The composition scheme is GST's simplified option for small businesses. Instead of the full mechanics of output tax and input tax credit, eligible taxpayers pay tax at a low flat rate on turnover and file less often. It's attractive for the right business — but it comes with conditions and trade-offs. Here's how it works.
Reviewed by CA Harika Chebolu, FCA · Last updated 2026-06-15
Quick answer
The composition scheme lets small businesses pay GST at a low flat rate with simpler filing — but with real trade-offs. Here's how it works.
Under the composition scheme, an eligible small taxpayer pays GST at a low flat rate on turnover rather than charging tax on each invoice and netting input credit. The compliance is lighter — fewer, simpler returns and a quarterly payment rhythm. It's designed to take the day-to-day GST burden off very small businesses that mainly serve end customers.
Eligibility is capped by turnover — your aggregate turnover must stay under the prescribed limit, which differs for goods and for the eligible categories of services, and can vary by state. Some businesses are excluded regardless of size, such as those making inter-state outward supplies, supplying through e-commerce operators, or dealing in goods outside the scheme. Confirm both the turnover limit and that your activity isn't excluded before opting in.
The simplicity comes at a price. A composition dealer cannot charge GST on invoices or pass on tax, and cannot claim input tax credit on purchases — the flat rate is paid out of the business's own pocket. You also cannot make inter-state outward supplies under the scheme. Because your customers can't claim credit from you, the scheme suits businesses selling to end consumers far better than those selling to other GST-registered businesses.
A composition taxpayer pays tax on turnover, typically on a quarterly schedule, and files the prescribed simpler returns plus an annual statement. You issue a bill of supply rather than a tax invoice (since you don't charge GST), and you generally must indicate composition status. The reduced filing is the main practical benefit — but it's still real compliance that must be kept up on time.
You opt into the scheme at the start of a period and it then applies for the year. If your turnover crosses the limit during the year, you must exit the scheme and move to regular GST from that point, with the heavier compliance that follows. Plan for this: a fast-growing business may outgrow the scheme mid-year, so watch your turnover and be ready to switch.
Small businesses whose aggregate turnover stays under the prescribed limit and whose activity isn't in an excluded category such as inter-state outward supplies or e-commerce sales. The limit differs for goods and eligible services and can vary by state, so confirm before opting in.
No — a composition taxpayer cannot claim input tax credit and cannot charge GST on invoices. The low flat rate on turnover is paid out of the business's own funds, which is the core trade-off for the scheme's simpler compliance.
You must exit the scheme and switch to regular GST from that point , taking on the fuller compliance — charging tax, claiming credit and filing the regular returns. Watch your turnover through the year so the switch doesn't catch you out.
Wondering if the composition scheme is right for your business? Write to the firm and we'll weigh the trade-offs against your numbers and help you decide.