Here is the short answer most small traders and restaurant owners actually want: the composition scheme almost always lowers your tax outflow and your compliance burden, but it does so by throwing away input tax credit and locking you out of inter-state sales. Whether that trade is worth it comes down to a single number — how much GST your suppliers charge you that you would otherwise have recovered as credit.
This is a decision a lot of businesses get wrong in both directions. A local kirana store or a stand-alone restaurant that buys mostly from unregistered or exempt sources is often overpaying under the regular scheme. Meanwhile a trader who sells B2B to registered buyers, or who deals across state lines, sometimes opts into composition and quietly loses customers because he can no longer pass on credit. Below is the full comparison, with the exact turnover numbers, rates and a worked example so you can see where the break-even sits for your own business.
What the composition scheme actually is
The composition scheme under Section 10 of the CGST Act is a simplified GST route for small taxpayers. Instead of charging GST on each invoice, tracking input credit and filing monthly returns, you pay a small flat percentage of your turnover and file far less paperwork. In exchange, you give up three things: you cannot collect GST from your customers, you cannot claim input tax credit (ITC) on your purchases, and you cannot sell outside your own state.
Think of it as paying a modest “convenience fee” on sales in return for being left alone by the return-filing machinery. For a genuinely small, local, B2C business, that fee is usually cheaper than the tax you would otherwise remit — because you were never in a position to recover much credit anyway.
Who is eligible: the turnover limits for FY 2025-26
Eligibility depends on your aggregate turnover in the previous financial year and on the nature of your business. There are two distinct tracks — one for goods (and restaurants), and a separate one for service providers.
| Category | Turnover limit | Governing provision |
| Traders and manufacturers of goods, and restaurants (most states) | Rs. 1.5 crore | Section 10(1) |
| Same, but in special category states (most North-Eastern states, etc.) | Rs. 75 lakh | Section 10(1) |
| Service providers (other than restaurants) | Rs. 50 lakh | Section 10(2A) |
A subtle but important point: a composition dealer in goods is allowed to supply a small amount of services alongside — up to 10% of turnover in the preceding year, or Rs. 5 lakh, whichever is higher — without being thrown out of the scheme. So a shop that mostly sells goods but does a little repair or installation work does not automatically lose eligibility.
The composition tax rates
The flat rates are laid down and are the same across the country:
| Type of business | Composition rate (on turnover) | Split |
| Manufacturers of goods | 1% | 0.5% CGST + 0.5% SGST |
| Traders / retailers of goods | 1% (on turnover of taxable supplies) | 0.5% CGST + 0.5% SGST |
| Restaurants (not serving alcohol) | 5% | 2.5% CGST + 2.5% SGST |
| Other service providers under Section 10(2A) | 6% | 3% CGST + 3% SGST |
Notice that the rate is charged on your turnover, not on your value addition or profit. This is the single biggest thing to understand about composition: you pay even on the margin you have not earned yet, and you pay out of your own pocket because you cannot recover it from the customer. That is exactly why the credit you forgo matters so much.
The three restrictions that decide everything
1. No input tax credit
Under composition you cannot claim ITC on any purchase — not on stock, not on rent, not on the GST your suppliers charge you. Under the regular scheme, that credit is real money you net off against your output tax. So the composition scheme only makes sense when you have little credit to lose in the first place.
2. No inter-state outward supplies
A composition dealer can only make sales within its own state. The moment you make an inter-state outward supply, you are ineligible. (You may still buy from other states — the restriction is only on your outward sales.) For a business that sells online or ships across state borders, this alone is usually a dealbreaker.
3. No supply through e-commerce operators and no tax invoice
You cannot supply goods through an e-commerce operator that is required to collect TCS. You also cannot issue a tax invoice or collect GST from your customer — you must issue a bill of supply and display “composition taxable person” on your signboard and bills. Certain businesses are barred outright: manufacturers of ice cream, pan masala and tobacco, casual and non-resident taxable persons, and dealers in goods that are wholly exempt.
Worked example: where composition wins, and where it loses
Take a retail trader in one state with annual sales (turnover) of Rs. 80 lakh, buying goods on which suppliers charge 12% GST. We will look at two scenarios: a high-margin business that buys little relative to sales, and a low-margin business that buys a lot.
| Particulars | Regular scheme (12% output) | Composition (1%) |
| Annual sales (turnover) | Rs. 80,00,000 | Rs. 80,00,000 |
| Output GST charged / payable | Rs. 9,60,000 (collected from customers) | Rs. 80,000 (paid from own pocket) |
| Purchases (Scenario A: Rs. 40 lakh) | ITC = Rs. 4,80,000 | ITC = Nil |
| Net GST outflow — Scenario A | Rs. 4,80,000 (9.6L output less 4.8L credit; recovered from customers, so cash cost is nil) | Rs. 80,000 (real cost, borne by you) |
In the regular scheme, the Rs. 9.6 lakh output tax is collected from customers and Rs. 4.8 lakh credit is netted off, so the business is broadly cash-neutral on GST — the tax is the customer’s, not yours. Under composition, the Rs. 80,000 is a genuine cost you absorb. So on paper composition “costs” Rs. 80,000 while regular “costs” nothing?
That framing is what trips people up. The right question is not “which scheme costs less tax” but “which scheme leaves me better off after pricing and paperwork.” Two things flip the answer:
First, your customers. If you sell to registered B2B buyers, they want your tax invoice because they claim your GST as their credit. Take that away (composition) and your effective price to them rises by the GST they can no longer recover — you lose competitiveness. But if you sell to end consumers (B2C), they cannot claim credit anyway, so under composition you can simply keep your price the same and absorb 1% — a tiny cost — while saving enormously on compliance.
Second, compliance cost. Regular registration means GSTR-1 and GSTR-3B every month (or QRMP quarterly), ITC reconciliation against GSTR-2B, and the risk of mismatch notices. Composition means one quarterly payment challan and one annual return. For a two-person shop, the accountant’s fees and the owner’s time saved are often worth more than the tax difference.
So the practical rule is: a small B2C business (kirana store, local eatery, salon) usually wins with composition; a B2B trader or anyone selling inter-state or online usually loses. You can model your own numbers with our GST Calculator, and if the call is genuinely close you can put the question to us through Ask a CA — GST.
Restaurant example: the 5% question
Restaurants are the classic composition case because a stand-alone (non-air-conditioned, non-hotel) restaurant under the regular scheme charges 5% GST without ITC anyway. So the comparison is unusually clean.
A restaurant with Rs. 60 lakh turnover pays 5% either way on its food sales. Under the regular route it charges the customer 5% and takes no input credit; under composition it pays 5% of turnover out of its own margin (Rs. 3 lakh) but escapes monthly filing and the customer sees a slightly lower bill (no separate 5% line). For a purely dine-in, cash-and-UPI local restaurant with turnover comfortably under Rs. 1.5 crore, composition is frequently the cleaner choice. The moment the restaurant wants to sell through Zomato/Swiggy (an e-commerce operator) at scale, it must weigh that composition bars TCS-based e-commerce supply.
Compliance calendar under composition
The reduced paperwork is a real benefit, but it is not zero. You still have two recurring obligations:
| Form | What it is | Due date |
| CMP-02 | Opt-in intimation for the scheme | By 31st March, for the next financial year |
| CMP-08 | Quarterly statement-cum-challan to pay tax | 18th of the month after each quarter |
| GSTR-4 | Annual return | 30th June of the next financial year (extended from 30th April, effective FY 2024-25) |
Key takeaways
- Composition scheme = a flat 1% (traders/manufacturers), 5% (restaurants) or 6% (other services) on turnover, in exchange for no ITC, no inter-state outward sales, and no tax invoice.
- Turnover limits for FY 2025-26: Rs. 1.5 crore for goods and restaurants (Rs. 75 lakh in special category states), and Rs. 50 lakh for service providers under Section 10(2A).
- The scheme wins for small B2C businesses that buy little creditable stock and value low compliance; it loses for B2B sellers (whose buyers want credit) and anyone selling inter-state or through TCS e-commerce.
- You cannot collect GST from customers under composition — the tax comes out of your own margin, so it is a real cost even at 1%.
- Compliance is light but not nil: opt in via CMP-02 by 31 March, pay quarterly through CMP-08 (18th after quarter-end), and file GSTR-4 annually by 30 June.
Frequently Asked Questions
Can a composition dealer charge GST separately on the bill?
No. A composition taxpayer must issue a bill of supply, not a tax invoice, and cannot show or collect GST from the customer. The composition tax is paid out of the dealer’s own funds, which is why it is effectively a cost on your margin.
Can I buy goods from another state under the composition scheme?
Yes. The restriction is only on outward supplies — you cannot sell inter-state. You are free to purchase from suppliers in other states; you simply cannot claim any input tax credit on those purchases.
My turnover crossed Rs. 1.5 crore mid-year. What happens?
You must exit the scheme from the day you cross the limit. From that point you become a regular taxpayer, must start issuing tax invoices, charging GST and filing GSTR-1/3B, and you can claim ITC on stock held on the date of transition (subject to conditions) by filing the prescribed form.
Is the composition scheme available to a service provider?
Yes, but through a separate route under Section 10(2A) with a lower turnover limit of Rs. 50 lakh and a higher rate of 6%. Restaurants are treated as supply of goods for this purpose and fall under the 5% goods track, not the 6% services track.
Should a B2B wholesaler opt for composition to save tax?
Usually no. Your registered buyers rely on the input tax credit in your tax invoice; if you switch to composition you can no longer pass on that credit, so your effective price to them rises and you tend to lose business. Composition is designed for businesses selling to final consumers, not for the supply chain.