The GST composition scheme
A flat rate on turnover for small businesses, in exchange for giving up input credit.
Last checked 20 September 2026
The composition scheme lets a small business pay GST at a flat percentage of turnover instead of tracking tax invoice by invoice. The trade-off is real: you cannot collect GST from customers, you cannot claim input tax credit, and you cannot make inter-state outward supplies.
Who can opt in
Eligibility is by turnover and by activity. The commonly cited limits are:
| Business | Turnover limit | Usual rate on turnover |
|---|---|---|
| Traders and manufacturers | ₹ 1.5 crore (lower in some special category states) | 1% |
| Restaurants not serving alcohol | ₹ 1.5 crore | 5% |
| Other service providers, under the separate service composition | ₹ 50 lakh | 6% |
Excluded outright are, among others, businesses making inter-state outward supplies, supplying through e-commerce operators who collect tax at source, and manufacturers of certain notified goods.
Careful
Limits, rates and exclusions are set by notification and differ by state. Treat this table as orientation and confirm your eligibility before opting in — leaving the scheme mid-year has consequences of its own.
What you give up
- No tax collection. You cannot charge GST on your invoices. The flat percentage comes out of your own margin.
- No input tax credit. The GST on your purchases becomes part of your cost.
- No credit for your buyers. A registered buyer gets nothing to claim, which makes you less attractive to trade customers.
- No inter-state sales. Your outward supplies have to stay within your state.
What you get
- A much simpler return cycle — a quarterly statement and an annual return rather than the monthly cycle.
- No invoice-level output tax to compute, and far less reconciliation.
- A lower effective rate than the slab, if your customers are consumers who cannot use credit anyway.
The document you issue
A composition dealer issues a bill of supply, not a tax invoice, because there is no tax to show. The rules also require you to state on it that you are a composition taxable person and not eligible to collect tax on supplies, and to display that fact at your place of business.
Bill of Supply — free, no signupMake a compliant bill of supply with no GST columns.Who it actually suits
Broadly: businesses selling to consumers, within one state, with thin compliance capacity. A retailer or a small restaurant may be better off. A distributor or wholesaler is usually not — your customers are registered businesses who want credit, and losing credit on your own purchases hits hardest exactly where purchases are the bulk of your cost.
Can I switch out of the scheme?
Yes, and you must if you cross the limit. Crossing it mid-year means moving to normal registration from that point, with transitional credit rules to work through. Plan it rather than discovering it.
Do I still pay reverse charge?
Yes. Composition does not exempt you from reverse-charge liability, and you cannot claim credit for it either. See reverse charge.
Is the rate on profit or on turnover?
On turnover. That is what makes it simple and also what makes it unattractive for a low-margin, high-turnover trade like distribution.
Sources
- CGST Act 2017, sections 10 and 10(2A); CGST Rules, Chapter II
- CBIC — GST Acts, Rules and notifications (cbic-gst.gov.in)
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Related reading
What is GST?
One tax on the supply of goods and services, charged at every stage but paid only on the value added.
Tax invoice, bill of supply, proforma or challan?
Five documents that look alike and mean completely different things.
What is input tax credit?
The tax you paid on purchases, set against the tax you collected on sales.