Composition scheme: eligibility, restrictions and exit
A simpler tax for smaller businesses, with three restrictions that decide whether it is actually cheaper.
Section 10 permits a registered person whose aggregate turnover in the preceding financial year did not exceed the prescribed limit to pay tax at the notified rate on turnover in lieu of the ordinary tax. The scheme is not available to a person making inter state outward supplies, supplying through an electronic commerce operator required to collect tax, supplying notified goods, or being a casual or non resident taxable person. A composition taxpayer cannot collect tax from customers and cannot claim input tax credit, and its customers cannot claim credit.
Eligibility and the rates
The turnover limit for goods and the separate limit for the service provider scheme under Section 10(2A) are notified and differ; the applicable limit for the State and the activity must be verified.
The rates differ by activity — manufacturer, trader, restaurant service, and the separate rate under the service provider scheme.
A composition taxpayer may supply services up to the value permitted by the proviso to Section 10(1), computed as prescribed.
Tax is paid on turnover in the State, and the return and payment cycle is quarterly with an annual return, which is the administrative attraction of the scheme.
The three restrictions that decide the economics
No credit. Tax on inputs is a cost, which matters more the higher the input tax content of the business.
No collection from customers. The tax is out of margin, and it cannot be passed on as tax.
Customers get no credit. A business to business supplier therefore loses competitiveness against a regular taxpayer, which is why the scheme suits business to consumer activity.
Reverse charge liabilities continue to apply and must be paid in cash, without credit.
Exit, voluntary and involuntary
Where the turnover exceeds the limit during the year, the option lapses from the day the limit is crossed, and the person becomes a regular taxpayer from that day, with an intimation in the prescribed form.
On exit, a statement of stock in hand is filed and credit on inputs held in stock may be claimed in the manner and within the period prescribed. This claim is frequently missed and it is real money.
Voluntary exit is by intimation before the beginning of the financial year in the prescribed form.
Where the department finds the person was ineligible from an earlier date, the demand is for the differential tax at ordinary rates with interest and penalty, and the inability to collect from customers retrospectively makes this exposure severe.
What to do on Monday
Model the scheme against the regular scheme on your actual input tax content and customer profile before opting.
Monitor turnover monthly against the limit, because the option lapses on the day it is crossed.
On exit, file the stock statement and claim credit on inputs in stock within the period.
Confirm eligibility annually against the restrictions, particularly the e-commerce and inter state limbs.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Can a composition taxpayer make inter state supplies?
Not outward inter state supplies of goods. Inward inter state procurement is permitted.
Can a composition taxpayer sell on an e-commerce platform?
Not where the operator is required to collect tax at source in respect of the supply. Check the platform's position before enrolling.
Do we get credit on stock when we exit?
Credit on inputs held in stock may be claimed on exit in the manner and within the period prescribed. Do not miss it.
Does reverse charge apply?
Yes, and it is paid in cash without credit, which is an additional cost under the scheme.
What happens if we are found ineligible from an earlier date?
Differential tax at ordinary rates with interest and penalty, and it cannot be recovered from customers retrospectively.
In this cluster
- GST registration in 2026: thresholds, documents and timelines
- Suo motu cancellation and the revocation route
- Retrospective cancellation and its effect on buyers
- Physical verification, biometric authentication and registration rejection
- Multiple registrations, places of business and additional premises
- Casual taxable person and non resident taxable person registration
- Amendment of registration and the officer's discretion
- Section 29(2) grounds of cancellation, read strictly
- Aggregate turnover: the computation that decides thresholds and obligations
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.