Composition Scheme 2025 – Eligibility, Limits, Pros & Cons

For small business owners in India, navigating the complexities of Goods and Services Tax (GST) compliance can often feel like a full-time job. The monthly filings, detailed record-keeping, and intricate rules can be overwhelming. To address this, the government introduced a much simpler alternative. This guide provides a complete composition scheme overview 2025, focusing specifically on the crucial details of composition scheme eligibility, its financial limits, and the pros and cons you must consider. By understanding composition scheme in India, you can determine if this simplified tax regime is the right strategic move to save time, reduce compliance costs, and focus on what you do best—growing your business.

Understanding the GST Composition Scheme in India

Before diving into the technical rules, it’s essential to grasp the core concept of the Composition Scheme and identify who benefits most from it. It’s a trade-off: you gain simplicity but give up certain benefits available under the regular GST framework.

What is the Composition Scheme?

The Composition Scheme is a simplified GST regime designed specifically for small taxpayers. Instead of dealing with the detailed compliance of filing multiple monthly returns and maintaining elaborate transaction-wise records, businesses under this scheme enjoy a much simpler process. The core mechanism is straightforward:

Pay a fixed percentage of your turnover as GST. This rate is low and easy to calculate.
File returns less frequently. You pay your tax on a quarterly basis and file a single annual return.
Issue a “Bill of Supply” instead of a “Tax Invoice.” This is because you are not allowed to collect GST from your customers. The tax is a cost borne by your business.

This structure significantly reduces the administrative and compliance burden, making it an attractive option for eligible small businesses.

Who is the Ideal Candidate for This Scheme?

The scheme is tailored for businesses with a high volume of transactions but where keeping detailed records for each one is cumbersome. The ideal candidates are typically:

Small retailers and traders who sell directly to consumers (B2C).
Restaurant owners who do not serve alcohol.
Small-scale manufacturers whose customer base is primarily end-users.

Essentially, if your business primarily operates in a B2C model, doesn’t require claiming input tax credit, and wants to minimize its compliance costs and complexities, the Composition Scheme could be a perfect fit.

Detailed Composition Scheme Eligibility Criteria for 2025

The primary gatekeeper for this scheme is your business’s annual turnover. Understanding the composition scheme eligibility India rules is the most critical step in making your decision. Let’s break down the eligibility criteria for composition scheme for the upcoming financial year.

Turnover Limits: The Primary Factor for Eligibility

To opt into the Composition Scheme, your aggregate turnover in the preceding financial year must be below a specified threshold. These composition scheme limits India are different for general category and special category states.

₹1.5 crore: This is the aggregate turnover limit for businesses in most states and union territories of India.
₹75 lakh: This lower limit applies to “Special Category States” to account for their unique economic conditions. These states include:
- Arunachal Pradesh
- Manipur
- Meghalaya
- Mizoram
- Nagaland
- Sikkim
- Tripura
- Uttarakhand

What is “Aggregate Turnover”? It’s crucial to calculate this figure correctly. It includes the total value of all taxable supplies, exempt supplies, exports, and inter-state supplies made by all businesses registered under the same Permanent Account Number (PAN) across India. However, it excludes the value of inward supplies on which tax is paid under the Reverse Charge Mechanism (RCM) and the GST component itself.

Who is NOT Eligible for the Composition Scheme?

Even if your turnover is within the prescribed limits, certain types of businesses and supplies are explicitly barred from this scheme. You are not eligible if you are:

A manufacturer of specified goods like ice cream, pan masala, or tobacco and manufactured tobacco substitutes.
A business engaged in making inter-state outward supplies of goods. (Note: Inter-state supply of services is allowed).
A business supplying goods through an e-commerce operator who is required to collect tax at source (TCS) under Section 52 of the CGST Act, such as sellers on Amazon or Flipkart.
Registered as a casual taxable person or a non-resident taxable person.
A supplier of non-GST goods, such as alcohol for human consumption or petroleum products.

Special Provision for Service Providers

Recognizing the need for a simplified scheme for service providers, the government introduced a similar option for them. If you are primarily a service provider (or supply a mix of services and goods), you can opt for this scheme if:

Your aggregate turnover in the preceding financial year was up to ₹50 lakh.
The applicable GST rate is 6% (3% CGST + 3% SGST) on your turnover.

This is a significant benefit for consultants, freelancers, and other small service-based businesses, provided they meet the other conditions of the scheme. For more details, you can refer to the relevant notifications on the official GST Portal.

Weighing the Pros and Cons of the Composition Scheme

Making an informed decision requires looking at both sides of the coin. The composition scheme advantages and disadvantages must be carefully weighed against your specific business needs and growth plans. Here are the key pros and cons of composition scheme.

The Advantages: Key Benefits of the Composition Scheme

The benefits of composition scheme India are primarily centered around simplicity and reduced costs, making it highly appealing for small taxpayers.

Reduced Compliance: This is the biggest draw. Instead of filing multiple monthly GSTR-1 and GSTR-3B returns, you only need to make a simple challan payment (Form CMP-08) every quarter and file one annual return (GSTR-4). This saves immense time and professional fees.
Lower Tax Liability: The fixed, low tax rates on turnover are often lower than the standard GST rates applicable to goods and services. This predictability makes financial planning easier and is one of the key composition scheme tax benefits India.
Increased Liquidity: Since the tax rates are lower and paid on turnover, less working capital is blocked in the form of taxes. This frees up cash for business operations, inventory, and growth.

The Disadvantages: Crucial Limitations to Consider

While the advantages are compelling, the limitations are significant and can be deal-breakers for certain business models.

No Input Tax Credit (ITC): This is the most critical disadvantage. A business under the composition scheme cannot claim ITC on its purchases (raw materials, inputs, or services). This means the GST paid on your inputs becomes a part of your cost, potentially reducing your profit margins.
Inability to Collect Tax: You cannot issue a tax invoice and are forbidden from collecting GST from your customers. The tax liability must be paid from your own pocket, which directly impacts your pricing and profitability. This can also make you less competitive for B2B customers, who prefer to buy from suppliers that provide a tax invoice so they can claim ITC.
Geographical Business Restriction: You are not allowed to make inter-state sales of goods. This severely limits your market to within your own state, which can be a major hurdle for businesses looking to scale and expand their reach across India.
Limited Market Access: You are ineligible to sell goods through major e-commerce platforms like Amazon or Flipkart that are required to collect Tax at Source (TCS). This closes off a massive and growing sales channel for many small businesses.

Tax Rates and Compliance Under the Scheme

If you decide the scheme is right for you, it’s important to know the exact tax rates and filing procedures.

GST Rates for Composition Dealers in 2025

The tax rates are standardized and depend on the nature of your business.

Category of Taxpayer	Rate of Tax (CGST + SGST)
Manufacturers & Traders	1% of turnover of taxable goods
Restaurants (not serving alcohol)	5% of turnover
Other Service Providers (up to ₹50 lakh turnover)	6% of turnover

Filing Returns and Paying Taxes

The compliance process is designed to be simple and straightforward.

Tax Payment: You must calculate and pay your tax liability on a quarterly basis by the 18th of the month following the end of the quarter, using Form GST CMP-08.
Return Filing: You need to file only one annual return, Form GSTR-4, by the 30th of April of the year following the financial year.
Invoicing: You must issue a “Bill of Supply” for all your sales. It is mandatory to mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of every bill you issue.

How to Opt for the Composition Scheme

The process for opting into the scheme differs slightly for new and existing taxpayers.

For New GST Registrants

If you are applying for a new GST registration, you can opt for the Composition Scheme directly within the application form itself. Simply indicate your choice in Part B of Form GST REG-01 on the GST Portal.

For Existing Taxpayers Switching to the Scheme

If you are already registered under the regular GST scheme and wish to switch, you need to file an intimation.

You must file Form GST CMP-02 on the GST Portal to declare your intention to opt-in.
This intimation must be filed before the beginning of the financial year for which you want to join the scheme. For example, to opt-in for FY 2025-26, you must file the form by 31st March 2025.

Conclusion

The GST Composition Scheme is a powerful tool for small businesses in India, offering a welcome escape from complex compliance and high tax rates. Its simplicity makes it an ideal choice for many retailers, restaurateurs, and small-scale manufacturers who primarily sell to end consumers. However, the decision should not be taken lightly. The inability to claim Input Tax Credit and the restrictions on inter-state sales and e-commerce are significant drawbacks that can impact your profitability and growth potential. A careful evaluation of your business model is essential. Before making a final decision, ensure you meet every aspect of the composition scheme eligibility.

Is the GST Composition Scheme the right choice for your business? The rules can be tricky. Let the experts at TaxRobo guide you. Contact us today for a free consultation on GST registration and compliance to ensure you make the most profitable decision.

Frequently Asked Questions (FAQs)

Q1. What happens if my business turnover crosses the composition scheme limits during the year?
Answer: The moment your aggregate turnover exceeds the prescribed threshold (₹1.5 crore or ₹75 lakh), you become ineligible to remain in the scheme. You must opt out by filing Form GST CMP-04 and switch to the regular GST scheme from that day forward. You will then need to start issuing tax invoices and comply with regular GST filing requirements.

Q2. Can a composition dealer charge GST on their bills?
Answer: No. A dealer under the composition scheme is strictly prohibited from collecting tax from their customers. The tax is an expense to be paid by the business owner out of their revenue. Instead of a Tax Invoice, you must issue a Bill of Supply.

Q3. Can I claim Input Tax Credit (ITC) on my purchases if I am registered under the composition scheme?
Answer: No. This is one of the most important conditions of the scheme. You are not eligible to claim ITC on any goods, services, or raw materials you purchase for your business. The GST you pay on your inputs becomes a direct cost to your business.

Q4. I am a freelancer providing digital marketing services. Does the eligibility criteria for composition scheme apply to me?
Answer: Yes, as a service provider, you can opt for a similar scheme designed for your category. If your aggregate turnover in the preceding financial year was up to ₹50 lakh, you are eligible to register under this scheme and pay a flat GST rate of 6% (3% CGST + 3% SGST). You would still be subject to other conditions, such as not being an e-commerce operator who is required to have TCS deducted.

Composition Scheme Eligibility 2025: Check if You Qualify!