The composition levy under Section 10 of the CGST Act, 2017 is an optional alternative to the normal levy under Section 9, designed to reduce the compliance burden on small taxpayers. A registered person opting for the scheme pays tax at a prescribed flat percentage of turnover, forgoes input tax credit entirely, and files one quarterly payment statement and one annual return in place of the monthly GSTR-1/GSTR-3B cycle applicable to regular taxpayers.
The scheme has undergone several amendments since 2017, and a number of superseded positions — the 2% manufacturer rate, the blanket bar on e-commerce supplies, the 30 April due date for GSTR-4 — continue to circulate in older guidance. This article consolidates the legal position as it stands for FY 2026-27, with reference to the governing sections, rules and notifications.
Statutory basis and threshold
The composition levy is governed by Section 10 of the CGST Act, 2017, read with Rules 3 to 7 of the CGST Rules, 2017.
The eligibility threshold under Section 10(1) is an aggregate turnover of Rs. 1.5 crore in the preceding financial year. This limit was raised from Rs. 1 crore by Notification No. 14/2019-Central Tax dated 07.03.2019 (superseding Notification No. 8/2017-Central Tax) with effect from 01.04.2019 and has remained unchanged since. For eight specified states - Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand - the limit is Rs. 75 lakh.
It may be noted that several secondary sources describe the Rs. 75 lakh limit as applicable to "North-Eastern states and Himachal Pradesh." This does not reflect the notified position. Assam and Himachal Pradesh opted for the Rs. 1.5 crore limit, while Uttarakhand, though not a North-Eastern state, falls within the Rs. 75 lakh category. Practitioners advising clients registered in these states should verify eligibility against Notification 14/2019 itself.
Aggregate turnover is computed PAN-wide on an all-India basis. Further, the proviso to Section 10(2) renders the option indivisible across registrations: where more than one registered person holds the same PAN, none is eligible for the scheme unless all registrations under that PAN opt for it. Selective adoption for particular GSTINs is not permissible.
Rates of tax
The applicable rates are prescribed under Rule 7 of the CGST Rules, 2017:
| Category | CGST | SGST/UTGST | Total | Turnover base |
|---|---|---|---|---|
| Manufacturers (other than manufacturers of notified goods) | 0.5% | 0.5% | 1% | Turnover in the State/UT |
| Restaurant service (para 6(b) of Schedule II) | 2.5% | 2.5% | 5% | Turnover in the State/UT |
| Traders and other eligible suppliers | 0.5% | 0.5% | 1% | Taxable supplies of goods and services in the State/UT |
| Service providers under Section 10(2A) | 3% | 3% | 6% | Turnover in the State/UT |
Two aspects of this table warrant attention. First, the rate for manufacturers is 1%, having been reduced from 2% by Notification No. 1/2018-Central Tax dated 01.01.2018; the superseded 2% rate continues to appear in pre-amendment material, including older CBIC FAQ documents. Second, the turnover base differs across categories: traders pay tax on taxable supplies only, so a trader dealing partly in exempt goods discharges composition tax on the taxable portion alone, whereas the manufacturer's 1% applies to the entire turnover in the State, including exempt supplies.
Composition scheme for service providers - Section 10(2A)
Service providers, other than restaurant service, were originally excluded from the scheme. Pursuant to the recommendations of the 32nd GST Council meeting, a parallel scheme was introduced through Notification No. 2/2019-Central Tax (Rate) dated 07.03.2019 and subsequently given statutory footing by insertion of Section 10(2A) through the Finance (No. 2) Act, 2019 with effect from 01.01.2020. A supplier of services whose aggregate turnover in the preceding financial year did not exceed Rs. 50 lakh may opt to pay tax at 6% (3% CGST + 3% SGST).
Independently of Section 10(2A), the second proviso to Section 10(1) permits a composition dealer in goods to supply services of value not exceeding 10% of turnover in the State or Union territory in the preceding financial year, or Rs. 5 lakh, whichever is higher. The Explanation to this proviso excludes the value of exempt services by way of extending deposits, loans or advances, where the consideration is represented by interest or discount, from this computation. Interest income on deposits therefore does not erode the marginal services limit.
Persons not eligible
Section 10(2), read with Rule 5 of the CGST Rules and the notified goods list, excludes the following categories from the scheme:
- Suppliers of services beyond the limits set out above
- Suppliers of goods not leviable to GST, such as alcoholic liquor for human consumption
- Persons making inter-State outward supplies of goods; inter-State inward supplies remain permissible
- Casual taxable persons and non-resident taxable persons
- Persons supplying services through an electronic commerce operator required to collect tax at source under Section 52
- Manufacturers of notified goods
The notified goods, as the list currently stands, are: ice cream and other edible ice (HSN 2105 00 00), pan masala (2106 90 20), tobacco and manufactured tobacco substitutes (Chapter 24), aerated water (2202 10 10, added by Notification No. 43/2019-Central Tax with effect from 01.10.2019), and fly ash bricks and blocks, building bricks, bricks of fossil meals and earthen or roofing tiles (added by Notification No. 04/2022-Central Tax dated 31.03.2022, with effect from 01.04.2022). Brick manufacturers were concurrently provided a separate levy of 6% without input tax credit (or 12% with credit) under Notification No. 02/2022-Central Tax (Rate); although commonly referred to as the "bricks composition scheme," it operates outside Section 10.
The position on e-commerce requires specific attention, as the law was amended with effect from 01.10.2023. The Finance Act, 2023 amended Sections 10(2)(d) and 10(2A)(c) to omit the reference to goods. Consequently, a composition dealer may now supply goods through an electronic commerce operator, subject to the supplies remaining intra-State. The bar continues to apply only to the supply of services through an operator required to collect tax at source under Section 52. Guidance published prior to October 2023 stating a blanket prohibition on e-commerce supplies no longer reflects the law.
Conditions of operation
A composition dealer is subject to the following conditions during the currency of the option:
The dealer shall not collect tax from the recipient and cannot issue a tax invoice. Supplies are made against a bill of supply, which must bear the words "composition taxable person, not eligible to collect tax on supplies" at the top. The words "composition taxable person" must also be displayed on the signboard at the principal place of business and every additional place of business.
Section 10(4) denies input tax credit in its entirety. All tax liability, including liability under reverse charge pursuant to Sections 9(3) and 9(4), must be discharged in cash; the electronic credit ledger is not available. Reverse charge liability is payable at the normal rates applicable to the goods or services concerned, not at the composition rate, and no credit is available for the tax so paid.
Compliance calendar and forms
| Compliance | Form | Timing |
|---|---|---|
| Opting in (existing registrant) | CMP-02 | Before commencement of the relevant FY (for FY 2027-28: by 31.03.2027) |
| Opting in (fresh registration) | Part B of REG-01 | With the registration application |
| Reversal of ITC on stock at entry | ITC-03 | Within 60 days of commencement of the FY |
| Quarterly statement of self-assessed tax | CMP-08 | 18th of the month following the quarter |
| Annual return | GSTR-4 | 30 June following the FY |
| Withdrawal from the scheme | CMP-04 | Within 7 days of the triggering event |
| Claim of ITC on stock at exit | ITC-01 | Within 30 days of withdrawal |
The due date for GSTR-4 was revised pursuant to the recommendation of the 53rd GST Council. Notification No. 12/2024-Central Tax dated 10.07.2024 shifted the due date from 30 April to 30 June of the following financial year, applicable from FY 2024-25 onwards. The return for FY 2025-26 was accordingly due on 30 June 2026. The late fee is Rs. 50 per day (Rs. 25 CGST + Rs. 25 SGST), capped at Rs. 2,000, and Rs. 20 per day capped at Rs. 500 for a nil return, with interest at 18% per annum on unpaid tax. A three-year outer limit on filing returns beyond the due date is operational on the portal from the July 2025 tax period, following the amendments introduced by the Finance Act, 2023.
CMP-08 is a statement of payment of self-assessed tax, not a return. Interest under Section 50 accrues from the quarterly due date irrespective of when the annual return is filed. Deferring quarterly payments to the annual filing therefore attracts interest for the intervening period.
Lapse of the option and exit
The option lapses on the day the aggregate turnover during the financial year exceeds the applicable limit. There is no grace period, and the dealer must move to the normal levy from that date: intimation in CMP-04 is required within seven days, tax invoices must be issued thereafter, and the regular return cycle applies. On exit, whether on crossing the threshold or voluntarily, the dealer may claim credit on inputs held in stock, inputs contained in semi-finished and finished goods, and capital goods (reduced on a pro-rata basis over five years) as on the date of transition, by filing ITC-01 within thirty days.
Where the proper officer has reason to believe that the person was ineligible for the scheme or has contravened its conditions, a show cause notice may be issued in CMP-05, to which a reply is filed in CMP-06, followed by an order in CMP-07. Tax wrongly paid under composition by an ineligible person is liable to determination under Sections 73/74 of the CGST Act (Section 74A for tax periods from FY 2024-25 onwards), together with applicable penalty. The eligibility assessment at the time of opting in therefore carries direct financial consequence.
Suitability assessment
The commercial suitability of the scheme turns principally on the composition of the client's customer base and the input tax embedded in its purchases. Since a composition dealer cannot pass on credit, registered business customers receive no input tax credit on purchases from such a dealer, which disadvantages the dealer in business-to-business supply chains. The scheme is generally advantageous for businesses supplying predominantly to end consumers within the State. Conversely, where purchases carry substantial embedded GST, the credit forgone under Section 10(4) may exceed the compliance saving by a significant margin. A quantitative comparison of input tax credit forgone against tax and compliance cost saved, based on the client's actual purchase records, should precede any recommendation.
It may also be noted that the rate rationalisation exercise of September 2025 restructured the principal GST rate slabs but did not alter Section 10 or Rule 7. The composition rates and thresholds applicable for FY 2026-27 are therefore the same as those in force since FY 2019-20.
Disclaimer: The contents of this article are for general informational purposes only and do not constitute professional advice. The provisions discussed are as per the CGST Act, 2017, the CGST Rules, 2017 and notifications issued thereunder, as in force on the date of writing. Readers are advised to verify the current legal position and consult a professional before acting on any information contained herein. The author accepts no liability for any loss arising from reliance on this article.
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