Government Schemes & Benefits Starting-A-Business Taxation

GST Composition Scheme – A Simple Tax Option for Small Businesses

If you run a small business, you know how overwhelming tax compliance can get—frequent return filings, multiple tax rates, and loads of paperwork. That’s where the GST Composition Scheme comes in. It’s a simplified tax option under the GST system, specially designed to ease the burden for small businesses.

In this blog, we’ll walk you through what the composition scheme is all about, who can opt for it, how it works, and whether it’s the right fit for your business.

What is the GST Composition Scheme?

The GST Composition Scheme is a simplified tax scheme under the Goods and Services Tax (GST) system in India. It’s aimed at small taxpayers who want to avoid the hassle of complex GST rules. Instead of paying GST at standard rates, you pay tax at a fixed lower rate based on your total turnover—and in return, you get to enjoy less paperwork and easier compliance.

Why Was This Scheme Introduced?

Let’s face it—small businesses have limited resources. Hiring a full-time accountant or keeping up with monthly GST returns isn’t always feasible. That’s why the government introduced the composition scheme:

To reduce compliance burden
To help small businesses save time and money
To encourage more businesses to register under GST

Who Can Opt for It?

Not everyone is eligible for the scheme. Here’s a quick list to check if you qualify:

Your annual turnover is up to ₹1.5 crore (or ₹75 lakhs if you’re in a northeastern or hill state)
You only sell within your state (interstate sales aren’t allowed)
You don’t sell through e-commerce platforms
You’re not supplying non-taxable goods or providing certain services (some services are allowed though, like running a restaurant)

Recently, the scheme has been extended to service providers too, but only those with turnover up to ₹50 lakhs and under a separate 6% flat rate scheme.

GST Composition Scheme Tax Rates (FY 2024–25)

Type of Business	GST Rate
Manufacturers	1% (0.5% CGST + 0.5% SGST)
Traders & Retailers	1% (0.5% CGST + 0.5% SGST)
Restaurants (Non-Alcoholic)	5% (2.5% CGST + 2.5% SGST)
Service Providers (under CMP-02)	6% (3% CGST + 3% SGST)

Key Features of the Scheme

Here’s what makes the Composition Scheme so attractive for small businesses:

You pay a flat rate of tax on your total turnover
You file quarterly returns instead of monthly
You don’t need to issue a tax invoice—just a bill of supply
No input tax credit (ITC) is available, which means you pay tax out of pocket

How to Apply for the Composition Scheme

Getting started is fairly easy:

Log in to the GST portal (gst.gov.in)
Go to Services > Registration > Application to Opt for Composition Levy
Fill and submit Form CMP-02 before the beginning of the financial year
File Form ITC-03 to reverse any previously claimed input tax credit

What Returns Do You Need to File?

While it reduces filing frequency, there are still a few returns to take care of:

GSTR-4 (quarterly) – summary of sales and tax paid
GSTR-9A (annual) – optional now, but may be brought back
Maintain proper records and mention “Composition Taxable Person” on every invoice or bill

Pros and Cons

✅ Advantages

Lower tax rates
Simple compliance
Less paperwork
Suitable for local businesses with steady turnover

❌ Limitations

No ITC benefit
Can’t sell outside your state
Can’t sell via e-commerce
Must pay tax under Reverse Charge if applicable

When Should You Exit the Scheme?

You’ll need to exit if:

Your turnover exceeds ₹1.5 crore
You start making interstate or e-commerce sales
You no longer meet the eligibility criteria

To exit, file Form CMP-04 within 7 days of disqualification.

Should You Opt for the Composition Scheme?

If you’re running a local shop, a small manufacturing unit, or a restaurant, and your turnover is well within the limit, then this scheme could really save you time and effort. But if you’re planning to scale, trade interstate, or deal with bigger clients who need input tax credit, the regular GST route might make more sense.

Final Thoughts

The GST Composition Scheme is like a stress-free tax option for small businesses. It won’t work for everyone—but if you fit the profile, it’s definitely worth considering. Just make sure you stay updated on any rule changes, and don’t forget to re-apply every year if you want to continue under the scheme.