Library / Goods and Services Tax: The Professional's Master Guide

9. Composition Scheme (Sections 10 and 10(2A))

The composition scheme lets small businesses pay tax at a flat, low rate on turnover instead of charging tax invoice by invoice and claiming ITC. It reduces compliance to a quarterly statement and an annual return. The price is that the business cannot collect tax from customers, cannot take ITC, and cannot sell outside its State. Whether the scheme suits a client depends on who the customers are and on the margins, and the answer often surprises.

9.1 Eligibility and rates

Section 10(1) is for suppliers of goods and restaurants. A registered person whose aggregate turnover in the preceding financial year did not exceed Rs. 1.5 crore (Rs. 75 lakh in certain special category States) may opt to pay tax at the rates in rule 7. Such a person may also supply services (other than restaurant services) up to 10% of turnover in the State in the preceding year or Rs. 5 lakh, whichever is higher. Section 10(2A) is a separate scheme for suppliers of services (or mixed suppliers) not eligible under section 10(1), with aggregate turnover in the preceding year up to Rs. 50 lakh.

Category	Rate (CGST + SGST)	Base
Manufacturers (other than of notified goods)	1% (0.5% + 0.5%)	Turnover in the State
Traders	1% (0.5% + 0.5%)	Turnover of taxable supplies in the State
Restaurants not serving alcohol	5% (2.5% + 2.5%)	Turnover in the State
Service providers under section 10(2A)	6% (3% + 3%)	Turnover in the State

For composition eligibility, the value of exempt services by way of deposits, loans or advances, where the consideration is interest or discount, is left out of turnover.

9.2 Restrictions

A composition taxpayer must not:

supply goods or services not leviable to GST (such as alcohol for human consumption);
make inter-State outward supplies;
supply services through an e-commerce operator; goods may be sold intra-State through an e-commerce operator from 1 October 2023;
manufacture notified goods such as ice cream, pan masala, tobacco products and aerated waters;
be a casual taxable person or non-resident taxable person;
collect tax from customers or claim ITC.

The option applies to all registrations under the same PAN; one GSTIN cannot be under composition while another under the same PAN is regular. The taxpayer must issue a bill of supply (not a tax invoice) marked "composition taxable person, not eligible to collect tax on supplies", display "composition taxable person" at the place of business, and pay tax under reverse charge where applicable at the normal rates, without ITC.

9.3 Forms and compliance

Form	Purpose	Timing
CMP-02	Intimation to opt for composition	Before the start of the financial year; new applicants opt in REG-01
CMP-03	Details of stock held on the date of opting	Within 60 days of opting
ITC-03	Reversal of ITC on stock and capital goods when opting in	Within 60 days from start of the year
CMP-08	Quarterly statement and payment of tax	By 18th of the month after the quarter
GSTR-4	Annual return	By 30 June after the financial year
CMP-04	Intimation of withdrawal from the scheme	Within 7 days of becoming ineligible, or before voluntary withdrawal
ITC-01	Claim of ITC on stock when leaving the scheme	Within 30 days of becoming liable under section 9

Illustration 44: Checking eligibility

Rathod Hardware, Rajkot, had turnover of Rs. 1,40,00,000 from sale of goods in 2024-25 and Rs. 12,00,000 from repair services. It also earned Rs. 3,00,000 as interest on deposits. It sells only within Gujarat.

Step 1: Aggregate turnover for composition (excluding interest) = Rs. 1,40,00,000 + Rs. 12,00,000 = Rs. 1,52,00,000.

Step 2: This is above Rs. 1.5 crore. Rathod Hardware is not eligible for 2025-26, even though the goods turnover alone is within the limit.

Step 3: Had the repair turnover been Rs. 9,00,000, aggregate turnover would be Rs. 1,49,00,000 (eligible), and services of Rs. 9,00,000 would be within the permitted limit of the higher of 10% of Rs. 1,49,00,000 (Rs. 14,90,000) and Rs. 5,00,000.

9.4 Opting in and opting out: effect on ITC (section 18)

A regular taxpayer who opts for composition must pay an amount equal to the ITC on inputs held in stock (including in semi-finished and finished goods) and on capital goods, reduced for capital goods by 5 percentage points per quarter or part of a quarter since the invoice date (section 18(4) and rule 44). Any balance left in the credit ledger lapses. When a taxpayer leaves the scheme, section 18(1)(c) allows ITC on stock and capital goods held on the day before he becomes liable to pay tax as a regular taxpayer, subject to the same reduction for capital goods and the one-year limit on invoices in section 18(2).

Illustration 45: ITC reversal on opting in

Kavya Stores, a regular taxpayer, opts for composition from 1 April 2026. On 31 March 2026 it holds stock on which ITC of Rs. 1,08,000 was taken, and a display refrigeration unit on which ITC of Rs. 90,000 was taken 7 quarters earlier (counting parts of quarters).

Step 1: Stock: reverse the full ITC of Rs. 1,08,000.

Step 2: Capital goods: reduce by 5 x 7 = 35 percentage points. Amount payable = 65% of Rs. 90,000 = Rs. 58,500.

Step 3: Total payable through ITC-03 = Rs. 1,08,000 + Rs. 58,500 = Rs. 1,66,500, which can be paid from the credit ledger. Any balance remaining in the ledger after this lapses.

Illustration 46: Crossing the limit during the year

Om Traders, under composition for 2025-26, sees its aggregate turnover cross Rs. 1.5 crore on 12 January 2026. On 11 January 2026 it holds stock of Rs. 8,00,000 bought within the last year, on which suppliers charged GST of Rs. 1,44,000.

Step 1: The option lapses from 12 January 2026 (section 10(3)). Om Traders files CMP-04 within 7 days and issues tax invoices from that date.

Step 2: It files ITC-01 within 30 days and claims ITC of Rs. 1,44,000 on the stock.

Step 3: Composition tax is paid on supplies up to 11 January 2026, and regular tax from 12 January 2026.

Illustration 47: Quarterly tax under composition

Joshi Namkeen, a manufacturer under composition in Gujarat, has turnover of Rs. 30,00,000 in the quarter ending December 2025. It paid freight of Rs. 40,000 to a GTA that has not opted for forward charge.

Step 1: Composition tax at 1% of Rs. 30,00,000 = Rs. 30,000 (CGST Rs. 15,000 + SGST Rs. 15,000).

Step 2: Reverse charge on freight at 5% = Rs. 2,000 (CGST Rs. 1,000 + SGST Rs. 1,000). No ITC is available.

Result: Total tax in CMP-08 = Rs. 32,000, paid in cash by 18 January 2026.

9.5 Composition or regular: worked comparisons

The scheme saves tax only where the tax on value added under the regular scheme exceeds the composition tax plus the ITC lost. It suits a business that sells to consumers at a good margin. It does not suit a business selling to registered buyers, who cannot take ITC on purchases from a composition supplier.

Illustration 48: Trader selling to consumers

Mehta Kirana, Ahmedabad, buys goods for Rs. 80,00,000 plus GST at 18% (Rs. 14,40,000) in a year and sells to consumers at a total shelf price of Rs. 1,18,00,000, which is fixed by the market whichever scheme it chooses.

Regular scheme: Output tax included in shelf price = Rs. 1,18,00,000 x 18 / 118 = Rs. 18,00,000. Net sales = Rs. 1,00,00,000. ITC = Rs. 14,40,000; tax paid in cash = Rs. 3,60,000. Margin = Rs. 1,00,00,000 minus Rs. 80,00,000 = Rs. 20,00,000.

Composition: Sales = Rs. 1,18,00,000 (no tax collected). Cost of goods including GST = Rs. 94,40,000. Composition tax at 1% = Rs. 1,18,000. Margin = Rs. 1,18,00,000 minus Rs. 94,40,000 minus Rs. 1,18,000 = Rs. 22,42,000.

Result: Composition gives Rs. 2,42,000 more margin and far less compliance. If Mehta Kirana's buyers were registered businesses wanting ITC, it would lose them, and the comparison would change.

Illustration 49: Small restaurant

Swad Restaurant, a standalone restaurant, expects customers to spend Rs. 63,00,000 a year. Restaurant service outside specified premises is taxed at 5% without ITC under the regular scheme.

Regular scheme: Menu price plus 5% GST. Revenue to the restaurant = Rs. 63,00,000 x 100 / 105 = Rs. 60,00,000; GST collected and paid = Rs. 3,00,000. No ITC.

Composition: GST cannot be charged, so menu prices are set to include it. Composition tax at 5% of Rs. 63,00,000 = Rs. 3,15,000. Revenue retained = Rs. 59,85,000.

Result: Composition costs Rs. 15,000 more a year, since the 5% applies to the tax-inclusive amount, and ITC is unavailable either way. Its only advantage is simpler compliance (CMP-08 and GSTR-4 instead of monthly GSTR-1 and GSTR-3B), which the owner should weigh against the extra cost.

9.6 Common mistakes

Treating each GSTIN separately for the Rs. 1.5 crore limit; the test is aggregate turnover under the PAN.
Making even one inter-State sale, which breaks eligibility from that date.
Issuing a tax invoice or showing GST on the bill; tax collected must be paid over and the option can be cancelled.
Forgetting reverse charge liability on GTA freight and legal fees, which composition taxpayers pay at the normal rates. (Since January 2025, composition taxpayers are not liable under reverse charge on commercial rent paid to unregistered landlords.)
Not filing ITC-03 on opting in, or ITC-01 within 30 days on opting out, and losing the credit.
Assuming the scheme is cheaper: for restaurants and for businesses with B2B customers it often is not.

Chapter summary

• Section 10(1): goods suppliers and restaurants with turnover up to Rs. 1.5 crore (Rs. 75 lakh in some States); rates 1% for manufacturers and traders, 5% for restaurants.

• Section 10(2A): service providers with turnover up to Rs. 50 lakh at 6%.

• No ITC, no tax collection, no inter-State outward supply, no services through e-commerce operators; bill of supply and signboard mandatory.

• CMP-02 to opt in, CMP-08 quarterly by the 18th, GSTR-4 by 30 June, CMP-04 to withdraw.

• Opting in requires reversal of ITC on stock and capital goods; opting out allows ITC on stock through ITC-01.

• Composition suits B2C traders with good margins; it often costs more for restaurants and loses B2B customers.

PART C: TIME, VALUE AND PLACE OF SUPPLY

When tax is payable, on what amount, and which Government collects it

Every taxable supply raises three questions: when does the liability arise, on what amount is tax charged, and is the supply intra-State or inter-State. This Part answers them in that order, and then applies the place of supply rules to imports, exports, supplies to SEZs and deemed exports.