In India, §10 of the Central Goods and Services Tax Act, 2017 (CGST Act) lets a registered person whose preceding-year aggregate turnover stayed below ₹1.5 crore pay a flat levy on turnover instead of tax under §9. Rule 7 of the CGST Rules, 2017 fixes four rates from 0.5% to 3% central tax. The trade-off is absolute: no input tax credit, no tax invoice, and no inter-State outward supply of goods.
TL;DR for founders
Composition is a bargain, not a discount. You pay a small percentage of everything you sell — half a per cent for a trader, two and a half for a restaurant — and in exchange you give up the entire credit chain. You cannot claim credit on your own purchases, and your customers cannot claim credit on what they buy from you. That makes the scheme excellent for a business selling to consumers and actively harmful for one selling to registered businesses, because your B2B buyers will price in the credit they lose. The other constraint is geographic: the moment you want to sell goods across a State border on your own account, you are out. Decide before the financial year starts, because the door only opens once a year.
The eligibility test to run before advising anyone into the scheme
Three gates operate in sequence, and a client must clear all three.
Gate one — the turnover ceiling. Notification 14/2019-Central Tax (CGST_14_2019), effective 15 April 2019, superseded Notification 8/2017-Central Tax and set the §10(1) ceiling at ₹1.5 crore of aggregate turnover in the preceding financial year, up from the original ₹1 crore. Eight States keep a ₹75 lakh ceiling: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. The parallel §10(2A) category for service suppliers and mixed suppliers, inserted with effect from 1 April 2019, runs on a separate ₹50 lakh ceiling. Aggregate turnover is measured all-India on a PAN basis and includes exempt and export supplies — which is why the option must be exercised PAN-wide and cannot be taken for one State while another State's registration stays regular.
Gate two — the goods exclusions. CGST_14_2019 bars manufacturers of ice cream and other edible ice (tariff item 2105 00 00), pan masala (2106 90 20) and Chapter 24 tobacco outright, whatever the turnover. Notification 50/2023-Central Tax (CGST_50_2023) added suppliers of specified actionable claims under §2(102A) — lottery, betting, gambling and online money gaming — from 1 October 2023, closing the composition route for gaming operators who had used it before the 28% regime landed.
Gate three — the activity bars in §10(2). Casual taxable persons and non-resident taxable persons are out. Suppliers of goods not leviable to tax are out. Any inter-State outward supply of goods is fatal — inward inter-State purchases are fine, and this asymmetry is the single most common misdiagnosis. Supply to a Special Economic Zone counts as inter-State and therefore also disqualifies.
The rate you apply — Rule 7's four tiers
Notification 50/2020-Central Tax (CGST_50_2020) substituted the Rule 7 table with effect from 1 April 2020, aligning it with the Finance Act 2020 expansion into services. Four tiers of central tax apply, each mirrored by an identical State or Union Territory tax:
| Category | Statutory hook | Central tax | Effective combined |
|---|---|---|---|
| Manufacturers other than those notified | §10(1), (2) | 0.5% of State turnover | 1% |
| Restaurant and food supplies under Schedule II para 6(b) | §10(1), (2) | 2.5% of turnover | 5% |
| Any other supplier — traders | §10(1), (2) | 0.5% of taxable supplies of goods and services | 1% |
| Service and mixed suppliers up to ₹50 lakh | §10(2A) | 3% of taxable turnover | 6% |
Note the base differs by tier. A manufacturer pays on turnover in the State; a trader pays on taxable supplies, so exempt turnover falls out of the trader's base but not the manufacturer's. The §10(2A) tier requires its own opt-in and is not automatic for a goods-side dealer whose service income has grown.
A separate low-rate route exists for the businesses §10 cannot reach. Notification 2/2019-Central Tax (Rate) (CGSTR_02_2019), effective 1 April 2019, gives 3% central tax on first supplies up to ₹50 lakh in a financial year to registered persons who are not eligible for §10(1) composition — subject to seven cumulative conditions including no inter-State outward supply, no e-commerce TCS-covered supply, and none of the three excluded goods. It carries the same consequences as composition: no tax collected from the recipient, no input tax credit, and a bill of supply bearing the prescribed declaration. Filing follows the composition cycle, because CGST_21_2019 extends CMP-08 and GSTR-4 to this class too.
Getting in, and the credit you surrender getting there
Entry is an annual event. An existing regular taxpayer intimates in FORM GST CMP-02 before the financial year commences; a fresh applicant uses Part B of FORM GST REG-01. Mid-year entry is not available.
Two consequential filings follow. FORM GST CMP-03 declares stock held on the date of option within 60 days. FORM GST ITC-03 reverses input tax credit under §18(4) read with Rule 44 — on inputs held as such, inputs contained in semi-finished and finished goods, and capital goods on a pro-rata five-year useful-life basis — within 60 days from the start of the financial year. The reversal is discharged from the electronic credit ledger, then from cash for any shortfall, and any residual credit balance lapses. That lapse is the real cost of entry and is frequently under-modelled: a business holding significant capital-goods credit can lose more on the way in than it saves in three years of reduced rate.
From that point the taxpayer is outside the credit chain in both directions. It cannot avail credit on inward supplies, and its registered customers cannot claim credit on purchases from it. It issues a bill of supply, never a tax invoice, carrying the words "composition taxable person, not eligible to collect tax on supplies", and must display "composition taxable person" on a signboard at the place of business.
Veritect Legal AI
The composition decision is almost never lost on the rate — it is lost on the surrounding conditions. Reverse charge is the clearest example: a composition dealer pays reverse-charge tax under §9(3) and §9(4) at the full applicable rate, not the composition rate, and gets no credit for it, so a client with heavy freight, legal or unregistered-landlord rent exposure can find the effective burden well above the headline half per cent. Notification 7/2025-Central Tax (Rate) (
CGSTR_07_2025) removed one of these from 16 January 2025, carving composition taxpayers out of the S. No. 5AB reverse charge on renting non-residential property from an unregistered landlord. Veritect Legal AI holds the full text of the composition notifications, the Rule 7 table across its 2018, 2019 and 2020 versions and the reverse-charge notification chain, so a query such as "does a composition restaurant pay reverse charge on commercial rent from an unregistered landlord after 16 January 2025" resolves against the operative entry rather than a generic rate table.
Getting out — voluntary, forced and denied
Threshold breach. The option lapses on the day turnover crosses the ceiling — not at year end. FORM GST CMP-04 is due within seven days, §9 liability starts from that date, and credit on stock and capital goods as at the withdrawal date is claimable under §18(1)(c) through FORM GST ITC-01 within 30 days.
Voluntary exit. Also FORM GST CMP-04. Circular 77/51/2018-GST (CIR_77_2018) settles the effective date: the taxpayer may choose it, but it cannot be earlier than the start of the financial year in which the form is filed.
Departmental denial. Where the proper officer finds ineligibility or contravention, a show-cause notice issues in FORM GST CMP-05 within 15 days, reply in CMP-06, and order in CMP-07 within 30 days. CIR_77_2018 fixes the date of effect at the date of contravention, or a retrospective date the authority determines, but never earlier than the contravention. Liability under §9 runs from the CMP-07 order date and recovery follows §73 or §74. Circular 223/17/2024-GST (CIR_223_2024) sets the proper-officer map after the ACES-GST to GSTN-BO migration: the Superintendent handles registration provisions under §§25(8) and 28–30, while §10(5) composition demand stays with the Assistant or Deputy Commissioner — a jurisdictional point worth checking on the face of any composition demand.
Late filing, and the amnesty that has closed
FORM GST CMP-08 is due by the 18th of the month following each quarter; FORM GSTR-4 by 30 April following the financial year (CGST_21_2019). Notification 73/2017-Central Tax (CGST_73_2017) sets the §47 late fee for GSTR-4 at ₹25 per day, or ₹10 per day where the central tax payable is nil, and Notification 21/2021-Central Tax (CGST_21_2021) capped it from FY 2021-22 onwards at ₹1,000, or ₹250 for a nil return. Notification 2/2023-Central Tax (CGST_02_2023) ran a three-month amnesty from 1 April to 30 June 2023 for the July 2017–March 2019 quarters and FY 2019-20 to 2021-22, waiving the fee above ₹250 or entirely where nil. That window has closed; unfiled historical returns outside the capped years accrue the fee on the uncapped basis. Wrongful availment of the scheme is separately determined under §73 or §74 with penalty — the CBIC composition FAQ (FAQ_composition-levy-revised_2019) is explicit on this consequence.
FAQ
Q: What is the turnover threshold for opting into the GST composition scheme?
A: Notification 14/2019-Central Tax (CGST_14_2019), effective 15 April 2019, sets the aggregate-turnover ceiling under §10(1) of the Central Goods and Services Tax Act, 2017 (CGST Act) at ₹1.5 crore in the preceding financial year, superseding the earlier ₹1 crore figure. A reduced ceiling of ₹75 lakh applies to registered persons in eight specified States — Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. The separate §10(2A) category for service suppliers and mixed suppliers runs on its own ₹50 lakh preceding-year ceiling. Aggregate turnover is computed all-India on a PAN basis and includes exempt and export supplies, so a multi-State group cannot opt in for one State alone.
Q: What rate does a composition dealer actually pay?
A: Rule 7 of the CGST Rules, 2017, as substituted by Notification 50/2020-Central Tax (CGST_50_2020) with effect from 1 April 2020, prescribes four tiers of central tax: 0.5% of State or Union Territory turnover for manufacturers other than those notified; 2.5% of turnover for restaurant and food supplies falling under paragraph 6(b) of Schedule II; 0.5% of taxable supplies of goods and services for any other supplier under §10(1) and §10(2); and 3% of taxable turnover for a registered person opting under §10(2A). Each figure is central tax only — the equivalent State tax doubles the effective rate, so a trader pays 1% and a restaurant 5% in total.
Q: Which businesses cannot opt for composition even if they are below the threshold?
A: Notification 14/2019-Central Tax (CGST_14_2019) expressly excludes manufacturers of ice cream and other edible ice (tariff item 2105 00 00), pan masala (2106 90 20) and all tobacco and manufactured tobacco substitutes (Chapter 24). Section 10(2) of the CGST Act separately bars casual taxable persons and non-resident taxable persons, suppliers of goods not leviable to tax, and any person making inter-State outward supplies of goods. Notification 50/2023-Central Tax (CGST_50_2023) added suppliers of specified actionable claims as defined in §2(102A) — lottery, betting, gambling and online money gaming — with effect from 1 October 2023.
Q: How do I opt into the composition scheme, and when?
A: An existing regular taxpayer intimates the option in FORM GST CMP-02 before the commencement of the financial year — mid-year entry is not permitted. A person seeking fresh registration uses Part B of FORM GST REG-01, which doubles as the intimation. Two follow-on filings then arise: FORM GST CMP-03 declaring stock held on the date of option, within 60 days; and FORM GST ITC-03 reversing input tax credit on stock, semi-finished and finished goods and capital goods under §18(4) of the CGST Act read with Rule 44, within 60 days from the commencement of the financial year. Capital-goods credit is reversed pro rata over a five-year useful life; any residual balance in the electronic credit ledger lapses.
Q: What are the filing deadlines for a composition taxpayer?
A: Notification 21/2019-Central Tax (CGST_21_2019), issued under §148 of the CGST Act, prescribes a quarterly self-assessed tax statement in FORM GST CMP-08 by the 18th of the month following each quarter, and an annual return in FORM GSTR-4 on or before 30 April following the financial year. Compliance with both is deemed to discharge the obligations under §37 and §39. The late fee under §47 for GSTR-4 runs at ₹25 per day of central tax (₹10 per day for nil returns) under Notification 73/2017-Central Tax (CGST_73_2017), capped from FY 2021-22 onwards at ₹1,000, or ₹250 where the central tax payable is nil, by Notification 21/2021-Central Tax (CGST_21_2021).
Q: What happens when turnover crosses the threshold mid-year?
A: The composition option lapses on the day the threshold is breached — it does not survive to the end of the financial year. FORM GST CMP-04 must be filed within seven days, and the person becomes a regular taxpayer liable under §9 of the CGST Act from that date. Credit on inputs held in stock and on capital goods as at the date of withdrawal is claimable under §18(1)(c) through FORM GST ITC-01 within 30 days. Circular 77/51/2018-GST (CIR_77_2018) confirms that a voluntary withdrawal date under CMP-04 cannot be earlier than the start of the financial year in which the form is filed.
Q: Can a composition dealer sell through an e-commerce operator?
A: For goods, yes, on an intra-State basis. Notification 36/2023-Central Tax (CGST_36_2023), issued under §148 of the CGST Act and effective 1 October 2023, notifies e-commerce operators required to collect tax at source under §52 as a class following a special procedure for supplies made through them by composition taxpayers. Three obligations attach to the operator: it must not allow any inter-State supply of goods by a composition taxpayer through the platform; it must collect tax at source under §52(1) and remit it under §52(3); and it must report those supplies in FORM GSTR-8. The relaxation does not extend to services, and the §10(2) bar on inter-State outward supply is unchanged.
Related on Veritect: Tracking GST rate notifications and tariff changes · GST registration and deregistration lifecycle · GST annual return — GSTR-9 and the §44 regime
Sources
Primary CBIC and Government of India sources relied on for this explainer:
- CBIC Tax Information Portal — notification and circular text: taxinformation.cbic.gov.in
- CBIC GST portal (archival instruments and the Composition Levy FAQ manual): cbic-gst.gov.in
- GST Council — recommendations underlying the threshold and §10(2A) expansion: gstcouncil.gov.in
- CGST Act, 2017 — §§10, 18, 47, 148: indiacode.nic.in
- Gazette of India — notification publication: egazette.gov.in
Corpus anchors: CGST_14_2019, CGST_50_2020, CGST_21_2019, CGST_21_2021, CGST_73_2017, CGST_02_2023, CGST_36_2023, CGST_50_2023, CGSTR_02_2019, CGSTR_07_2025, CIR_77_2018, CIR_223_2024, FAQ_composition-levy-revised_2019.
This explainer is general information on Indian central GST law and is not legal or tax advice. Verify the operative notification text and effective dates for the period in question before acting.
Beyond this brief Preview
This article covers the decision framework. The full compliance picture includes the verbatim text of §10 with all four sub-sections and the §10(5) demand power, the complete Rule 7 rate table across its 2018, 2019 and 2020 substitutions, Rules 3 to 6 on the intimation, effective date and validity of the option, Rule 44's capital-goods reversal arithmetic in full, the seven cumulative conditions and Annexure of Notification 2/2019-Central Tax (Rate) with its mandatory bill-of-supply declaration, and the CMP-01 to CMP-08 form set with the CMP-05/06/07 denial timeline. Veritect Legal AI holds all thirteen anchor instruments cited above in full text, supersession-tracked, so practitioners can resolve queries such as "what is the ITC-03 reversal on capital goods bought 26 months before a composition opt-in" or "can a trader with ₹1.4 crore goods turnover and ₹8 lakh service income stay in §10(1)" against the operative sources rather than secondary summaries. Access through veritect.ai.