Composition Scheme under GST 2025

A Complete, Practical and Legal Guide for Small Businesses

The GST Composition Scheme is a special taxation option designed for small and medium-sized businesses to reduce compliance burden while ensuring steady tax collection for the government. In 2025, the Composition Scheme continues to play a crucial role for traders, manufacturers, restaurants, and small service providers who operate within a limited turnover and a domestic business model.

This guide explains the Composition Scheme under GST in complete detail, covering eligibility, turnover limits, tax rates, restrictions, invoicing rules, return filing, legal implications, and practical suitability for businesses.

1. Legal Basis of Composition Scheme

The Composition Scheme is governed by:

• Section 10 of the CGST Act, 2017
• Rule 5 of the CGST Rules, 2017 (for service providers)
• Notifications issued periodically by GST Council

The Composition Scheme is completely optional. A taxpayer can choose to opt for it if all eligibility conditions are satisfied. However, once the scheme is opted, the taxpayer must strictly follow all rules and conditions. Any violation can lead to cancellation of the scheme and additional tax liability.

2. Meaning and Objective of Composition Scheme

Under the Composition Scheme, eligible taxpayers pay GST at a fixed and lower rate on their total turnover. Unlike the regular GST system, they do not charge GST separately on invoices and are not allowed to claim Input Tax Credit (ITC).

The main objective of this scheme is to:

·       Make GST compliance easier for small businesses

·       Reduce paperwork and reconcilations

·       Avoid complex return filing and notices

·       Provide certainty in monthly or quarterly tax payments

However, while the process is simplified, the scheme comes with strict limitations. These restrictions must be clearly understood before choosing the Composition Scheme, as non-compliance can result in penalties and disqualification.

3. Who is Eligible for GST Composition Scheme in 2025

A person can opt for the GST Composition Scheme in 2025 only if all eligibility conditions are satisfied at the same time. The scheme works on strict eligibility rules, and missing even one condition can make the taxpayer ineligible.

Basic Eligibility Conditions

To be eligible for the Composition Scheme:

·       The person must be registered under GST.

·       The aggregate turnover of the person in the preceding financial year must be within the limit prescribed under the GST law.

·       The person must not be involved in inter-state outward supply of goods or services. Only intra-state supplies are allowed.

·       The person must not supply goods or services through an e-commerce platform that is required to collect Tax Collected at Source (TCS), such as major online marketplaces.

·       The person must not be engaged in the manufacture or supply of goods or services that are specifically restricted or notified by the government for the Composition Scheme.

4. Turnover Limits under Composition Scheme

To opt for the GST Composition Scheme in 2025, a taxpayer’s aggregate turnover in the preceding financial year must be within the prescribed limits.

Applicable Turnover Limits

The turnover limits applicable for different categories are as follows:

·       For manufacturers and traders, the turnover limit is up to Rs. 1.5 crore.

·       For businesses located in Special Category States, the turnover limit is up to Rs. 75 lakh.

·       For service providers opting under the special composition scheme, the turnover limit is up to Rs. 50 lakh.

If the turnover exceeds these limits at any time, the taxpayer becomes ineligible for the Composition Scheme.

What Is Included in Aggregate Turnover

While calculating aggregate turnover, the following are included:

·       All taxable supplies

·       All exempt supplies

·       Inter-state supplies, even if the person is otherwise not allowed to make such supplies under the Composition Scheme

·       Turnover of all businesses registered under the same PAN

Important Clarification on Turnover Calculation

Eligibility for the Composition Scheme is checked on a PAN basis and not registration-wise. This means that if a person has multiple GST registrations under the same PAN, the total turnover of all registrations is considered together for eligibility.

5. Categories Allowed under Composition Scheme

The GST Composition Scheme is available only to specific categories of businesses. A taxpayer can opt for the scheme only if their business falls within the permitted categories mentioned below.

Manufacturers

Manufacturers are eligible for the Composition Scheme except those specifically notified by the government as ineligible. These include manufacturers of ice cream, pan masala, tobacco and tobacco substitutes.

Brick kiln manufacturers are also not eligible to opt for the Composition Scheme. They are governed by a separate taxation mechanism under GST, where tax is payable either at 6% without input tax credit or at 12% with input tax credit, as per applicable notifications.

Traders

Both wholesale traders and retail traders dealing in goods are eligible, provided their supply is made within the same State or Union Territory. Inter-state outward supply of goods is not permitted under the Composition Scheme.

Restaurants

Restaurants supplying food or beverages are eligible for the Composition Scheme, provided they do not supply alcoholic liquor for human consumption. Restaurants opting for composition pay tax at a fixed rate on turnover and cannot collect GST separately from customers.

Service Providers

A separate and special Composition Scheme is available for service providers. This scheme is applicable to service providers whose aggregate turnover does not exceed Rs. 50 lakh in the preceding financial year.

6. GST Tax Rates under Composition Scheme

Under the GST Composition Scheme, tax is paid at a fixed rate on turnover. These rates are much lower than regular GST rates, but taxpayers choosing this scheme cannot collect GST from customers and cannot claim Input Tax Credit (ITC).

Applicable Composition Tax Rates

The applicable tax rates are:

Manufacturers – 1% of turnover
Traders (retailers or wholesalers) – 1% of turnover
Restaurants (not serving alcohol) – 5% of turnover
Service Providers (under special composition scheme) – 6% of turnover

These rates include both CGST and SGST. There is no separate state-wise or central calculation required.

Important Clarification

The composition tax is payable on the total turnover, not on profit. GST collected from customers separately is strictly not allowed under the Composition Scheme.

Simple Example

If a trader has an annual turnover of Rs. 50 lakh and opts for the Composition Scheme:

Applicable tax rate = 1%
GST payable = Rs. 50,000

This amount is paid directly to the government, and no GST is shown separately on invoices.

7. Key Benefits of Composition Scheme

The GST Composition Scheme offers several practical advantages to small businesses that want simpler compliance and predictable tax liability.

Reduced Tax Liability

Under the Composition Scheme, tax is paid at a lower flat rate on turnover. This avoids complex rate calculations and reduces overall GST burden compared to the regular scheme in many cases.

Simplified Compliance

Taxpayers opting for the Composition Scheme are not required to file monthly returns like GSTR-1 and GSTR-3B. Instead, fewer returns are filed, which makes compliance easier and less time-consuming.

Lower Administrative and Professional Costs

Since detailed invoice-wise reconciliation and input tax credit tracking are not required, businesses can operate with lower accounting and consultancy costs.

No ITC-Related Notices or Mismatches

As taxpayers under the Composition Scheme are not eligible to claim Input Tax Credit, there is no risk of ITC mismatch, reversal, or related notices from the department.

Predictable and Stable Tax Outflow

The fixed tax rate on turnover ensures certainty in tax liability. This helps small businesses manage cash flow better and plan expenses with more confidence.

8. Restrictions and Limitations under Composition Scheme

Although the GST Composition Scheme offers simplified compliance, it comes with strict restrictions. These limitations must be fully understood before opting for the scheme.

Major Restrictions

Under the Composition Scheme:

·       GST cannot be charged or collected separately from customers.

·       Input Tax Credit (ITC) cannot be claimed on any purchase or expense.

·       A tax invoice cannot be issued. Only a bill of supply can be issued to customers.

·       Inter-state outward supply of goods or services is not permitted.

·       Supply of goods or services through e-commerce platforms that are required to collect TCS is not allowed.

·       Composition tax is payable even if the business operates at a loss during the year.

Consequences of Non-Compliance

If any condition of the Composition Scheme is violated:

·       The taxpayer is required to exit the Composition Scheme immediately.

·       Tax becomes payable under the regular GST scheme from the date of violation.

·       Interest and penalties may be imposed as per GST law.

9. Invoice / Bill Format for Composition Dealers

A taxpayer registered under the Composition Scheme is not allowed to issue a Tax Invoice. Instead, a Bill of Supply must be issued for every sale.

Mandatory Declaration on Every Bill

Every Bill of Supply issued by a composition dealer must clearly contain the following declaration:

“Composition taxable person, not eligible to collect tax on supplies.”

This declaration is compulsory and helps customers and authorities identify that the supplier is under the Composition Scheme.

Important Points to Remember

While issuing a Bill of Supply:

GST rate or GST amount must not be mentioned anywhere on the bill.

Only basic transaction details should be shown, such as:

• supplier name
• GSTIN
• bill number and date
• value of goods or services supplied
• GST should not be charged separately from the customer under any circumstance.

Consequences of Incorrect Invoicing

If a composition dealer issues a Tax Invoice or wrongly shows GST on the bill:

·       The taxpayer may be treated as violating the Composition Scheme conditions.

·       The Composition Scheme may be cancelled from the date of violation.

·       Additional tax, interest, and penalties may be levied by the department.

10. Return Filing and Payment under Composition Scheme

Taxpayers registered under the Composition Scheme follow a simplified return filing and tax payment structure as compared to regular GST taxpayers.

Quarterly Tax Payment – Form CMP-08
Composition taxpayers are required to pay GST on a quarterly basis using Form CMP-08.
This form is used to declare quarterly turnover and pay the composition tax payable for that quarter.

CMP-08 is filed after the end of each quarter, and tax payment must be made within the prescribed due date.

Important clarification:
Form CMP-08 does not attract any late fee. However, if tax payment is delayed, interest at the applicable rate is payable on the delayed amount.

Annual Return – Form GSTR-4
In addition to quarterly tax payment, composition taxpayers are required to file an annual return in Form GSTR-4.
GSTR-4 is filed once after the close of the financial year. It contains a consolidated summary of turnover, tax paid through CMP-08, and other prescribed details of the business.

Late Fee and Interest – Correct Position

• Delay in filing Form CMP-08 does not attract late fee, but interest is payable if tax payment is delayed.
• Delay in filing Form GSTR-4 attracts late fee as prescribed under GST law.
• Interest may also apply if any tax remains unpaid.
• Continuous non-compliance may lead to notices, blocking of facilities, or cancellation proceedings by the department.

11. Procedure to Opt for Composition Scheme

Existing taxpayers must file Form GST CMP-02 on the GST portal before the beginning of the financial year. Once accepted, the Composition Scheme applies from the first day of that year, subject to eligibility.

New taxpayers can opt for the Composition Scheme at the time of GST registration itself, and composition tax applies from the effective date of registration.

The option remains valid for the entire financial year, provided all conditions are continuously complied with. If eligibility conditions are violated, the taxpayer must shift to the regular GST scheme along with applicable tax, interest, and penalties.

12. When Composition Scheme May Not Be Advisable

The Composition Scheme is not ideal for all businesses. It may not be advisable in the following cases:

• If your customers require GST tax invoices to claim Input Tax Credit (ITC), as composition dealers cannot issue tax invoices or pass on ITC.
• If your business involves inter-state supplies or regular B2B transactions across different states.
• If you sell goods or services through online or e-commerce platforms where TCS is applicable.
• If your profit margins are low, since GST must be paid from your own margin and cannot be recovered from customers.

In such situations, opting for the regular GST scheme may be a better commercial and compliance decision despite higher filing requirements.

13. Important Practical and Compliance Points

• Display “Composition Taxable Person” at the business place and on every Bill of Supply.
• Monitor turnover regularly to avoid crossing the prescribed limit.
• Review any change in business model such as inter-state supply or e-commerce sales.
• Switch to the regular GST scheme immediately if any condition is violated.
• Maintain basic purchase, sales, and turnover records for verification.

14. Legal Consequences of Wrongful Availment

If the Composition Scheme is availed despite ineligibility:

• GST may be demanded at normal rates from the date of ineligibility.
• Interest under Section 50 will apply on the differential tax.
• Penalty proceedings may be initiated under Section 73 or 74, depending on facts.
• GST registration may be cancelled, even with retrospective effect.

Wrongful availment can turn a simplified scheme into costly tax exposure and litigation. Hence, eligibility must be checked carefully and monitored continuously.

15. Conclusion

The GST Composition Scheme 2025 is a compliance-relief option for small businesses operating within limited turnover and an intra-state model, and which do not rely on input tax credit or GST-based pricing.

For eligible taxpayers, it offers simplified return filing, lower compliance burden, reduced administrative costs, and predictable tax liability, allowing businesses to focus more on operations than on complex GST procedures.

However, the Composition Scheme is not merely a low-tax option. It is a conditional concession with strict legal requirements. Restrictions on inter-state supplies, inability to collect GST, non-availability of ITC, and turnover-based eligibility make it unsuitable for businesses with B2B clients, growth plans, online sales, or thin margins.

Wrongful availment or delayed exit can lead to tax at normal rates, interest, penalties, and even cancellation of registration. Therefore, opting for the scheme requires careful evaluation of business structure, customer profile, pricing strategy, and future plans.

In conclusion, the Composition Scheme should be adopted as a conscious compliance decision, not as a default tax-saving choice. Businesses that monitor eligibility and comply consistently can benefit from the scheme, while ignoring its limitations may result in avoidable disputes and financial exposure.