Composition Scheme vs Regular GST: Which Is Better?

Choosing between the composition scheme vs regular GST is one of the first decisions a small business makes after registration, and it shapes pricing, paperwork and customer relationships. The composition scheme lets eligible small taxpayers pay tax at a low flat rate on turnover with simpler returns, but they cannot claim input tax credit or charge GST to customers. Regular registration involves more compliance but keeps the credit chain intact. This comparison explains eligibility, rates, compliance and, most importantly, the profit impact with a worked example.

Who is eligible for the composition scheme

Category	Turnover limit (previous year)
Manufacturers and traders of goods, and restaurants	Up to ₹1.5 crore (₹75 lakh in certain special category states)
Service providers and mixed suppliers under section 10(2A)	Up to ₹50 lakh

Even within the limit, you cannot opt for composition if you:

• Make inter-state outward supplies of goods or services.
• Supply goods notified as excluded, such as ice cream, pan masala and tobacco products.
• Are a casual or non-resident taxable person.
• Supply goods through e-commerce operators who collect TCS, except under the relaxations introduced in 2023 for intra-state supplies subject to conditions.
• Have another registration under the same PAN that is not under composition. The choice applies to all registrations of a PAN.

Tax rates under composition

Type of business	Composition rate (CGST + SGST)	Base
Manufacturers	1% (0.5% + 0.5%)	Turnover in the state
Traders	1% (0.5% + 0.5%)	Turnover of taxable supplies of goods
Restaurants not serving alcohol	5% (2.5% + 2.5%)	Turnover in the state
Service providers under section 10(2A)	6% (3% + 3%)	Turnover in the state

Composition tax is paid from the business's own funds and cannot be shown separately on the bill. Reverse charge tax on purchases is still payable at normal rates.

Side-by-side comparison

Feature	Composition scheme	Regular GST
Tax collected from customers	Not allowed	Yes, at applicable rates (5%, 18% or 40%)
Input tax credit	Not available	Available, subject to conditions
Document issued	Bill of supply	Tax invoice
Inter-state sales	Not allowed	Allowed
Returns	CMP-08 quarterly and GSTR-4 annually	GSTR-1 and GSTR-3B monthly or quarterly, GSTR-9 annually
Customer's ITC	Buyer gets no credit	Buyer gets credit
Compliance effort	Low	Moderate to high
Signboard and bill declaration	Must display "composition taxable person"	Not applicable

Worked example: which leaves more profit?

Consider a trader selling household goods taxed at 18%, buying from registered suppliers.

Case A: selling to consumers at fixed shelf prices

Assume customers pay a total of ₹1,41,60,000 in a year, whatever the scheme, because shelf prices are set by competition. Purchases cost ₹90,00,000 plus 18% GST of ₹16,20,000, that is ₹1,06,20,000.

Line	Regular GST	Composition
Amount received from customers	₹1,41,60,000	₹1,41,60,000
Output GST included in price	₹21,60,000 (18% of ₹1,20,00,000)	Not applicable
Net revenue	₹1,20,00,000	₹1,41,60,000
Cost of purchases (net of credit)	₹90,00,000 (₹16,20,000 credit recovered)	₹1,06,20,000 (no credit)
Composition tax at 1% of turnover	Not applicable	₹1,41,600
Gross margin	₹30,00,000	₹33,98,400

Under regular GST, the trader pays net GST of ₹21,60,000 minus ₹16,20,000 = ₹5,40,000, which is already reflected in the lower net revenue. Under composition, margin is ₹1,41,60,000 minus ₹1,06,20,000 minus ₹1,41,600 = ₹33,98,400. Composition leaves ₹3,98,400 more in this case. Note that turnover of ₹1.416 crore is within the ₹1.5 crore limit. The advantage comes from value addition: composition taxes the full turnover at a low rate, while regular GST taxes only the margin at 18%.

Case B: selling to registered businesses

If the same trader sells mainly to registered businesses, those buyers want credit. Under composition, they get none, so a business buyer effectively pays 18% more than it would for the same goods from a regular dealer who passes credit. Most B2B buyers will move to a regular supplier or demand a lower price. Here regular GST is almost always better.

Case C: low-margin trading

If margins are thin, say purchases of ₹1,10,00,000 against net sales of ₹1,20,00,000, the credit lost under composition (₹19,80,000 on purchases at 18%) is large relative to the 1% tax saving, and regular GST usually wins even for consumer sales. Run your own numbers before deciding.

Compliance under each option

Composition

• Opt in by filing CMP-02 before the start of the financial year (by 31 March), or at the time of new registration.
• Pay tax quarterly through CMP-08, usually by the 18th of the month after the quarter.
• File GSTR-4 annual return, usually by 30 April after the year.
• Issue bills of supply with the composition declaration.
• Exit by filing CMP-04 when you want to opt out, or automatically when turnover crosses the limit. On exit, you may claim credit on stock held in ITC-01 within the time allowed.

Regular

• File GSTR-1 and GSTR-3B monthly, or quarterly under QRMP if turnover is up to ₹5 crore.
• Reconcile purchases with GSTR-2B to claim credit.
• File GSTR-9 annually if required. See our guides on filing GSTR-3B.

Switching schemes: what happens to credit on stock

From regular to composition

When you opt into composition, you must reverse the input tax credit on inputs held in stock, inputs in semi-finished or finished goods, and capital goods (on a reduced basis for their remaining life), by filing ITC-03. Any balance left in the electronic credit ledger after that lapses. This reversal can be significant for businesses carrying heavy stock.

Example: A trader opting in on 1 April holds stock of ₹8,00,000 bought at 18%, on which credit of ₹1,44,000 was claimed. That ₹1,44,000 must be reversed (paid back through the ledgers) when switching. Spread over the expected benefit of composition, this one-time cost must be part of the decision.

From composition to regular

When you leave composition, voluntarily or because turnover crosses the limit, you can claim credit on inputs held in stock and in semi-finished or finished goods on the day before you became liable to pay regular tax, by filing ITC-01 within 30 days, subject to the one-year age limit on invoices. From that day, you issue tax invoices, charge GST and file regular returns.

Example: A composition trader crosses ₹1.5 crore turnover on 10 January. From that date it must pay tax normally. It holds stock bought for ₹5,00,000 plus GST of ₹90,000 within the last year. It can claim ₹90,000 as credit through ITC-01, which reduces its first regular GSTR-3B liability.

Composition for service providers

Small service providers, such as a repair shop or a local design studio with turnover up to ₹50 lakh, can opt for the section 10(2A) scheme at 6%. Consider a studio with annual billing of ₹40,00,000, all intra-state to consumers and small unregistered businesses. Composition tax is 6% of ₹40,00,000, that is ₹2,40,000. Under regular GST at 18%, if prices stay the same and include tax, taxable value would be ₹40,00,000 divided by 1.18, which is ₹33,89,831, and output tax would be ₹6,10,169, against which it might claim perhaps ₹1,00,000 of credit on equipment and software, leaving net tax of about ₹5,10,169. For a consumer-facing service business with low input costs, composition can be substantially cheaper. For a studio billing registered companies, regular registration is usually needed to stay competitive, because clients want credit.

Common mistakes made by composition dealers

• Charging GST on the bill, which is not allowed and can lead to the tax being demanded with penalty.
• Making a single inter-state sale, which makes the person ineligible.
• Forgetting reverse charge liability on purchases from unregistered suppliers where notified, or on legal services.
• Not displaying "composition taxable person" at the place of business and on bills.
• Missing CMP-08 for a quarter, which leads to late fees and interest.
• Not tracking turnover against the limit until the year end.

Decision checklist

1. Are more than a small share of your sales to registered businesses? If yes, prefer regular.
2. Do you sell or plan to sell outside your state, including online? If yes, composition is not available.
3. Is your value addition high (gross margin above roughly 15 to 20% on cost)? Composition may save money for B2C sales.
4. Do you buy capital goods with large GST? Regular lets you claim that credit.
5. Do you have the bandwidth for monthly reconciliation? If not, composition or QRMP reduces effort.
6. Is your turnover close to the limit? Crossing it mid-year forces you out, so plan for a transition.

How Fininvo helps

Whichever scheme you choose, Fininvo ERP supports both tax invoices and bills of supply from its invoice templates, and keeps purchase and sales registers that make the comparison above easy to rerun with your actual figures. See accounting, reports and pricing.

General information only, not tax advice. Rates, limits and conditions change by notification; consult your CA before choosing a scheme.

Frequently Asked Questions

Can a composition dealer sell to other states?

No. Composition taxpayers cannot make inter-state outward supplies. They can buy from other states, paying IGST that they cannot claim as credit.

Can a composition dealer show GST on the bill?

No. A composition dealer issues a bill of supply and cannot collect tax from customers. The composition tax is a cost of the business.

When can I switch from composition to regular?

You can opt out at any time by filing CMP-04, and you are moved out automatically if turnover crosses the limit. You can opt in only at the start of a financial year.

Do composition dealers pay reverse charge?

Yes. Tax on inward supplies covered by reverse charge must be paid at the normal rate, and no credit is available for it.

Is composition good for restaurants?

Restaurants not serving alcohol often find the 5% composition rate convenient because regular restaurant services are also generally taxed at 5% without input tax credit. The compliance saving is the main benefit, but compare your figures with your CA.