What is the GST Composition Scheme?

The Composition Scheme under section 10 of the CGST Act 2017 is a simplified GST regime for small taxpayers. Eligible businesses pay GST at a fixed concessional rate (1 per cent for traders and manufacturers, 5 per cent for restaurants, 6 per cent for service providers under section 10(2A)) on their aggregate turnover, rather than collecting standard GST rates from customers and claiming input tax credit. Compliance is also simpler: a quarterly payment via Form CMP-08 and a single annual return on Form GSTR-4. The trade-off is that composition dealers cannot collect GST on invoices, cannot claim input tax credit on purchases, and cannot make inter-state supplies.

Who is eligible for the Composition Scheme in FY 2026-27?

Two separate eligibility tracks apply. For goods (traders and manufacturers), the aggregate annual turnover must not exceed ₹1.5 crore (₹75 lakh for special category states except Jammu & Kashmir and Uttarakhand). For services under section 10(2A), the aggregate turnover must not exceed ₹50 lakh in all states. The scheme excludes inter-state suppliers, e-commerce sellers (other than through their own platform), manufacturers of certain notified goods (tobacco, pan masala, aerated water, ice cream, etc.), and taxpayers who supply through e-commerce operators required to collect TCS under section 52.

What is the GST rate under the Composition Scheme?

For traders (resellers), the composite rate is 1 per cent of the taxable turnover (0.5 per cent CGST + 0.5 per cent SGST). For manufacturers, the rate is also 1 per cent. For restaurants and outdoor catering, the rate is 5 per cent (2.5 per cent CGST + 2.5 per cent SGST). For service providers and mixed supplies under section 10(2A), the rate is 6 per cent (3 per cent CGST + 3 per cent SGST). These rates are paid by the supplier on their own turnover; they are not collected from customers on invoices.

Can a composition dealer issue tax invoices and claim input tax credit?

A composition dealer cannot issue a tax invoice with GST charged separately. Instead, they issue a Bill of Supply (no GST shown) and must state on the bill the words 'Composition Taxable Person, Not Eligible to Collect Tax on Supplies'. Composition dealers cannot claim input tax credit on their purchases under section 10(4). They also cannot make inter-state supplies, supply non-taxable goods or services, or supply through e-commerce operators under section 52. The composition turnover and the tax on it are reported on Form CMP-08 quarterly and Form GSTR-4 annually.

How does a taxpayer opt in to or opt out of the Composition Scheme?

To opt in for FY 2026-27, the taxpayer files Form GST CMP-02 on the GST portal before 31 March 2026. Once filed, the option is effective from 1 April 2026. New registrants can opt in at the time of registration by selecting the composition option in Form GST REG-01. The option is for the full financial year and cannot be withdrawn mid-year except in case of exceeding the turnover threshold. To opt out, the taxpayer files Form GST CMP-04 within seven days of becoming ineligible, or before 1 April of the next financial year if exiting voluntarily. Opt-out triggers a one-time ITC reversal under section 18(4) on the closing stock of goods.

GST Composition Scheme in FY 2026-27: who can opt in, the 1 per cent / 5 per cent / 6 per cent rates, and the trade-off most small businesses get wrong

The Composition Scheme under section 10 of the CGST Act 2017 is one of the more frequently misapplied parts of Indian GST law. Founders often opt in believing it is a tax saver because the rate (1 per cent or 5 per cent or 6 per cent) is dramatically lower than the standard 18 per cent. In practice it is a tax saver only for a specific customer profile, and it is a tax cost for the more common B2B sub-₹1 crore service business.

This post walks through who is eligible, the rate structure, the trade-off most small businesses get wrong, the inter-state supply restriction, and the practical opt-in workflow for FY 2026-27.

The rate structure

Section 10 of the CGST Act 2017 prescribes the following concessional rates:

Category	CGST	SGST	Total
Traders and resellers (section 10(1))	0.5%	0.5%	1%
Manufacturers (section 10(1))	0.5%	0.5%	1%
Restaurants and outdoor catering	2.5%	2.5%	5%
Other service providers (section 10(2A))	3%	3%	6%

The rate is applied to the aggregate taxable turnover. There is no input tax credit; the composition tax is a final cost paid by the supplier out of their own margin.

The two turnover tracks

For goods (section 10(1)): aggregate annual turnover up to ₹1.5 crore (₹75 lakh in special category states). Traders, manufacturers, and restaurants fall under this track.

For services (section 10(2A)): aggregate annual turnover up to ₹50 lakh in all states, including special category states. Most independent professionals, consultancies, and B2B service businesses fall under this track.

The aggregate turnover is the all-India total across all GSTINs held by the same PAN. A business with two GSTINs in two states is checked against the combined turnover, not state-wise.

When the Composition Scheme actually saves tax

The Composition Scheme saves tax in exactly one scenario: when the customer is a B2C buyer (an individual consumer) who does not need or cannot use input tax credit.

A small retailer selling directly to walk-in customers is the textbook case. Their customers do not need an input tax credit invoice. The retailer chooses between two options:

Standard regime: Charge 18 per cent GST on top of the price. The customer pays the higher inclusive price. The retailer remits the collected GST after netting input tax credit on purchases.
Composition: Bill at a price that includes a built-in margin to absorb the 1 per cent composition tax. The customer pays a lower price. The retailer pays 1 per cent on turnover, out of margin.

In this scenario, the composition retailer is more price-competitive and the 1 per cent is a smaller dent than the lost ITC on rent, electricity, point-of-sale software, and packaging.

When the Composition Scheme costs more

The opposite scenario, and the one where founders most often get it wrong, is a B2B small business. Consider a freelance consultant with ₹40 lakh annual receipts from corporate clients.

Standard regime: Bill the corporate client ₹40 lakh + 18 per cent GST = ₹47.2 lakh. The corporate client pays the full amount, claims back the ₹7.2 lakh as input tax credit, so the GST is a wash for them. The consultant remits the ₹7.2 lakh GST collected, net of any input tax credit on their own expenses (say ₹1 lakh ITC), so the net GST payable is ₹6.2 lakh. The consultant takes home ₹40 lakh.
Composition (section 10(2A) at 6 per cent): Bill the corporate client ₹40 lakh (no GST shown). The corporate client pays ₹40 lakh and gets no input tax credit. The consultant pays 6 per cent on the ₹40 lakh turnover = ₹2.4 lakh composition tax. The consultant takes home ₹37.6 lakh.

In the second scenario, the consultant pockets ₹2.4 lakh less. The corporate client does not care whether GST is itemised; they are net-cost-indifferent at the gross billed level. The Composition Scheme has transferred ₹2.4 lakh from the consultant's pocket to the government, with no offsetting benefit to the customer.

This is the most common pricing error we see when reviewing the GST history of small B2B services businesses. The fix is to opt out of composition and bill at standard 18 per cent.

The inter-state supply restriction

A composition dealer cannot make inter-state supplies. Under the IGST Act 2017, all inter-state supplies attract IGST regardless of whether the supplier has opted in to the Composition Scheme; the Composition Scheme is restricted to intra-state supplies only.

For a Maharashtra-based composition trader, this means they can sell within Maharashtra but cannot accept an order from a customer in Karnataka. The moment they ship goods inter-state, they have violated the scheme's conditions and must opt out under section 10(5) read with section 29.

The practical implication: composition is incompatible with any business model that relies on inter-state e-commerce, online marketplaces (other than the dealer's own website serving the same state), or pan-India service delivery.

The e-commerce restriction

Composition dealers cannot supply through e-commerce operators that are required to collect TCS under section 52 (Amazon, Flipkart, Meesho, etc.). The reasoning is that e-commerce supply is treated as inter-state by default for tax purposes.

The exception: a composition dealer can run their own e-commerce website serving customers in the same state, where neither party invokes the TCS mechanism. But this is a niche carve-out and most online sellers eventually need to switch out of composition.

Compliance under Composition

The compliance schedule is meaningfully lighter than standard GST:

Quarterly: Form GST CMP-08, due by the 18th of the month following the quarter. This is a simple self-assessment of turnover and composite tax for the quarter, with payment of the tax.
Annually: Form GSTR-4, due by 30 April of the following financial year. For FY 2026-27 (1 April 2026 to 31 March 2027), GSTR-4 is due 30 April 2027.
No monthly GSTR-3B or GSTR-1. This is the meaningful simplification compared to standard regime.

Books of account requirements are also lighter. Composition dealers maintain a simplified record of inward and outward supplies, not the full invoice-level register required of standard taxpayers.

How to opt in for FY 2026-27

The opt-in window for FY 2026-27 closed on 31 March 2026. Taxpayers who wanted the scheme for the current year would have filed Form GST CMP-02 before that date. The option, once exercised, applies for the full financial year (1 April 2026 to 31 March 2027) and cannot be withdrawn mid-year except in case of crossing the turnover threshold.

For taxpayers reading this in May 2026 who want the scheme for next financial year (FY 2027-28), the opt-in window opens later in 2026 and closes on 31 March 2027. Mark the calendar.

New registrants can opt in at the time of GST registration by selecting the composition option in Form GST REG-01. The option is effective from the date of registration.

How to opt out

Opt-out is via Form GST CMP-04. It must be filed:

Within seven days of becoming ineligible (e.g., turnover exceeds ₹1.5 crore or ₹50 lakh, or a prohibited supply is made).
Voluntarily, before 1 April of the next financial year.

Opt-out triggers a one-time ITC reversal under section 18(4). On the date of opt-out, the dealer must compute the input tax credit attributable to the closing stock of inputs and capital goods, and reverse this credit by paying back the equivalent amount. The reversal is an outflow at the moment of transition.

Once opted out, the dealer must charge standard GST rates on outward supplies from the opt-out date forward, file monthly GSTR-1 and GSTR-3B, and claim input tax credit normally.

Decision framework for small businesses

Three questions resolve the composition vs. standard choice for most small businesses:

Question one: are your customers individual consumers (B2C) or businesses (B2B)?

B2C → Composition is usually better (1 per cent vs 18 per cent on price).
B2B → Standard is usually better (B2B clients want the ITC).

Question two: do you make any inter-state sales?

Yes → Composition is unavailable, default to standard.
No → Composition is on the table for B2C; still standard for B2B.

Question three: are your input costs material (rent, software, raw materials, capital equipment)?

High inputs (10 per cent+ of revenue) → Standard, because the input tax credit on those inputs is meaningful.
Low inputs (mostly labour, no significant physical inputs) → The ITC benefit of standard is smaller, so composition becomes more attractive even at the same revenue.

The framework resolves cleanly for most cases. The edge cases (B2C with high input costs, or B2B with low input costs and a price-sensitive customer base) need case-by-case modelling.

A note on the turnover threshold

The ₹1.5 crore goods threshold has been at this level since FY 2019-20 and is unlikely to be revised in the near term. The ₹50 lakh services threshold was introduced as part of section 10(2A) in the 32nd GST Council meeting and operationalised from 1 April 2019. There has been periodic industry advocacy for raising the services threshold to ₹1 crore to match the goods track, but no formal announcement has been made.

For taxpayers near either threshold, the practical advice is to plan for the year-end turnover with care. Crossing the threshold by ₹1 lakh in March triggers automatic opt-out from 1 April with the closing stock ITC reversal under section 18(4). A taxpayer at ₹1.45 crore in February has time to either restructure (defer revenue, accelerate inputs) or accept the transition and prepare for it. A taxpayer at ₹1.55 crore in March is already in the next regime.