Short answer: the composition scheme charges you 1% instead of a regular rate, with far less compliance. But you cannot collect tax from your customers, and they cannot claim credit on what you supply.
That single pair of facts decides the question. Composition works well for a business selling to end consumers. It quietly penalises a business selling to other registered businesses.
The schemes
There are two, and they are frequently conflated.
| Section 10(1) — goods | Section 10(2A) — services | |
|---|---|---|
| Turnover limit (preceding FY) | ₹1.5 crore; ₹75 lakh in eight specified states | ₹50 lakh |
| Rate — manufacturer or trader | 1% (0.5% CGST + 0.5% SGST) | — |
| Rate — restaurant, not serving alcohol | 5% (2.5% + 2.5%) | — |
| Rate — services | — | 6% (3% + 3%) |
The eight states with the reduced ₹75 lakh limit are Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
The service scheme under Section 10(2A) came in through a rate notification in 2019 and was given statutory footing with effect from 1 January 2020. It sits alongside the goods scheme rather than inside it, with its own lower limit and higher rate.
The decision that actually matters
Set the paperwork saving aside for a moment and look at the arithmetic from your customer's side.
Selling to an end consumer. They cannot reclaim GST whatever you do. A regular dealer charges, say, 18% on top of the price; a composition dealer charges nothing visible and absorbs 1%. The composition dealer can price lower and still keep more. Composition wins clearly.
Selling to a registered business. Your buyer reclaims whatever GST they are charged, so a regular supplier's 18% costs them nothing — they take it back as credit. From you, they get a bill of supply with no tax, and therefore no credit at all. Your 1% is not invisible to them; it is embedded in your price with nothing to reclaim against it. On top of that, you cannot claim credit on your own purchases either, so that input GST is embedded in your cost too.
The result is that a composition dealer is structurally more expensive to a registered buyer than a regular dealer offering the same price. Business customers work this out quickly, and some will not buy from a composition dealer at all.
This is the calculation that should drive the decision, and it is usually reduced in general write-ups to "you cannot claim ITC" — which understates it considerably.
What you give up
- No tax collection. You cannot charge GST to the recipient. The 1% comes out of your margin.
- No tax invoice. You issue a bill of supply, and it must carry the words indicating you are a composition taxable person.
- No input tax credit on your own purchases.
- No inter-State outward supplies. Selling to another state takes you out of the scheme entirely.
- No supply through an e-commerce operator required to collect tax at source. This rules out most marketplace selling.
- Signage. The words "composition taxable person" must be displayed at your place of business.
Certain manufacturers are excluded from the scheme outright — including ice cream, pan masala, tobacco and aerated waters.
The service allowance for goods dealers
A dealer in goods is not barred from supplying services altogether. Under the first proviso to Section 10(1), services may be supplied up to 10% of turnover in the State in the preceding financial year, or ₹5 lakh, whichever is higher.
Two details worth knowing: the value of exempt services by way of deposits, loans or advances, where the consideration is interest or discount, is excluded from that computation; and the limit is applied state-wise, not across the PAN.
So a small trader who also does occasional installation or repair work is not automatically disqualified — but the headroom is limited and needs watching.
The compliance side, which is the genuine benefit
| Obligation | Form | Due |
|---|---|---|
| Quarterly statement and payment | CMP-08 | 18th of the month after the quarter |
| Annual return | GSTR-4 | 30 June of the following financial year |
Against monthly GSTR-1 and GSTR-3B, that is a real reduction — four payments and one return a year instead of twenty-four filings.
Note the GSTR-4 date. It moved to 30 June following Notification 12/2024-Central Tax. A considerable amount of published material still shows 30 April, and relying on it means filing two months late.
Opting in, and opting out
In: intimation in Form CMP-02, filed before the beginning of the financial year from which the scheme is to apply. You cannot opt in mid-year for a year already running.
Out: Form CMP-04. This becomes compulsory the moment turnover crosses the limit — the scheme stops applying from that point, not from the next financial year.
Both directions carry input tax credit consequences under Section 18. Coming into the scheme requires reversal of credit on stock held; going out entitles you to credit on stock as at the date you become liable to pay tax normally. Neither happens automatically — the stock position has to be computed and declared, and it is the part most often left undone.
Who it genuinely suits
- Retail shops, kirana stores and other B2C traders below the limit, whose customers never ask for a tax invoice.
- Small restaurants not serving alcohol, at 5%.
- Small service providers under Section 10(2A) whose clients are individuals rather than businesses.
- Businesses where the compliance burden is genuinely the binding constraint, and the margin arithmetic still works.
Who should stay regular
- Anyone selling to registered businesses, for the reason set out above.
- Anyone selling inter-State, which is not permitted at all.
- Anyone selling through a marketplace that collects tax at source.
- Anyone with substantial input GST — the embedded, unclaimable credit can easily exceed the compliance saving.
- Anyone approaching the turnover limit, since the exit brings its own credit computation and a mid-year change of basis.
Before you decide
The comparison worth doing is not "1% versus 18%" — that is not what either party actually bears. It is your net position after embedded input tax, against your customers' ability to reclaim, over a realistic year.
The wider position on thresholds, the monthly calendar and credit is on the GST registration and return filing page; the registration process and the 30-day stock-credit window are in GST registration and the 30-day trap.
Limits, rates and due dates are stated as at the date above and are subject to change by notification. Whether composition suits a particular business depends on its customers, its input costs and its state, and should be worked through against those before any intimation is filed.