Composition Scheme in GST: Rules for Small Shops
Turnover limits, tax rates, returns and billing rules of the GST composition scheme, and how to decide if it suits your shop.
Gaddibook Team · · 7 min read
The composition scheme is a simpler way to pay GST for small businesses. Instead of charging GST on every bill and claiming input tax credit, you pay a small fixed percentage of your turnover and file fewer returns. For many kirana stores, small traders and restaurants, the composition scheme saves time and paperwork. This guide explains who can opt in, the rates, billing rules and returns, and when it is not a good idea.
Who can opt for the composition scheme?
| Type of business | Turnover limit (previous financial year) | Tax rate on turnover |
|---|---|---|
| Traders (goods) | Up to ₹1.5 crore (₹75 lakh in special category states) | 1% (0.5% CGST + 0.5% SGST) |
| Manufacturers | Up to ₹1.5 crore (₹75 lakh in special category states) | 1% |
| Restaurants (not serving alcohol) | Up to ₹1.5 crore | 5% |
| Service providers (separate scheme) | Up to ₹50 lakh | 6% |
The turnover limit is counted on aggregate turnover across all businesses registered on the same PAN. For traders, the 1% is calculated on the turnover of taxable goods; check with your CA on how exempt sales are treated.
Who cannot opt in
Even if your turnover is within the limit, the composition scheme is not available if you:
- make inter-state sales of goods (selling to customers in other states)
- sell through e-commerce operators who collect tax at source, except for the intra-state supply of goods allowed under recent relaxations
- manufacture notified goods such as ice cream, pan masala and tobacco products
- are a casual taxable person or a non-resident taxable person
- supply goods that are not taxable under GST, such as alcohol for human consumption
If any of these apply, you must stay a regular taxpayer.
Billing rules for composition dealers
Composition dealers cannot collect GST from customers. That changes your bill:
- Issue a bill of supply, not a tax invoice.
- Write "Composition taxable person, not eligible to collect tax on supplies" at the top of every bill.
- Do not show any GST amount on the bill.
- Display "Composition taxable person" on a board at your shop and on your signboard.
The tax you pay (1%, 5% or 6%) comes out of your own margin. Your billing software should have a composition mode that prints the right heading and removes the tax columns. Our guide to the GST invoice format shows how the bill of supply differs from a tax invoice.
Returns and due dates
Composition dealers file far fewer returns than regular taxpayers:
| Return | What it is | Frequency | Due date |
|---|---|---|---|
| CMP-08 | Statement and payment of tax | Quarterly | 18th of the month after the quarter |
| GSTR-4 | Annual return | Yearly | 30 April after the financial year |
Compare that with a regular taxpayer, who files GSTR-1 and GSTR-3B every month (or quarterly under QRMP). For a small shop, this alone saves many hours each year. Always check the portal for any changes in due dates.
Pros and cons of the composition scheme
Advantages
- Lower tax rate on turnover for most traders
- Fewer returns and simpler records
- No need to collect GST from customers, which keeps prices simple
- Less risk of mismatch notices
Disadvantages
- No input tax credit on purchases, so GST paid to suppliers becomes your cost
- No inter-state sales
- Registered business buyers cannot claim ITC on your bills, so they may prefer suppliers on the regular scheme
- If your turnover crosses the limit during the year, you must switch to the regular scheme from that day
Is it right for your shop?
The composition scheme works best when most of your customers are consumers (B2C), your purchases carry little GST, and you sell only within your state. A kirana store in a residential area is a typical example.
It is usually a poor fit for distributors and wholesalers, because their customers are registered shops that want input tax credit. It can also cost more if you buy goods at 18% GST and sell to consumers, since you cannot claim back that 18%. Work out both options with your CA using last year's figures before deciding.
A worked example: composition vs regular
Take a kirana store with yearly sales of ₹60 lakh, all to consumers, and purchases of ₹50 lakh on which it paid an average of 5% GST (₹2.5 lakh).
Under the composition scheme, the store pays 1% of ₹60 lakh, which is ₹60,000. It cannot claim back the ₹2.5 lakh GST on purchases, so that stays part of its cost. It files CMP-08 four times a year and GSTR-4 once.
Under the regular scheme, the store charges GST on its sales. If its sales carry an average of 5% GST, it collects about ₹2.86 lakh in tax (on a taxable value of about ₹57.1 lakh), claims ₹2.5 lakh of input tax credit, and pays the difference of about ₹36,000 in cash. But it files monthly returns, and its prices to customers include GST.
In this example the regular scheme costs less in cash tax, but more in time and compliance. If the same store sold mainly items at 18%, or bought from unregistered suppliers, the numbers would change. That is why the decision should be made with your own figures, not a rule of thumb.
Records a composition dealer must keep
Simpler returns do not mean no records. Keep:
- every bill of supply issued, in one consecutive series
- all purchase bills, including from unregistered suppliers
- a stock register, especially if you might move to the regular scheme later
- payment challans for CMP-08 and copies of GSTR-4
Billing software keeps all of these automatically, which makes a GST audit or a switch to the regular scheme much easier.
How to opt in or opt out
- Opting in: file form CMP-02 on the GST portal before the start of the financial year (usually by 31 March). New businesses can choose composition while applying for registration.
- Opting out: file form GST CMP-04 when you want to leave voluntarily. If you become ineligible (for example, turnover crosses the limit), you must leave within the time allowed and start issuing tax invoices.
When you move out of composition, you can claim input tax credit on the stock you hold on that day, by filing form ITC-01 within the time limit.
Composition billing in Gaddibook
Gaddibook has a composition mode that prints a bill of supply with the required heading and no tax columns, and gives you a turnover report for CMP-08. When you switch to the regular scheme, you change one setting and your bills become tax invoices. See our billing software for retail shops and the kirana store billing tips.
FAQ
What is the composition scheme limit for 2026?
The turnover limit is ₹1.5 crore for traders, manufacturers and restaurants (₹75 lakh in special category states), and ₹50 lakh for service providers under the separate scheme.
Can a composition dealer issue a tax invoice?
No. A composition dealer issues a bill of supply and cannot charge GST to customers.
Can a composition dealer claim input tax credit?
No. Input tax credit is not available under the composition scheme.
Can I sell online under the composition scheme?
Intra-state sales of goods through e-commerce operators are allowed after recent changes, subject to conditions. Inter-state sales are not allowed.
What happens if I cross the turnover limit?
You must leave the composition scheme and register as a regular taxpayer, issuing tax invoices from the date you cross the limit.
