Composition Scheme vs Regular GST: Section 10 Slabs, Restrictions & Decision Guide
A comprehensive comparative guide to Section 10 Composition Levy versus Regular GST: ₹1.5 Crore goods and ₹50 Lakh service thresholds, ITC restrictions, and CMP-08 mechanics.
Composition Scheme vs Regular GST: Section 10 Slabs, Restrictions & Decision Guide
When registering a business under the Goods and Services Tax (GST) in India, one of the most critical structural decisions every entrepreneur faces is whether to opt for the Composition Scheme under Section 10 of the Central Goods and Services Tax (CGST) Act, 2017 or enroll as a Regular Taxpayer.
The Composition Scheme was designed by the GST Council as a simplified compliance track for micro and small enterprises, shielding them from the demanding cadence of invoice-level monthly filings and extensive accounting registers. In exchange for this procedural simplicity, however, the statute imposes severe operational limitations—including a complete ban on collecting tax from customers, zero Input Tax Credit (ITC) recovery, and strict prohibitions on interstate commerce.
This guide provides a comprehensive statutory comparison of the Composition Scheme versus Regular GST, analyzing turnover ceilings, tax rate structures, invoicing restrictions, and long-term commercial trade-offs.
The Core Architecture of Section 10 Composition Levy
The Composition Scheme operates as an alternative, optional levy designed for small, local B2C (business-to-consumer) enterprises. Instead of computing tax at standard rates (5%, 12%, 18%, or 28%) and offsetting Input Tax Credit, the taxpayer pays a small, flat percentage of their overall business turnover directly out of their revenue.
COMPOSITION SCHEME VS REGULAR GST
| Composition Scheme (Section 10) | Regular GST Scheme |
|---|---|
| Flat low tax paid out of pocket | Standard tax rate charged to buyer |
| No Input Tax Credit (ITC) | Seamless 100% ITC on purchases |
| Invoices via “Bill of Supply” | Invoices via full “Tax Invoice” |
| Intra-state local sales only | Unrestricted nationwide selling |
| Quarterly statement (CMP-08) | Monthly GSTR-1 & GSTR-3B filings |
Statutory Turnover Thresholds: Goods vs Services
Eligibility is governed strictly by the taxpayer’s aggregate turnover in the preceding financial year:
1. Manufacturers and Traders of Goods (Section 10(1))
- General States: Aggregate turnover ceiling of ₹1.5 Crores in the preceding financial year (Notification No. 14/2019-Central Tax).
- Special Category States: Ceiling of ₹75 Lakhs in 8 designated northeastern/hill states (Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand).
- Marginal Service Supply Window: To accommodate goods suppliers who occasionally provide incidental services (e.g., equipment repair or installation), the second proviso to Section 10(1) allows service supplies up to 10% of turnover in the preceding financial year, or ₹5 Lakhs, whichever is higher.
2. Service Providers & Mixed Suppliers (Section 10(2A))
Historically, pure service businesses were excluded from the composition scheme. To rectify this, the government introduced Section 10(2A) via Notification No. 02/2019-Central Tax (Rate):
- Turnover Ceiling: Aggregate turnover up to ₹50 Lakhs in the preceding financial year.
- Eligible Entities: Independent service consultants, repair workshops, salons, graphic designers, and boutique agencies operating locally.
Applicable Tax Rates Under the Composition Scheme
Unlike regular taxpayers who track different GST slabs across their inventory, composition taxpayers discharge tax at uniform rates:
| Category of Registered Business | CGST Rate | SGST Rate | Total Composite Rate |
|---|---|---|---|
| Traders of Goods | 0.5% of taxable turnover | 0.5% of taxable turnover | 1.0% of taxable supplies |
| Manufacturers of Goods | 0.5% of total turnover | 0.5% of total turnover | 1.0% of total turnover |
| Restaurants (Non-Alcoholic) | 2.5% of total turnover | 2.5% of total turnover | 5.0% of total turnover |
| Service Providers (Section 10(2A)) | 3.0% of total turnover | 3.0% of total turnover | 6.0% of total turnover |
[!NOTE] Traders pay 1% only on their taxable supplies (exempt goods are excluded). Manufacturers, however, must pay 1% on their total aggregate turnover, including exempt goods.
Absolute Statutory Restrictions Imposed on Composition Dealers
To prevent distortion of the national tax chain, Section 10(2) bars composition dealers from several standard commercial activities:
- No Interstate Outward Supplies: A composition dealer cannot sell goods or provide services to a customer located in another State. Even a single interstate sale invalidates the composition status immediately. (Purchasing goods from other states is permitted, but inward tax must be absorbed as cost).
- No E-Commerce Marketplaces: Taxpayers cannot sell through an Electronic Commerce Operator (such as Amazon or Flipkart) that is required to collect TCS under Section 52 (subject only to narrow localized intra-state seller relaxations).
- Ineligible Product Sectors: Manufacturers of ice cream, pan masala, tobacco products, aerated water, fly ash bricks, and brick kilns are statutorily disqualified from the scheme.
- No Casual Taxable Person / NRI Status: Cannot operate as a temporary exhibition vendor across states.
Invoicing Mechanics: Tax Invoice vs Bill of Supply
Under Section 31(3)© of the CGST Act, a composition taxpayer is legally prohibited from issuing a Tax Invoice:
- Bill of Supply Mandate: The taxpayer must issue a Bill of Supply for all sales transactions.
- Prohibition on Tax Collection: The seller cannot add a separate CGST/SGST line item or collect any tax from the purchaser. The 1%, 5%, or 6% composite tax must be paid out of the business’s own profit margin.
- Mandatory Legal Endorsement: Every Bill of Supply and business signboard must state:
“COMPOSITION TAXABLE PERSON, NOT ELIGIBLE TO COLLECT TAX ON SUPPLIES”
- The B2B Disadvantage: Because no tax invoice is issued, B2B corporate customers cannot claim Input Tax Credit on purchases made from a composition dealer. Consequently, corporate clients almost universally refuse to purchase from composition suppliers.
Compliance Burden: CMP-08 & GSTR-4 vs Monthly Filings
The primary justification for choosing the Composition Scheme is the dramatic reduction in accounting overhead:
COMPLIANCE CADENCE COMPARISON
| Regular Taxpayer (Monthly) | Composition Taxpayer (Quarterly) |
|---|---|
| GSTR-1: Due 11th of each month | Form GST CMP-08: Due 18th after |
| GSTR-3B: Due 20th of each month | each quarter (simple tax payment) |
| GSTR-2B: Monthly matching | Form GSTR-4: Annual return due |
| Annual: GSTR-9 by Dec 31 | April 30 following year-end |
| Total: Minimum 25 filings/year | Total: Exactly 5 filings/year |
Detailed Comparative Matrix: Regular vs Composition
| Parameter | Regular GST Scheme | Composition Scheme (Section 10) |
|---|---|---|
| Turnover Limit | Unlimited. | ₹1.5 Crores (Goods) / ₹50 Lakhs (Services). |
| Input Tax Credit (ITC) | Full credit allowed on inputs, input services, and capital goods. | Zero ITC. All tax paid on procurements is a direct expense. |
| Interstate Sales | Fully permitted across all Indian states and export markets. | Strictly prohibited. Only local intra-state sales allowed. |
| Invoicing Type | Tax Invoice with line-item GST. | Bill of Supply with zero tax collected from buyers. |
| Target Customer Profile | B2B enterprises, corporate clients, export buyers, and general retail. | Local B2C consumers, retail walk-ins, and neighbourhood diners. |
| Exit Trigger | Voluntary surrender or cancellation. | Automated exit the day turnover exceeds the statutory ceiling. |
Frequently Asked Questions
Can a composition dealer issue a tax invoice so that a B2B corporate customer can claim ITC?
No. Under Section 31(3)© of the CGST Act, a composition taxpayer cannot issue a tax invoice and cannot collect any tax from recipients. They must issue a ‘Bill of Supply’ with the mandatory endorsement: ‘composition taxable person, not eligible to collect tax on supplies’. B2B buyers cannot claim any input tax credit on purchases from composition dealers.
Can a small restaurant serving food opt for the Composition Scheme?
Yes. Standalone restaurants that do not serve alcoholic liquor for human consumption can opt for the Composition Scheme under Section 10(1)(b), paying a flat rate of 5% (2.5% CGST + 2.5% SGST) on total turnover, provided they do not make inter-state supplies.
What happens if a composition dealer’s turnover crosses ₹1.5 Crores during the financial year?
Under Rule 6 of the CGST Rules, the moment aggregate turnover exceeds the statutory ceiling (₹1.5 Crores for goods, ₹50 Lakhs for services), the composition option lapses immediately. The taxpayer must issue regular tax invoices from the very next transaction, file Form GST CMP-04 within 7 days to exit the scheme, and file Form GST ITC-01 within 30 days to claim credit on closing stock.
What are the return filing deadlines for a composition taxpayer?
A composition taxpayer is exempt from monthly GSTR-1 and GSTR-3B filings. They make quarterly tax payments using Form GST CMP-08 by the 18th of the month following the quarter, and file a single consolidated annual return in Form GSTR-4 by April 30 following the end of the financial year.
Can a composition dealer sell goods through Amazon or Flipkart?
Generally, Section 10(2)(d) bars composition dealers from supplying goods through an e-commerce operator liable to collect TCS under Section 52. However, under recent statutory relaxations, small intra-state dealers with valid state-level enrolments may engage in limited local marketplace supplies under Notification 34/2023.
Official References
- Central Goods and Services Tax Act, 2017 - Section 10 (Composition Levy) — Central Board of Indirect Taxes and Customs (CBIC), Government of India
- CBIC Notification No. 14/2019 - Central Tax (Turnover Threshold for Composition Scheme) — CBIC, Department of Revenue, Ministry of Finance
- CBIC Notification No. 02/2019 - Central Tax (Rate) (Composition Scheme for Services) — CBIC, Department of Revenue, Ministry of Finance