The Composition Scheme under GST is a simplified tax option for small taxpayers, allowing them to pay GST at a fixed percentage of turnover without claiming ITC. Introduced in 2017 and updated in 2025, it reduces compliance burden for millions of micro and small businesses. With GST collections at record highs, the scheme remains popular for its ease. Who can opt for it, and is it right for you? Let’s break it down.
What Is the Composition Scheme Under GST?
The composition scheme under GST in India is a voluntary tax scheme for small taxpayers. It allows eligible businesses to pay GST at a fixed rate on turnover. However, they cannot collect tax from customers or claim input tax credit. The scheme mainly targets small traders, manufacturers, and restaurants.
For example, a local kirana store or small workshop can opt for it. The turnover limit is ₹1.5 crore annually for most states. Moreover, for special category states, the limit is ₹75 lakh. According to GST rules, composition taxpayers file quarterly returns instead of monthly ones.
Eligibility and Tax Rates Under the Composition Scheme:
Not every business qualifies for the composition scheme under GST in India. Service providers are mostly excluded, except restaurants not serving alcohol. In addition, inter-state suppliers and e-commerce sellers cannot opt in. Here are the standard GST composition rates:
- Manufacturers: 1% of turnover
- Traders: 1% (0.5% CGST + 0.5% SGST)
- Restaurants: 5% of turnover
These rates are much lower than regular GST slabs. Therefore, small businesses can improve cash flow. over 70% of GST registrants fall under small and medium categories, making simplified schemes crucial for compliance.
Certain businesses cannot opt in. For example, ice cream manufacturers, pan masala sellers, and tobacco traders are excluded. Moreover, e-commerce sellers using platforms like Amazon or Flipkart are not eligible.
Benefits and Limitations of the Composition Scheme for Small Businesses:
The biggest advantage of the composition scheme under GST in India is compliance simplicity. Businesses file quarterly returns instead of monthly ones. Therefore, owners spend less time on tax matters. Lower tax rates improve cash flow predictability. This is helpful when managing working capital needs. Moreover, small traders gain relief from complex GST calculations. In addition, fewer audits and notices improve peace of mind.
Despite benefits, the composition scheme under GST in India is not suitable for all. Businesses dealing with GST-registered clients may lose competitiveness. This happens because buyers cannot claim input tax credit. Moreover, branding and expansion plans may suffer. For example, inter-state expansion becomes impossible under this scheme. Therefore, growing businesses often shift to the regular GST system.
Moreover, branding and expansion plans may suffer. For example, inter-state expansion becomes impossible under this scheme. Therefore, growing businesses often shift to the regular GST system.
When Should You Opt for the Composition Scheme?
Choosing the composition scheme under GST in India depends on your business model. It works best for local sellers with end consumers. Moreover, businesses with low input taxes benefit the most. You should consider opting in if:
- Your turnover stays below ₹1.5 crore
- You sell mainly within one state
- Your customers are price-sensitive
However, growing startups planning inter-state expansion should avoid it. Once turnover crosses the limit, migration to regular GST becomes mandatory. Therefore, long-term plans matter as much as short-term savings. In addition, the scheme suits businesses aiming for stability rather than rapid scale. Strategic tax planning supports sustainable growth.
Conclusion:
The Composition Scheme under GST in India is a lifeline for small businesses, offering lower taxes and simpler compliance in 2025. But it’s not for everyone — weigh lost ITC against savings. With GST 2.0 reforms simplifying further, the scheme remains attractive for local, low-margin operations. Explore more GST and small business insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Composition Scheme under GST here – https://cleartax.in/composition-scheme