For small business owners in India, GST compliance can feel like a never-ending cycle of monthly returns, reconciliations, and portal submissions. If you are running a small shop, restaurant, manufacturer, or service business with annual turnover below Rs 1.5 crore, there is a simpler option built specifically for you - the GST Composition Scheme.
Under this scheme, you pay GST at a flat, low rate on your total turnover. You file just one annual return (GSTR-4) instead of twelve monthly GSTR-3B filings. And you do not need to maintain elaborate records of every input tax credit.
This guide explains whether the Composition Scheme is right for your business in 2026, how it works, what the rates are, and how to opt in before the deadline.
What is the GST Composition Scheme?
The GST Composition Scheme is a simplified taxation framework under Section 10 of the Central Goods and Services Tax (CGST) Act, 2017. It allows eligible small taxpayers to pay GST at a fixed percentage of their total turnover - instead of the standard GST rate applied invoice by invoice.
The key advantage is simplicity: lower compliance burden, reduced record-keeping, and one return per year. The trade-off is that you cannot collect GST from your customers, cannot issue tax invoices, and cannot claim Input Tax Credit (ITC) on your purchases.
Who is Eligible for the GST Composition Scheme in 2026?
To opt for the Composition Scheme, your business must meet all of the following conditions:
- Annual aggregate turnover must not exceed Rs 1.5 crore in the preceding financial year (Rs 75 lakh for businesses in North-Eastern states and Himachal Pradesh)
- For service providers, the limit is lower - Rs 50 lakh for businesses providing only or primarily services
- Must be registered as a regular GST taxpayer (you switch from regular to composition by filing CMP-02)
- Must deal only in intra-state (within the same state) supplies - the scheme does not allow inter-state sales
- Must not supply goods through an e-commerce operator that is required to collect Tax Collected at Source (TCS) under Section 52 of the CGST Act
Important: The aggregate turnover is calculated on a PAN basis across all businesses registered under the same PAN. If you own two businesses in the same name, both must be within the Rs 1.5 crore limit combined.
Who Cannot Use the Composition Scheme?
- Manufacturers of ice cream, pan masala, or tobacco products
- Businesses making inter-state supplies
- Casual taxable persons or non-resident taxable persons
- Businesses supplying goods that are exempt from GST
- Businesses that supply services through e-commerce platforms that deduct TCS (e.g., Swiggy, Zomato for restaurant orders above certain thresholds - check current TCS applicability)
GST Composition Scheme Tax Rates (2026)
|
Business Type |
GST Rate (Composition) |
Effective Breakdown |
|---|---|---|
|
Manufacturers (other than restricted goods) |
1% of turnover |
0.5% CGST + 0.5% SGST |
|
Traders (dealers in goods) |
1% of turnover |
0.5% CGST + 0.5% SGST |
|
Restaurants (not serving alcohol) |
5% of turnover |
2.5% CGST + 2.5% SGST |
|
Service providers (mixed or pure service) |
6% of turnover |
3% CGST + 3% SGST |
These rates are charged on total turnover - not on the margin or profit. The tax is paid from your own pocket, not collected from customers. This is why composition dealers must display the phrase 'Composition taxable person, not eligible to collect tax on supplies' on all bills of supply.
Compliance Requirements Under the Composition Scheme
|
Compliance |
Requirement |
Deadline |
|---|---|---|
|
Quarterly tax payment |
Form CMP-08 (quarterly statement) |
18th of month following each quarter |
|
Annual return |
Form GSTR-4 |
30 June of the following financial year |
|
Bill of Supply |
Issue instead of Tax Invoice |
For every sale - must state composition status |
|
Opt-in intimation |
Form CMP-02 (to opt in each year) |
By 31 March for the next financial year |
|
Opt-out |
Form CMP-04 (to switch back to regular) |
Any time - takes effect from next quarter |
Important: The opt-in deadline for FY 2027-28 is 31 March 2027. If you want to join the Composition Scheme for FY 2026-27, the deadline to file CMP-02 was 31 March 2026. If you missed this, you must wait until next year or consult a GST professional.
Key Advantages of the Composition Scheme
- Dramatically reduced compliance burden - CMP-08 quarterly and GSTR-4 annually replaces 12 GSTR-3B filings per year
- Lower tax rates - 1% to 6% on turnover is far lower than standard GST rates (5% to 28% on taxable value)
- No need to issue tax invoices or maintain detailed ITC records
- Improved cash flow - less tax outflow compared to standard GST in many cases
- Ideal for businesses that primarily sell to end consumers (B2C) where ITC is not a consideration for buyers
Key Disadvantages - When NOT to Use the Composition Scheme
- You cannot claim Input Tax Credit on your purchases - if you buy a lot of taxable inputs, this can make the scheme less attractive than it appears
- Your B2B customers cannot claim ITC on their purchases from you - this can make you less attractive as a vendor to GST-registered businesses
- You cannot make inter-state supplies - limits your geographic expansion
- You cannot use e-commerce platforms (like Amazon or Flipkart for goods) if those platforms are required to collect TCS
- Under the new Income Tax Act 2025 (effective April 2026), professional tax deductions are only available under the old tax regime - verify how your composition tax interacts with your chosen income tax regime
Composition Scheme vs Regular GST - Quick Decision Guide
|
Your Business Profile |
Better Option |
|---|---|
|
Turnover under Rs 1.5 crore, primarily B2C (retail, restaurants) |
Composition Scheme |
|
Turnover under Rs 1.5 crore, primarily B2B (selling to registered businesses) |
Regular GST (they need ITC from you) |
|
Turnover above Rs 1.5 crore |
Regular GST (not eligible for Composition) |
|
Making inter-state sales |
Regular GST |
|
Selling on Amazon, Flipkart, etc. |
Regular GST (e-commerce TCS applicable) |
|
Exporting goods or services |
Regular GST (to claim refund of taxes paid) |
How Targolegal Can Help
Our Targo Accounts and GST Registration services advise small businesses on whether the Composition Scheme is the right fit - and handle the complete CMP-02 opt-in process, quarterly CMP-08 payments, and annual GSTR-4 return filing. We ensure you never miss a deadline or pay more tax than necessary.
If you are already on regular GST and want to evaluate switching to the Composition Scheme for FY 2027-28, contact Targolegal today.
