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Glossary: GST

What Is Composition Scheme? GST Composition Meaning, Rates and a Worked Example

For small traders, manufacturers and restaurants weighing up GST options: what the composition scheme is, what it saves and what it limits.

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A sweet shop owner handing a wrapped box to a customer

What is composition scheme? Under GST, it is a simpler way for smaller businesses to pay tax: a flat percentage of turnover, fewer returns, and no tax charged on the bill. The trade-off is no input tax credit and limits on whom you can sell to.

For a small shop or workshop the appeal is clear: fewer filings and a lower rate. But choosing it without checking customers and purchases can cost more than it saves, especially if your buyers are GST-registered businesses who want credit.

This page gives the rules in plain words, an illustrative example and how Apragya handles billing and returns for a composition dealer. This is general information; confirm your case with a tax adviser.

GST composition scheme meaning and rules

The composition scheme is an optional GST scheme for smaller taxpayers. Instead of charging GST on each invoice and claiming input tax credit, a composition dealer pays tax at a flat percentage of turnover, split equally between CGST and SGST.

The commonly applied rates are 1% of turnover for manufacturers and traders, 5% for restaurants that do not serve alcohol, and 6% under the separate scheme for service providers. Turnover limits apply, lower in some special category states. Check the current limits and rates in the latest notification before you opt in.

Key restrictions: a composition dealer cannot collect GST from customers, cannot claim input tax credit, issues a bill of supply instead of a tax invoice, and generally cannot make inter-state outward supplies of goods. Certain notified goods and services are excluded altogether.

A worked example: a trader with quarterly turnover of 18 lakh pays 1%, which is 18,000: 9,000 CGST and 9,000 SGST, from its own pocket. Tax on purchases under reverse charge is paid at the normal rate on top.

  1. Check eligibility: turnover, type of supply and state.
  2. Opt in on the GST portal before the start of the financial year, within the notified timeline.
  3. Issue bills of supply without tax, with the required composition declaration.
  4. File the quarterly statement (CMP-08) and pay the tax.
  5. File the annual return (GSTR-4) and reassess eligibility each year.

What choosing the wrong GST scheme costs

Lost credit

A composition dealer cannot claim GST paid on purchases.

Lost B2B buyers

Registered buyers cannot claim credit on a bill of supply.

Limited reach

Inter-state sales of goods are generally not allowed.

Wrong returns

Filing the regular returns for a composition dealer creates confusion.

An example: a Madurai sweet shop

Take an illustrative sweet and snacks shop selling over the counter to walk-in customers, with annual turnover well within the limit. It compares the two schemes before the new year.

The eligibility and fit check

  • Turnover within limitWell below the notified threshold.Checked
  • Sales within the stateAll sales at the counter, in Tamil Nadu.Checked
  • Buyers mostly consumersFew customers need GST credit.Checked
  • Input credit given upPurchases are mostly exempt or low-tax.Checked
  • Option filed in timeFiled before the financial year began.Done
  • Bills of supply readyBilling set to issue them without tax.Ready
The fit test mattered more than the lower rate.

The shop moved to the scheme from April. Counter bills carried no GST, the tax was paid quarterly on turnover, and the owner's accountant filed a handful of returns in the year instead of monthly ones.

Bill slips, a money box and four coins beside a calendar with four tabs
Counter bills without tax, and one tax payment a quarter on turnover.

How Apragya supports a composition dealer

Step 1 of 5

Company setting

The selling company is marked as a composition dealer, with its category and rate.

  1. Company setting: The selling company is marked as a composition dealer, with its category and rate.
  2. Bill of supply: Sales and counter bills are issued without output GST.
  3. CMP-08 figures: Quarterly tax is worked out from turnover on the books, plus reverse charge purchases.
  4. GSTR-4 summary: The annual return rolls up the four quarters.
  5. Wrong-return warning: A GSTR-1 built for a composition company is flagged, not quietly produced.

GST composition scheme or regular scheme

The regular scheme suits businesses that sell to registered buyers, sell across states or buy heavily taxed inputs. Composition suits small, local, consumer-facing businesses. Software should follow whichever you choose without separate tools.

Composition by hand, against Apragya

FeatureManual billing and returnsApragya
BillsTax removed by handBill of supply without output tax
Quarterly taxWorked out on a calculatorFrom turnover recorded in the books
Reverse chargeEasy to forgetAdded from purchase bills
Annual returnRebuilt from four filesRolled up from the quarters
Switching schemesNew booksSame books, company setting changed

Checked against public information on 16 September 2026.

What sets Apragya apart for small GST taxpayers

Counter billing

Point of sale for walk-in customers.

One record

Sales, purchases and tax on the same books.

Regular GST too

GSTR-1, GSTR-3B and e-invoicing when you move to the regular scheme.

AI you can put to work

An agent can watch turnover against the limit you set.

Many companies

One company can be composition while another is regular.

Audit log

Who changed the tax setting, and when, is logged.

Read the full GST composition scheme guide and how to automate the composition scheme. Related terms: chart of accounts and 26AS.

Getting started as a composition dealer

  1. Check eligibility and the current limit with your adviser.
  2. Opt in on the portal before the financial year starts.
  3. Mark your company as a composition dealer.
  4. Issue bills of supply from day one.
  5. Review turnover every quarter against the limit.

If turnover approaches the limit, plan the move to the regular scheme early.

What it costs to start

Free
Up to 3 users
CRM, HR and Vendor Onboarding
INR 3,999
Starter, a month
Up to 10 users, CRM and HR plus a choice of apps
INR 7,999
Pro, a month
Up to 25 users and every enterprise app

Composition dealer questions, answered

Can a composition dealer sell to other businesses?
Yes, but the buyer cannot claim input credit on a bill of supply, which can put off registered buyers.
Can a service business opt in?
A separate composition option exists for service providers, with its own limit and rate. Check the current notification.
What happens if turnover crosses the limit?
The dealer must move to the regular scheme within the time the rules allow.
Does a composition dealer pay reverse charge tax?
Yes. Tax on reverse charge purchases is paid at the normal rate, not the composition rate.
What does it cost to start?
The free plan covers up to 3 users with CRM, HR and Vendor Onboarding and 1,000 AI Credits a month. Starter is INR 3,999 a month for up to 10 users, with CRM and HR plus a choice of apps such as Sales and POS, Inventory, Payroll, Purchase and Payables, Support and Manufacturing. Pro is INR 7,999 a month for up to 25 users with every enterprise app, including Finance and Accounting, plus 5,000 AI Credits, single sign-on and audit logs.

Bill and file correctly under composition

Mark your company as a composition dealer and see bills of supply and quarterly tax follow.

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