In-Depth Guide to GST Composition Scheme – FY 2025–26

Introduction

The GST Composition Scheme is a simplified taxation system introduced to ease the compliance burden of small taxpayers. Applicable to small manufacturers, traders, and service providers, the scheme allows them to pay tax at a fixed rate of turnover. With lower compliance requirements and simplified returns, it remains one of the most preferred schemes for small businesses in FY 2025–26.

Eligibility Criteria for FY 2025–26

• Manufacturers and traders: Turnover up to ₹1.5 crore (₹75 lakh for special category states).
• Service providers: Turnover up to ₹1.5 crore.
• Must operate within a single state.
• Cannot engage in inter-state supply.
• Not applicable for e-commerce suppliers.
• Alcoholic beverage manufacturers, tobacco sellers, and non-taxable goods suppliers are excluded.

Applicable GST Rates

• Manufacturers: 1% (0.5% CGST + 0.5% SGST)
• Traders: 1% (on taxable turnover)
• Restaurants (not serving alcohol): 5%
• Service providers under Notification 2/2019: 6% (3% CGST + 3% SGST)

Advantages of Composition Scheme

• Low compliance burden (quarterly tax and one annual return).
• No requirement to maintain detailed records.
• Not liable for Input Tax Credit reconciliation.
• Lesser tax liability.
• Ideal for small retail outlets, service consultants, and local manufacturers.

Disadvantages & Limitations

• Cannot issue tax invoices or charge GST from customers.
• Not eligible for Input Tax Credit.
• Ineligible to undertake inter-state trade.
• Not suitable for B2B businesses seeking ITC.
• Loss of competitive edge for vendors supplying to large buyers.

Returns& Compliance under Composition Scheme

• CMP-08 (quarterly): Payment of self-assessed tax.
• GSTR-4 (annually): Summary of outward supplies.
• ITC-03 (at the time of switching from regular to composition scheme).
• Display ‘Composition Taxable Person’ at business premises and on invoices.

How to Opt into the Scheme

• File CMP-02 on the GST portal before the financial year begins.
• Once opted, the dealer must file ITC-03 within 60 days to reverse ITC.
• Continue until voluntarily opted out or ineligible due to turnover.

Comparison with Regular Scheme

Here is the information converted into a table format:

Businesses must avoid underreporting turnover or supplying interstate to remain eligible. Authorities monitor such practices, and wrong claims can lead to penalties and scheme cancellation.

Recent Changes & Updates for FY 2025–26

• Real-time monitoring of turnover via e-invoice linkage.
• Optional biometric authentication in selected states.
• Cross-validation with ITR filing for turnover accuracy.
• Clarification issued on service composition turnover applicability.

Conclusion

The GST Composition Scheme is a simplified taxation mechanism for eligible small taxpayers. If you are a small trader, manufacturer, or service provider, this scheme can reduce compliance hassle and tax liability. Consult Nitin Bhatia & Associates to determine eligibility, apply for the scheme, and manage compliance efficiently.

Turnover Calculation for Composition Eligibility

Turnover includes:

• All taxable supplies
• Exempt supplies
• Exports
• Inter-state supplies

It excludes:

• Reverse charge inward supplies
• Interest income on loans/deposits

Restrictions on Composition Scheme

• Cannot engage in inter-state supply
• Not applicable to e-commerce sellers
• Not eligible for Input Service Distributor (ISD) or TDS deductors
• Cannot make supply through an agent in another state

Switching Between Regular and Composition Scheme

• Businesses can shift from regular to composition by filing CMP-02 at the beginning of FY
• ITC must be reversed via ITC-03
• If turnover exceeds limits, one must switch to regular scheme and file CMP-04
• Late transition can attract penalty

Consequences of Ineligibility

If a business wrongly continues under the Composition Scheme:

• Must pay differential tax at regular rates
• ITC cannot be claimed
• Penalty and interest may apply
• Tax liability recalculated from date of ineligibility