The GST Composition Scheme offers small businesses a simplified compliance route — lower tax rates, quarterly payment, and simpler returns — in exchange for giving up input tax credit and the ability to make interstate supplies. It's a genuinely useful option for the right kind of business, and a genuinely costly mistake for the wrong kind. The decision comes down to understanding exactly what you're trading away, not just what you're saving.
Eligibility in 2026
- Aggregate turnover in the preceding financial year not exceeding ₹1.5 crore (₹75 lakh for specified special category states) for traders and manufacturers; a separate, distinct composition scheme for service providers applies with a lower turnover threshold of ₹50 lakh.
- The business must not make any interstate outward supply — composition dealers can only supply within their own state (except for specific notified exceptions).
- The business must not supply through e-commerce operators required to collect tax at source, in most cases — this specifically excludes many businesses that sell through online marketplaces.
- Not applicable to manufacturers of specified goods (ice cream, pan masala, tobacco, and certain other notified items) or to casual taxable persons and non-resident taxable persons.
Tax Rates Under Composition
- 1% of turnover for traders (0.5% CGST + 0.5% SGST)
- 2% of turnover for manufacturers
- 5% of turnover for restaurant services (not serving alcohol)
- 6% of turnover for the separate services composition scheme
These rates apply on turnover, not on value addition — a critical distinction, since a low-margin, high-turnover business pays composition tax on its full turnover regardless of thin margins, which can actually be a heavier burden than regular GST computed on value addition, depending on the business's cost structure.
What You Give Up
1. Input Tax Credit. This is the big one. A composition dealer cannot claim ITC on purchases — meaning GST paid on inputs, raw materials, and business expenses becomes a real cost baked into pricing, rather than a pass-through credit. For businesses with significant input costs carrying GST (raw materials, packaging, professional services), this often outweighs the benefit of the lower headline tax rate.
2. No interstate supply. A composition dealer is confined to intra-state sales — any business with growth ambitions beyond its home state needs to weigh this restriction seriously, since moving to regular scheme mid-year to enable interstate supply involves its own transition compliance.
3. Cannot issue a tax invoice with GST charged separately. Composition dealers issue a 'bill of supply' instead of a tax invoice, and cannot collect tax from customers — meaning the composition tax is an absorbed cost, not a pass-through, which matters for competitive pricing against regular-scheme competitors who can show GST separately and let B2B customers claim credit.
4. B2B customers lose ITC. Since composition dealers don't charge GST on their invoices, business customers buying from a composition dealer get no input credit — making composition dealers commercially less attractive to B2B buyers who would otherwise claim that credit, which can be a real competitive disadvantage in B2B-heavy sectors.
Signs It's Time to Opt Out (Move to Regular Scheme)
- Turnover approaching the threshold — mandatory exit is required once turnover crosses the applicable limit, but planning the transition ahead of the threshold (rather than scrambling once it's breached) avoids compliance gaps in the transition quarter.
- Growing B2B customer base that would value ITC — if your customer mix is shifting toward businesses that would benefit from claiming input credit on your supplies, staying in composition scheme is actively costing you sales.
- Expansion into other states — any genuine interstate growth ambition makes the composition scheme's intra-state restriction a real constraint, not a minor inconvenience.
- Rising input costs with GST — if your input tax credit foregone under composition scheme now exceeds the tax saved through the lower composition rate, the math has flipped against staying in the scheme.
- Selling through e-commerce marketplaces — since this is largely incompatible with composition scheme eligibility, any serious move toward online marketplace sales channels forces an exit regardless of other considerations.
Making the Decision Properly
The right call depends on running the actual numbers — comparing composition tax liability (on turnover) plus foregone ITC, against regular-scheme GST liability (on value addition) net of ITC claimed — for your specific cost and sales structure, not a generic rule of thumb. This is worth a proper accounting and compliance review at least annually, since a business's optimal scheme can change as its cost structure, customer mix, and growth trajectory evolve — a scheme choice made at registration shouldn't be left unrevisited for years.
Perfect Accounting runs composition-versus-regular-scheme comparisons for small businesses annually, factoring in actual input costs and customer mix rather than headline tax rates alone.