GST Composition Scheme: Eligibility, Rates and Limits (FY 2025-26)

The GST composition scheme lets small businesses exit the paperwork-heavy normal scheme and pay tax as a flat percentage of turnover. This guide covers who qualifies, the rates applicable for FY 2025-26 after the 56th Council’s GST 2.0 restructuring, what composition dealers cannot do, and the compliance calendar that keeps the option alive.

What Is the Composition Scheme Under Section 10?

Section 10 of the CGST Act offers registered persons a simplified levy. Instead of charging GST on every invoice and matching input tax credit, the dealer pays a fixed percentage of turnover in cash through a quarterly challan and one small annual return. In exchange, the dealer gives up the right to collect GST from customers and to claim credit on purchases, which is why the scheme suits businesses selling mainly to end consumers.

Eligibility: Turnover Limits and Who Can Opt In

• Aggregate turnover (AATO) of up to ₹1.5 crore in the preceding financial year, tested cumulatively during the current year.
• Special category states operate a lower limit of ₹75 lakh, which also applies to persons supplying only services.
• Traders, manufacturers and restaurant businesses can opt in through Form CMP-02, and specified service providers through the 6% option described below.
• The dealer must not be making inter-state outward supply of goods, supplies through an e-commerce operator in the prohibited categories, or goods that are outside the scheme such as ice cream and pan masala.

New taxpayers can elect the scheme while applying for registration itself, and existing dealers can switch at the start of a financial year. A person whose registration was cancelled for any reason other than voluntary withdrawal cannot rejoin while the cancellation stands.

Composition Rates for FY 2025-26

Traders and manufacturers now stand unified at 1%; manufacturers had paid 2% in the scheme’s early years before the rate was cut, and the rate structure was confirmed through the 56th Council changes that took effect with GST 2.0 on 22 September 2025. Service providers can use the 6% option under section 10(2A), available since April 2019, only where aggregate turnover is up to ₹50 lakh and the value of services does not exceed ₹5 lakh a year. Restaurant dealers pay 5% on the full turnover value with no input tax credit, and no option to charge tax on bills.

What Composition Dealers Cannot Do

• Issue tax invoices — only a bill of supply can be issued, and no GST can be collected from customers.
• Claim input tax credit on purchases of any kind.
• Make inter-state outward supply of goods from a state where the scheme operates.
• Sell notified goods such as ice cream, pan masala or tobacco products, or goods bought from unregistered suppliers where the purchase is not covered by the scheme conditions.

Two long-standing restrictions have changed in the dealer’s favour. Composition dealers can sell goods through e-commerce operators from 1 October 2023, subject to conditions such as TCS collection by the operator and correct declaration of composition status on documents. Reverse charge obligations also continue inward, meaning the dealer must pay RCM tax in cash on notified inward supplies and on imports of services.

Crossing ₹1.5 Crore: The Scheme Ends Automatically

The turnover ceiling is monitored cumulatively within the financial year, not only at year-end. The moment aggregate taxable turnover crosses ₹1.5 crore during the FY, the option lapses automatically from the following day and the dealer reverts to the normal scheme, with invoice-level GST obligations from that point. We explain the practical fallout in our post on composition scheme cancellation on crossing ₹1.5 crore turnover. A dealer who prefers to exit voluntarily files Form CMP-04 before the start of a financial year, and the withdrawal takes effect from that year.

Compliance Calendar for Composition Dealers

• CMP-08: quarterly statement-cum-challan with tax payment, due by the 18th of the month following each quarter (18 April, 18 July, 18 October and 18 January).
• GSTR-4: annual return for the financial year, due by 30 April of the following year, so the FY 2025-26 GSTR-4 was due on 30 April 2026.
• Serially numbered bills of supply, and e-way bills for inward inter-state movement of goods above ₹50,000.

Because no credit is available, every rupee of tax — including reverse charge — comes from the cash ledger. Businesses juggling the scheme alongside growth plans often pair it with MSME registration and professional support from a GST consultant to decide the annual switch between schemes.

Key Takeaways

• Eligibility ends at ₹1.5 crore AATO (₹75 lakh for special category states and services-only persons).
• Rates for FY 2025-26: 1% for traders and manufacturers, 5% for restaurants without ITC, 6% for eligible service providers up to ₹50 lakh.
• No tax invoices, no ITC and no inter-state outward supply of goods; e-commerce sale of goods is allowed since 1 October 2023.
• The scheme ends automatically the day after cumulative turnover crosses ₹1.5 crore in the FY.

Frequently Asked Questions

Can a service provider opt into the composition scheme?

Yes. A registered person with aggregate turnover up to ₹50 lakh can pay 6% (3% CGST + 3% SGST) on services up to ₹5 lakh a year under section 10(2A), a facility available since April 2019.

Can composition dealers sell on Amazon or Flipkart?

Yes, for goods, with effect from 1 October 2023, when the earlier prohibition was removed. The e-commerce operator will deduct TCS, and the dealer’s documents must reflect composition status.

What happens if turnover crosses the limit mid-year?

The option lapses automatically from the day after the breach. The dealer must immediately switch to the normal scheme, charge GST on invoices and file regular returns from that point.

Is input tax credit available under the scheme?

No. Composition dealers cannot claim ITC on any purchase, which is why businesses with heavy input costs usually stay in the normal scheme even when their turnover fits the limit.

What is the GST rate for restaurants under the scheme?

Restaurants opting for composition pay 5% on turnover value (2.5% CGST + 2.5% SGST) without input tax credit, and they cannot charge GST separately on bills to customers.

Disclaimer: Tax laws change frequently. Verify current rates and deadlines on the official portals (incometax.gov.in, gst.gov.in) or consult a qualified professional before acting.