GST Composition Scheme: Eligibility, Limits, CMP-08 and GSTR-4

The GST composition scheme is an optional, simpler way of paying GST for small businesses. Instead of charging GST on every sale, you pay a flat percentage of turnover: 1% for traders and manufacturers, 5% for restaurants and 6% for eligible service providers. It’s open if your previous year’s turnover was up to ₹1.5 crore (₹50 lakh for service providers). The trade-off: you can’t collect GST from customers, can’t claim input tax credit, and can’t sell to other states.

Who is eligible for the composition scheme?

Type of business	Turnover limit (previous financial year)	Composition rate
Traders (goods)	₹1.5 crore (₹75 lakh in special category states*)	1% of taxable turnover
Manufacturers (other than excluded goods)	₹1.5 crore (₹75 lakh*)	1%
Restaurants not serving alcohol	₹1.5 crore (₹75 lakh*)	5%
Service providers and mixed suppliers (Section 10(2A))	₹50 lakh	6%

*Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

Rates are split equally between CGST and SGST. For example, 1% means 0.5% CGST + 0.5% SGST.

Tip: A trader or manufacturer under the ₹1.5 crore scheme can also supply some services, up to 10% of the previous year’s turnover or ₹5 lakh, whichever is higher, without losing eligibility.

Who cannot opt for composition?

You can’t use the scheme if you:

• make inter-state outward supplies (sales to customers in other states). Buying from other states is fine;
• supply services through an e-commerce operator that must collect tax at source;
• manufacture notified goods, such as ice cream, pan masala, tobacco products and aerated waters;
• are a casual taxable person or non-resident taxable person;
• supply goods or services that aren’t taxable under GST.

All registrations on the same PAN must opt in together. You can’t run one state’s branch under composition and another under the normal scheme.

Watch out: Goods sellers on marketplaces have been allowed under composition since 1 October 2023, but only for sales within their own state. If you want to sell across India on Amazon or Flipkart, composition won’t work. Our e-commerce sellers’ GST guide covers the alternatives.

Pros and cons of the composition scheme

Advantages

• Lower tax for businesses selling mainly to consumers, such as kirana stores and small restaurants.
• Simple compliance: one quarterly payment and one annual return instead of monthly returns.
• Easier bookkeeping, since there’s no invoice-level ITC matching.

Disadvantages

• No input tax credit (ITC), the GST you pay on purchases that normal taxpayers can deduct. The tax on your purchases becomes a cost.
• You can’t charge GST on your bills, so B2B customers can’t claim credit. Many will prefer suppliers who aren’t on composition.
• No inter-state sales, which limits growth.
• Tax is paid from your own pocket, not collected from the customer.
• You must still pay reverse charge tax at normal rates where it applies.

Example: A trader in Jaipur sells goods worth ₹30 lakh in a quarter, all taxable. Composition tax is 1% × ₹30 lakh = ₹30,000 (₹15,000 CGST + ₹15,000 SGST), paid through CMP-08. Under the normal scheme, the tax would depend on the rate of each item minus ITC on purchases. Compare both before choosing.

How to opt for composition (CMP-02)

• New applicants can choose composition in the registration application (REG-01). See our GST registration threshold guide to check whether you need registration at all.
• Existing taxpayers file CMP-02 on the GST portal (Services > Registration > Application to Opt for Composition Levy) before the start of the financial year, that is, by 31 March, to switch from 1 April.
• When switching from the normal scheme, report the stock you hold in ITC-03 and reverse the ITC on it. Migrated taxpayers file a stock statement in CMP-03.

Which returns does a composition dealer file?

Form	What it is	Due date
CMP-08	Quarterly statement-cum-challan to pay composition tax	18th of the month after the quarter
GSTR-4	Annual return	30 June after the financial year (from FY 2024-25)
CMP-04	Intimation of withdrawal from the scheme	When you opt out, or within 7 days of becoming ineligible

CMP-08 is required even for a nil quarter. Late payment attracts interest, and a late GSTR-4 attracts a late fee. See our guide to GST late fees and interest.

Rules on bills and signboards

• Issue a bill of supply, not a tax invoice. Don’t show GST separately.
• Write “composition taxable person, not eligible to collect tax on supplies” at the top of the bill.
• Display “composition taxable person” on a board at your place of business.

Leaving the composition scheme

You leave the scheme when:

• your turnover crosses the limit during the year. The option lapses from that day, so file CMP-04 within 7 days;
• you start an activity that isn’t allowed, such as inter-state sales;
• you choose to opt out by filing CMP-04.

After leaving, you can claim ITC on stock held on that date by filing ITC-01 within 30 days. If you’re winding up instead, our guide to cancelling GST registration covers the steps.

Common mistakes

• Charging GST on bills while under composition. Tax collected this way must be paid over, and penalties can follow.
• Making one inter-state sale, often through a marketplace that ships across states.
• Missing the 31 March deadline for CMP-02 and assuming you can switch mid-year.
• Not filing nil CMP-08s. Missing returns can lead to cancellation. Under Section 29, a composition dealer’s registration can be cancelled if the annual return is more than three months late.
• Calculating 1% on total turnover for traders, when the 1% applies to taxable supplies only.

What to do next

1. Compare your tax cost under composition and under the normal scheme for last year’s actual sales and purchases.
2. Check whether your customers need GST invoices. If most are businesses, composition may cost you sales.
3. If you’re opting in, file CMP-02 before 31 March and set reminders for each CMP-08.

Our GST return filing service handles CMP-08 and GSTR-4 for composition dealers. If you aren’t sure which scheme suits you, you can request a callback.