The Goods and Services Tax (GST) is a comprehensive system of indirect taxation in India designed to streamline the country’s tax structure. Among its various provisions, the GST Composition Scheme stands out as a simplified tax-paying mechanism primarily aimed at small businesses. This scheme allows eligible taxpayers to pay tax at a fixed rate based on their turnover, reducing compliance burdens and making tax payments more manageable.
In this guide, we’ll explore the various aspects of the GST Composition Scheme, including its features, benefits, turnover limits, applicable tax rates, rules, and sector-specific applicability. If you are wondering about the composition scheme in GST, whether it applies to your business, and how to benefit from it—this detailed guide is for you!
Also Read: Understanding GST Registration
What is the GST Composition Scheme?
The GST Composition Scheme is a tax payment mechanism under GST designed specifically for small businesses. It allows eligible taxpayers to pay taxes at a fixed rate of their turnover instead of following the regular GST taxation process. The scheme simplifies tax compliance by eliminating the need for detailed record-keeping and frequent GST returns, making it ideal for businesses with limited resources.
This scheme is particularly beneficial for small taxpayers such as manufacturers, restaurants, traders, and certain service providers who want to ease their compliance responsibilities while enjoying reduced tax rates.
Features of the GST Composition Scheme
The GST Composition Scheme comes with the following key features:
- Reduced Tax Burden: A fixed composition tax rate based on turnover ensures businesses don’t pay excessively.
- Simplified Compliance: Fewer GST returns need to be filed compared to the normal GST system.
- Applicable Sectors: Scheme eligibility includes traders, manufacturers of goods, restaurants (excluding alcohol), and specific categories of service providers.
- Quarterly Filing: Taxpayers under this scheme file GST returns quarterly instead of monthly.
- Cash Flow-Friendly: The scheme improves cash flow as taxes are not charged on every individual transaction.
Benefits for Small Businesses
Businesses, especially SMEs, stand to gain significantly from the GST Composition Scheme, thanks to the following benefits:
- Ease of Compliance: Fewer GST formalities, simplified forms, and a single quarterly return make paperwork hassle-free.
- Lower Tax Rate: With the composition scheme GST rate being minimal, tax liability reduces significantly.
- Enhanced Liquidity: Lower tax outflow ensures better business liquidity.
- Focused Operations: Small businesses can focus on their core activities without worrying about tax regulations and filings.
GST Composition Scheme Turnover Limit
One of the key distinguishing factors of the scheme is the eligibility based on turnover, commonly referred to as the GST Composition Scheme Turnover Limit. For the financial year 2025, the turnover limits are:
| Sector | Turnover Limit |
| Manufacturers and Traders | Up to ₹1.5 crores |
| Service Providers | Up to ₹50 lakhs |
It is worth noting that the GST Composition Scheme Turnover Limit for Service Providers is comparatively lower to cater to the nature of their businesses.
Eligibility Criteria for GST Composition Scheme
1. Turnover Limits
To qualify for the GST Composition Scheme, a business’s aggregate turnover during the financial year must not exceed the prescribed threshold:
- ₹1.5 crores for the supply of goods in most states.
- ₹50 lakhs for service providers and mixed suppliers.
2. Ineligible Transactions
Certain transactions and entities are not eligible for the scheme:
- Businesses engaged in interstate supplies.
- Taxpayers providing services other than those specified (except under the GST Composition Scheme Turnover Limit for Service Providers).
- Suppliers of exempt goods like tobacco, alcohol, and petroleum products.
Before proceeding, businesses must evaluate if their transactions fit the scheme’s eligibility.
How to Opt for the GST Composition Scheme?
1. Registration Process
To opt for the scheme, businesses must register under GST and choose the Composition Scheme option during registration. Existing taxpayers can switch during the start of a financial year by filing Form CMP-02.
2. Filing Requirements
Taxpayers under the Composition Scheme file quarterly returns using Form CMP-08. Additionally, they must file an annual return through Form GSTR-4.
Simplified procedures ensure that businesses spend minimal time dealing with compliance.
Sector-Specific Applicability of Composition Scheme
The composition scheme in GST applies to multiple business categories. Here is an overview of sector-specific applicability:
GST Composition for Service Providers
Eligible service providers with an annual turnover below ₹50 lakhs can opt for the scheme and pay a 6% composition tax rate (3% CGST + 3% SGST).
GST Composition for Manufacturers
Small manufacturers enjoy a lower composition scheme GST rate of 1%, easing their tax burden significantly.
GST Composition for Restaurants and Hotels
Restaurants not serving alcohol are eligible for a 5% GST composition rate, making it a cost-efficient option.
GST Composition for Jewellers, Contractors, and Others
Based on turnover limits, artisans, contractors, and certain small-scale suppliers can enjoy tailored tax rates based on their category.
GST Composition Rules and Conditions
To avoid penalties or disqualification, businesses must follow these rules and conditions:
1. Basic Conditions:
- Cannot claim input tax credit (ITC).
- Shall pay tax on aggregate turnover, not individual transactions.
2. Tax Filing Requirements:
- Submit CMP-02 for registration.
- File quarterly returns using CMP-08.
3. Turnover Limit:
Strict adherence to the applicable GST Composition Scheme Turnover Limit is required.
4. Invoices/Bill Format:
Use “Bill of Supply” instead of traditional invoices, as no GST is collected from customers.
| Condition | Requirement |
| Restriction on ITC | Cannot claim input tax credit |
| Returns | File quarterly through CMP-08 and annual GSTR-4 |
| Billing Format | Use “Bill of Supply” format for all transactions |
GST Composition Scheme vs. Regular GST
| Aspect | GST Composition Scheme | Regular GST Scheme |
| Filing Frequency | Quarterly returns (CMP-08) | Monthly returns |
| Tax Rate | Fixed composition tax rate based on turnover | Standard GST rates |
| Eligibility | Restricted by turnover | No turnover restrictions |
| ITC Availability | Not available | Available |
For small businesses, the Composition Scheme offers simplified compliance and lower tax rates, while the Regular GST Scheme works best for larger enterprises seeking ITC benefits.
Conclusion
The GST Composition Scheme is an excellent solution for small businesses to simplify their tax compliance, reduce their financial burden, and focus on business operations. Whether you are wondering who is eligible for GST Composition Scheme or curious about the composition scheme GST rate, it’s important to review your business type and turnover to determine eligibility. Staying compliant with the scheme’s regulations ensures smoother operations—and often more significant savings for your business.
If you’re looking for GST registration, filing, or expert consultation to opt for the Composition Scheme, RegisterKaro is here to assist you at every step. Our dedicated team ensures that your GST compliance and taxation journey is seamless and hassle-free.
FAQs
1. Who is eligible for GST Composition Scheme?
Small taxpayers with a turnover under ₹1.5 crores (goods) or ₹50 lakhs (services) are eligible for the scheme, provided they meet all conditions.
2. What is the GST Composition Scheme Turnover Limit for Service Providers?
Service providers with annual turnover below ₹50 lakhs can opt for the scheme. The composition tax rate for service providers is 6%.
3. What is the Composition Scheme GST Rate?
The rate varies by business type: 1% for manufacturers, 5% for restaurants, and 6% for service providers.
4. Can I claim ITC under the GST Composition Scheme?
No, input tax credit (ITC) cannot be claimed under this scheme.
For official rules, check out the CBIC GST Portal.
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