25 Jan 2024

Updated: May 2026

GST Composition Scheme 2026: A Complete Guide for Small Businesses

The GST Composition Scheme remains one of the most practical relief measures available to small businesses in India — offering reduced compliance burden, lower tax rates, and quarterly instead of monthly returns. Yet many eligible businesses either don't know they qualify or make structural errors in their opt-in. At Regi Tom Antony And Associates, we guide SMEs through the Composition Scheme decision every quarter. Here is what you need to know in 2026.

What is the GST Composition Scheme?

The Composition Scheme under Section 10 of the CGST Act, 2017 allows eligible small businesses to pay GST at a flat, reduced rate on their turnover instead of computing GST on each transaction under the regular scheme. The key benefit: dramatically lower compliance — no GSTR-1 (monthly), no GSTR-3B (monthly); instead, a quarterly statement (CMP-08) and one annual return (GSTR-4).

Who is Eligible for the Composition Scheme in FY2025–26?

Eligibility is based on aggregate annual turnover in the preceding financial year:

• Manufacturers and traders: Turnover up to ₹1.5 crore (₹75 lakh for special category states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand)
• Restaurant services (not serving alcohol): Turnover up to ₹1.5 crore
• Service providers (other than restaurant): Turnover up to ₹50 lakh — under the Special Composition Scheme for services introduced in 2019

Composition Scheme Tax Rates (Current)

The applicable rates under the Composition Scheme are:

• Manufacturers: 1% of turnover (0.5% CGST + 0.5% SGST)
• Traders: 1% of turnover on taxable supplies
• Restaurants (not serving alcohol): 5% of turnover (2.5% CGST + 2.5% SGST)
• Other service providers: 6% of turnover (3% CGST + 3% SGST) under the special notification scheme

Important: These rates apply on turnover, not on value added — so the effective GST cost depends on your margins.

Who Cannot Opt for the Composition Scheme?

The following businesses are excluded:

• Businesses making inter-state outward supplies
• Businesses supplying non-taxable goods (e.g., alcohol for human consumption)
• E-commerce operators required to collect TCS under Section 52
• Manufacturers of notified goods (ice cream, pan masala, tobacco — specific notification)
• Casual taxable persons and non-resident taxable persons
• Businesses with turnover exceeding the threshold

Key Advantages of the Composition Scheme

• Reduced compliance: Only CMP-08 quarterly + GSTR-4 annual. No monthly GSTR-1 or GSTR-3B.
• Lower tax outgo: For businesses with high turnover but modest margins, the flat 1% rate can be significantly lower than the regular GST rate on value addition
• No input tax credit claims to manage: Simplifies books of account
• Reduced audit risk: Lower scrutiny compared to regular taxpayers

Key Disadvantages and Restrictions

• No Input Tax Credit (ITC): Composition dealers cannot claim ITC on purchases — this can be a significant cost if you have substantial GST-paying inputs
• Cannot issue tax invoices: Must issue a "Bill of Supply" instead — customers (B2B) cannot claim ITC on your supplies, making you less attractive to GST-registered buyers
• No inter-state sales: Composition dealers cannot sell goods across state lines
• Turnover threshold applies to aggregate PAN-level turnover: All businesses under the same PAN are counted together

How to Opt In — Process and Timing

Opting into the Composition Scheme is done via Form GST CMP-02 on the GST portal. Key rules:

• New registrants can opt in at the time of registration via Form GST REG-01
• Existing taxpayers must opt in at the beginning of a financial year — the option cannot be exercised mid-year
• The option must be filed before 31st March for the next financial year
• Once opted in, all GSTINs on the same PAN must be under the Composition Scheme

Composition Scheme vs Regular GST — Decision Framework

The decision is primarily driven by three factors:

• Customer base: If most of your customers are B2B GST-registered buyers who need ITC, Composition Scheme makes you less competitive — they cannot claim credit on your supplies
• Input tax credit value: Calculate the ITC you would forego. If your GST-paid purchases are significant, the ITC loss under Composition may exceed the rate benefit
• Geographic scope: If you have or plan inter-state sales, Composition is not an option

For purely local B2C businesses (retail, local services, restaurants), the Composition Scheme is often the right choice. For B2B suppliers, it rarely is.

Recent GST Council Updates Affecting Composition Dealers

The GST Council has periodically revised the Composition Scheme. Key recent developments:

• The threshold for the Special Composition Scheme for service providers (₹50 lakh) has remained unchanged since 2019 — industry bodies have sought an increase to ₹1 crore, but no change has been notified as of May 2026
• GSTR-4 annual return is now compulsory even if there is nil tax liability
• Late fees for delayed GSTR-4 filing: ₹200 per day (₹100 CGST + ₹100 SGST), maximum ₹5,000

For practical GST advisory and compliance management for your SME, visit www.smeadvisory.in.

Frequently Asked Questions

Can a composition dealer sell on Amazon or Flipkart?

No. Businesses supplying goods through an e-commerce operator (like Amazon or Flipkart) that is required to collect TCS under Section 52 of the CGST Act cannot opt for the Composition Scheme. This is an absolute restriction — such businesses must register under the regular GST scheme.

What happens if a composition dealer's turnover crosses the threshold during the year?

If your aggregate turnover exceeds the Composition threshold (₹1.5 crore for most businesses) at any point during the financial year, you must immediately apply for regular GST registration in Form GST CMP-04 and switch to the regular scheme from the date of exceeding the threshold. Tax for the period as a composition dealer stands — but you must start charging GST at regular rates from that point.

Is the GST Composition Scheme available for a CA firm or professional services firm?

CA firms and most professional service providers are excluded from the Composition Scheme for services under the Special Notification route (which covers only specific service categories like restaurants and others). Professional services are not eligible. Regular GST registration at 18% applies to CA, legal, consulting, and other professional services.