1. What Is the GST Composition Scheme?

The GST composition scheme is a voluntary, simplified taxation option under Section 10 of the Central Goods and Services Tax (CGST) Act, 2017. It was designed to relieve small taxpayers from the administrative burden of the regular GST regime — monthly return filing, maintaining detailed invoice-level records, tracking ITC on every purchase, and reconciling GSTR-2B every month.

Under the composition scheme, a registered dealer pays GST at a fixed percentage of total turnover — regardless of the tax rate on individual goods or services. There is no ITC to track, no GSTR-1 to file monthly, and no GSTR-3B to reconcile with GSTR-2B. Instead, the dealer files a quarterly statement (Form CMP-08) to pay tax and one annual return (Form GSTR-4) to summarise the year’s activities.

The trade-off is significant but clear-cut: composition dealers cannot claim ITC on their purchases, cannot collect GST from their customers, cannot make inter-state supplies of goods, and cannot sell through e-commerce platforms that collect TCS. These restrictions make the scheme suitable for certain types of small, locally-operating businesses — and unsuitable for others.

2. Who Is Eligible for the GST Composition Scheme — Turnover Limits & Conditions

Eligibility for the GST composition scheme is governed by Section 10 of the CGST Act and the corresponding CGST Rules. A taxpayer must satisfy all of the following conditions simultaneously:

2.1 Turnover Limits for FY 2025-26

*Special category states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand (₹75 lakh limit for goods).

2.2 How to Calculate Aggregate Turnover for Eligibility

The turnover limit is checked against aggregate turnover, which is calculated on an all-India PAN basis — not state by state. Aggregate turnover includes:

• All taxable supplies (intra-state + inter-state)
• Exempt supplies
• Exports of goods and services
• Supplies made on behalf of the principal

And excludes:

• Inward supplies on which tax is paid on reverse charge basis
• Central tax, State tax, Union Territory tax, and Integrated tax
• Cess

2.3 Other Eligibility Conditions

• The taxpayer must be registered under GST (having a valid GSTIN)
• All businesses under the same PAN must opt for composition — you cannot have one GSTIN under regular scheme and another under composition if both are under the same PAN
• The taxpayer must not be dealing in goods that are not taxable under GST
• The taxpayer must not be a casual taxable person or a non-resident taxable person

3. Who Cannot Opt for the GST Composition Scheme

The following categories are explicitly excluded from the composition scheme regardless of turnover:

4. GST Composition Scheme Tax Rates for 2025-26

The composition scheme tax rate is applied on the total turnover of the quarter — not on value added or on the margin. This means a trader with ₹50 lakhs in sales pays tax on ₹50 lakhs, regardless of how much the goods cost to purchase. The dealer cannot pass this tax on to the buyer — it is paid from the dealer’s own funds.

5. Benefits vs. Drawbacks — Is the GST Composition Scheme Right for You?

6. How to Opt Into the GST Composition Scheme — CMP-02 Procedure

An existing regular GST taxpayer who wishes to switch to the composition scheme for the next financial year must file Form GST CMP-02 by 31st March of the current financial year.

7. Form ITC-03 — Mandatory ITC Reversal on Opting Into Composition

When a regular GST taxpayer switches to the composition scheme, they have been claiming ITC on all their purchases up to the date of switching. Under the composition scheme, ITC is not available — meaning the taxpayer can no longer carry forward and utilise the ITC that was legitimately claimed under the regular scheme.

To address this, the law requires that on the date of opting into the composition scheme, the taxpayer must reverse all ITC available in the Electronic Credit Ledger on:

• Inputs held in stock
• Inputs contained in semi-finished and finished goods
• Capital goods (proportionate reversal based on remaining useful life)

This reversal is declared in Form GST ITC-03, which must be filed within 60 days from the date of filing CMP-02. The amount reversed reduces the Electronic Credit Ledger balance — any reversal exceeding the available credit balance must be paid in cash through the Electronic Cash Ledger.

8. Form CMP-08 — Quarterly Filing Guide with Due Dates 2025-26

Form CMP-08 is the quarterly statement-cum-challan filed by composition dealers to declare their self-assessed tax liability and make the tax payment. It replaced the old quarterly GSTR-4 filing from FY 2019-20 onwards.

8.1 Who Files CMP-08

All taxpayers registered under the GST composition scheme — both goods dealers (via CMP-02) and service providers under the special composition scheme — must file CMP-08 every quarter without exception.

8.2 Due Dates for CMP-08 Filing — FY 2025-26

8.3 What to Declare in CMP-08

CMP-08 is a simple form with one primary table — Table 3. You declare:

• Total value of outward supplies (sales) for the quarter on which you are liable to pay tax
• Inward supplies on which you must pay RCM (Reverse Charge Mechanism)
• Any interest payable for delayed payment from earlier quarters

The portal automatically calculates the tax based on your registered composition rate. No invoice-level detail is required in CMP-08.

8.4 Late Fee for CMP-08

If CMP-08 is not filed by the due date, a late fee of ₹200 per day (₹100 CGST + ₹100 SGST) applies, subject to a maximum of ₹5,000. In addition to the late fee, interest at 18% per annum applies on the tax amount from the due date until payment. Critically: failure to file CMP-08 for two consecutive quarters blocks e-way bill generation — a severe operational disruption for traders who need to move goods.

9. GSTR-4 Annual Return — Complete Filing Guide

GSTR-4 is the annual GST return for composition taxpayers. It consolidates all four quarters’ CMP-08 data for the financial year into a single comprehensive return. From FY 2024-25 onwards, the due date for GSTR-4 has been extended to 30th June of the following financial year.

9.1 Key Due Dates

9.2 What GSTR-4 Contains

• Table 4A–4D: Details of inward supplies from registered and unregistered suppliers, imports, and reverse charge transactions
• Table 5: Summary of CMP-08 liabilities (auto-populated from your four quarterly CMP-08 filings)
• Table 6: Tax rate-wise summary of all supplies for the year
• Table 7: TDS/TCS credits received during the year
• Table 8: Final tax liability, tax paid in CMP-08, balance payable, interest, and late fee

10. Key Obligations: What Composition Dealers Must and Must Not Do

10.1 Mandatory Obligations

• Display “Composition Taxable Person” on every Bill of Supply — the full text must read: “Composition Taxable Person, not eligible to collect tax on supplies.” This is mandatory on all Bills of Supply and on business signboards.
• Issue Bill of Supply instead of tax invoice — no GST should be shown separately on any supply document
• Pay RCM on applicable inward supplies — even composition dealers must pay GST on reverse charge basis (see Section 11)
• File CMP-08 quarterly by the 18th of the following month
• File GSTR-4 annually by 30th June
• File CMP-04 immediately if turnover crosses the threshold mid-year
• Maintain books of accounts — simplified but still mandatory under GST law

10.2 Things Composition Dealers Cannot Do

• Cannot collect GST from customers — the composition tax is borne by the dealer
• Cannot issue tax invoices — only Bills of Supply are permitted
• Cannot make inter-state outward supplies of goods
• Cannot sell through e-commerce operators who collect TCS
• Cannot claim ITC on any purchase, service, or capital expenditure
• Cannot supply to SEZ units (these are treated as inter-state/zero-rated supplies)

11. Reverse Charge Mechanism (RCM) Under the GST Composition Scheme

One frequently misunderstood aspect of the GST composition scheme is the treatment of Reverse Charge Mechanism (RCM). Many composition dealers assume that since they pay a flat composition tax, RCM does not apply to them. This is incorrect.

Composition dealers must still pay GST on reverse charge on:

• Purchases from unregistered suppliers if notified under RCM (Section 9(4)) — applicable for specific notified categories
• Specified services subject to RCM regardless of supplier’s registration status — e.g., legal services from advocates, transport services from GTA (Goods Transport Agency), services from insurance agents, etc.
• Import of services — any services imported from abroad attract IGST under RCM

The RCM liability is declared in Table 3 of CMP-08 under “Inward supplies liable to reverse charge.” The tax is paid along with the quarterly CMP-08. Unlike regular taxpayers, composition dealers cannot claim ITC on the RCM tax they pay — it is a dead cost. For our detailed coverage of RCM under the regular GST scheme, see our post on Reverse Charge Mechanism under GST.

12. Exiting the GST Composition Scheme — Voluntary and Compulsory Exit

12.1 Compulsory Exit — When Turnover Exceeds the Limit

If your aggregate annual turnover crosses the prescribed limit during the financial year, the option to pay under the composition scheme lapses immediately from the day the threshold is crossed. You must:

12.2 Voluntary Exit

A composition dealer can also voluntarily exit the scheme at any time by filing Form GST CMP-04 on the GST portal. After voluntary exit, the same post-exit obligations apply: file ITC-01 within 30 days to claim ITC on closing stock, and switch to regular GST compliance from the exit date.

13. Case Study: How a Delhi Trader Saved ₹4.2 Lakhs by Switching to Composition

M/s Ravi General Store, a grocery and household goods retailer in Laxmi Nagar, Delhi, had annual turnover of ₹80 lakhs in FY 2023-24. The proprietor, Mr. Rajesh Kumar, was registered under the regular GST scheme paying 5% and 12% GST on various goods. His accountant spent approximately ₹18,000/month on GST compliance — filing GSTR-1, GSTR-3B, reconciling GSTR-2B, and managing late fees for the occasional delayed filing. His customers were almost entirely walk-in retail buyers who never asked for tax invoices.

Analysis done before switching:

Result: Switching to the composition scheme saved Mr. Rajesh Kumar approximately ₹1,60,000 per year on a pure cash basis. Additionally, since his customers never claimed ITC anyway (walk-in retail), there was zero business impact from switching to Bills of Supply. The compliance burden dropped dramatically — no more GSTR-2B reconciliation, no more GSTR-1, no more month-end stress.

Over a 3-year period, the cumulative saving — accounting for modest turnover growth — exceeded ₹4.2 lakhs. Mr. Rajesh used this saving to invest in expanding his store’s inventory.

Frequently Asked Questions — GST Composition Scheme

Conclusion

The GST composition scheme is one of the most valuable compliance simplification tools available to small businesses in India — but only if used for the right type of business. For a local kirana store, a neighbourhood restaurant, a small manufacturer supplying to retail customers, or a service provider working primarily with individuals, the scheme delivers real savings: lower tax rates, minimal compliance, and predictable quarterly payments.

For businesses selling to other GST-registered companies that need ITC — or for businesses making inter-state sales or selling through e-commerce — the composition scheme can actually be a competitive disadvantage, and the regular GST scheme with full ITC is the better choice.

The most time-sensitive item right now is the 31 March 2026 deadline for Form CMP-02 for FY 2026-27. If you have been considering switching to the composition scheme, this is your annual window — and it closes without extension. Once you opt in, remember that Form ITC-03 must follow within 60 days, and then CMP-08 quarterly filings begin from 18 July 2026 for the first quarter of FY 2026-27.

For more guidance on connected compliance topics, explore our posts on GST registration cancellation (if you need to exit the scheme entirely), Reverse Charge Mechanism under GST (which applies even to composition dealers), ITC reversal under Rule 42 (relevant when switching back to regular), and the Year-End GST Compliance Checklist. Or contact our CA team for a personalised composition scheme suitability assessment.