💡 Key Takeaways
- The turnover limit for traders and manufacturers is ₹1.5 crore (₹75 lakh for special states).
- Tax rates range from a flat 1% to 6%, paid out of pocket.
- Filing is drastically reduced to one quarterly statement (CMP-08) and one annual return.
- Input Tax Credit (ITC) cannot be claimed under any circumstances.
- Inter-state sales and selling on TCS-mandated e-commerce platforms are strictly prohibited.
Running a small business in India is hard enough without drowning in monthly tax paperwork. That is exactly why the GST composition scheme exists. If your annual turnover is under ₹1.5 crore, this simplified tax facility is an absolute lifesaver. It allows you to pay a flat rate—as low as 1%. You also file returns quarterly instead of monthly.
No complex input tax credit calculations. No paperwork headache. Fully online. Done in days.
However, Section 10 of the CGST Act isn’t a magical fix for everyone. If you sell across state lines or run an e-commerce storefront, strict restrictions apply. So, is this the right move for your startup or retail shop in FY 2025-26? In this comprehensive guide, we explain the latest turnover limits, exact tax rates, and the undeniable benefits. You will also learn exactly how to opt into this scheme via the GST portal. Let’s break down the rules so you can keep your focus on growth, not compliance.
What Is the GST Composition Scheme Under Section 10?
The GST composition scheme is a simplified tax mechanism under Section 10 of the CGST Act designed specifically for small businesses in India. Instead of filing complex monthly GST returns and calculating Input Tax Credit (ITC), eligible businesses pay a nominal, flat percentage of their total turnover—typically between 1% and 6%—directly to the government. This scheme significantly reduces compliance costs. It is ideal for local traders, small manufacturers, and standalone restaurants.
Who Is Eligible for the GST Composition Scheme in 2026?
The primary condition to join revolves around your annual aggregate turnover. As per the GST Council, regular businesses can opt for the composition scheme if their turnover in the preceding financial year did not exceed the strict turnover limit of ₹1.5 crore.
For businesses in Special Category States—such as Himachal Pradesh—this threshold is reduced to ₹75 lakh. Service providers also have a dedicated limit. If you supply services (other than restaurants), you can join provided your turnover is under ₹50 lakh.
What our CA team sees in practice: Many local retailers assume they qualify purely based on one shop’s sales. They overlook the Permanent Account Number (PAN) based calculation. The turnover limit applies to all businesses registered under the same PAN. If you own a hardware store and a cafe under the same PAN, managing their business licenses and combined revenue requires extra care. Their combined revenue must stay below the ₹1.5 crore cap.
Furthermore, the business must not supply goods not liable to GST. Understanding these precise boundaries prevents sudden tax notices later in the financial year.
What Are the Current GST Composition Scheme Tax Rates?
If you meet the eligibility criteria, the next step is understanding the financial impact. The tax rates under Section 10 are remarkably straightforward. They completely eliminate the need to track individual product GST slabs.
According to the official GST Portal, the rates for FY 2025-26 are fixed based on your specific business category. Manufacturers and regular traders pay a flat 1% tax on their turnover (0.5% CGST + 0.5% SGST). This covers small-scale producers and local retail shops.
Restaurants not serving alcohol are taxed at a flat rate of 5% (2.5% CGST + 2.5% SGST). This is highly beneficial for small eateries and independent food stalls looking to avoid the standard 18% slab.
For service providers opting into the scheme, the rate is set at 6% (3% CGST + 3% SGST).
Why Do Small Businesses Opt for Section 10?
Why do thousands of Indian MSMEs choose this route? The primary benefit is the drastic reduction in compliance burden. Under normal GST, businesses often file three returns a month. Composition dealers only file a simple quarterly statement (CMP-08) and one annual return (GSTR-4).
Secondly, it improves your cash flow. Because you pay a minimal fixed percentage, your working capital isn’t tied up in heavy tax deposits.
Here is a quick comparison showing the stark differences:
| Feature | Normal GST Scheme | Composition Scheme |
|---|---|---|
| Tax Rate | 5%, 12%, 18%, 28% | 1%, 5%, 6% |
| Return Filing | Monthly (GSTR-1, 3B) | Quarterly (CMP-08) |
| Input Tax Credit | Fully Available | Not Available |
| Tax Invoice | Can issue Tax Invoice | Bill of Supply only |
Another massive advantage is high liquidity. You simply pay a flat rate on your sales and move on. There is zero friction regarding mismatched invoices with suppliers. You save money on accounting software and professional fees for Income Tax Returns. If you run a local B2C business where end consumers do not claim ITC, this scheme is a fundamentally smart financial decision.
What Are the Disadvantages and Strict Restrictions?
Despite its appeal, Section 10 GST has strict guardrails. The biggest drawback is the total loss of Input Tax Credit. If you buy ₹5 lakh worth of raw materials and pay 18% GST on them, you cannot claim that ₹90,000 back. It becomes a dead cost to your business.
Additionally, you are legally barred from making inter-state outward supplies. You can buy goods from another state. However, you cannot sell goods outside your home state. If a Delhi-based business wants to ship a product to a customer in Haryana, they immediately violate the composition scheme conditions.
You are also prohibited from selling through e-commerce portals based on Tax Collected at Source (TCS) mandates by the Income Tax Department. This means selling on platforms like Amazon or Flipkart is absolutely out of the question.
Finally, you cannot issue a standard tax invoice. You must issue a Bill of Supply instead. You must boldly mention “Composition taxable person, not eligible to collect tax on supplies” on every receipt. This restriction often makes B2B clients avoid you.
How to Opt for the Composition Scheme Online?
Switching to this simplified framework is entirely digital. If you are already a registered taxpayer, you must file Form GST CMP-02 on the official portal before the new financial year begins.
Based on the official GST user guide, the process takes only a few minutes.
- Log into the GST portal.
- Navigate to the ‘Services’ tab.
- Select ‘Registration’, and click on ‘Application to Opt for Composition Levy’.
The system will auto-populate your business details. You simply select your business category, sign the declaration using an EVC or Digital Signature Certificate (DSC), and submit.
Crucially, within 60 days of opting in, you must also file Form GST ITC-03 to declare your existing stock. If you ever exceed the turnover limit, you must immediately file Form GST CMP-04 to voluntarily withdraw from the composition levy. For businesses needing assistance, exploring professional GST Registration Services ensures zero errors during this transition.
Frequently Asked Questions (FAQs)
Q: Can a composition dealer claim Input Tax Credit (ITC) under Section 10?
A: No, a taxpayer registered under the GST composition scheme cannot claim any Input Tax Credit. Any GST paid on the purchase of raw materials or services becomes a direct business cost. Because you pay a highly reduced, flat tax rate on your outward sales, the government strictly disables the ITC facility to balance the tax ecosystem and prevent double benefits.
Q: What happens if my turnover exceeds the ₹1.5 crore limit mid-year?
A: The moment your aggregate turnover crosses the ₹1.5 crore threshold (or ₹75 lakh in special category states), you are disqualified from the scheme. You must notify the tax department by filing Form CMP-04 within seven days. From that day forward, you must register as a normal taxpayer, issue standard tax invoices, and begin filing regular monthly returns like GSTR-3B.
Q: Can I sell products on Amazon or Flipkart under this scheme?
A: No, businesses registered under Section 10 cannot sell goods through e-commerce operators that are legally required to collect Tax Collected at Source (TCS). Major platforms like Amazon, Flipkart, and Myntra fall into this category. If you plan to expand your retail operations by selling pan-India through these digital marketplaces, you must opt out of the scheme and operate as a normal taxpayer.
Q: Is a composition dealer allowed to purchase goods from another state?
A: Yes, an individual or business under the composition scheme is fully permitted to purchase goods from suppliers located in different states. The legal restriction applies exclusively to outward supplies (sales). You can buy stock from Maharashtra and bring it to Delhi, but you cannot legally sell and ship those goods from your Delhi storefront to a customer residing in Haryana.
Q: How do I calculate the turnover limit if I have multiple businesses?
A: The ₹1.5 crore turnover limit is strictly calculated on a PAN India basis, not a per-branch basis. If you operate three different businesses—such as a retail shop, a hardware store, and a small cafe—all registered under a single Permanent Account Number, you must combine their total sales. If the sum total of all entities exceeds the limit, none can use the scheme.
Navigating India’s indirect tax system doesn’t have to be overwhelming. The composition scheme is a powerful tool, offering reduced compliance, a flat 1% to 6% tax rate, and improved working capital. However, the inability to claim Input Tax Credit and the ban on inter-state sales mean it isn’t for everyone.
Talk to a Delhi Tax Solutions expert to get your GST registration filed within 3 days and secure the right tax structure. Staying compliant via our GST Compliance Hub while maximising your legal tax benefits will always be your competitive advantage.
About this article: Researched using official government sources, real-time competitor and search-trend analysis, and Delhi Tax Solutions’ in-house tax advisory team. Last updated September 2026. This article is for general informational purposes and is not a substitute for personalised professional tax advice.
