on inward supplies.
Q7. What happens if conditions of the scheme are violated?
The dealer becomes liable under the regular GST scheme from the date of violation, along with interest and penalty.
Q8. Can a composition dealer switch to the regular scheme?
Yes. Voluntary withdrawal is permitted by filing Form GST CMP-04.
Q9. Are e-commerce sellers eligible for the Composition Scheme?
No. Persons supplying through e-commerce operators required to collect TCS are not eligible.

Services We Offer

Jitesh Telisara & Associates LLP, CA Near Me is a professionally managed firm catering to domestic and international clients with a broad range of services in domestic and international taxation, regulatory and advisory services and crosses border transaction-related services.

The team at the firm has dedicated and experienced professionals and associates like Chartered Accountants, Company Secretary and Consultants to provide end to end services to your business. With the effort of gaining a deep understanding of your business, the team is committed to providing valuable, consistent and efficient services based on its in-depth knowledge and wide experience in the areas of audit, taxation, regulatory compliances, and related business services.