GST Composition Scheme for FY 2026-27: Eligibility, Rates, and Compliance Explained

Introduction

Section 10 of the CGST Act, 2017 offers small taxpayers an alternative to the standard GST regime: pay tax at a low, flat percentage of turnover, skip input tax credit altogether, and file quarterly instead of monthly. For a certain category of small trader, manufacturer, or service provider, this trade-off makes real commercial sense. But the composition scheme has been amended piecemeal several times since 2017 thresholds raised, a separate service-provider variant introduced, the e-commerce bar partially lifted, due dates shifted and a fair amount of outdated guidance still circulates online. This article sets out the composition scheme as it stands for FY 2026-27, with the relevant statutory and notification references.

Legal Basis and Turnover Threshold

The scheme operates under Section 10 of the CGST Act, 2017, read with Rules 3 to 7 of the CGST Rules, 2017. A registered person is eligible to opt in where aggregate turnover in the preceding financial year did not exceed:

• ₹1.5 crore , for most states and Union Territories — this limit has been in place since Notification No. 14/2019-Central Tax dated 7 March 2019 raised it from the original ₹1 crore, effective 1 April 2019.
• ₹75 lakh , for a specified set of smaller/special-category states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.

A point worth flagging for practitioners: this ₹75 lakh list is often loosely described as "North-Eastern states and Himachal Pradesh," which is inaccurate. Himachal Pradesh and Assam in fact fall under the ₹1.5 crore threshold, while Uttarakhand — not a North-Eastern state — is part of the lower ₹75 lakh bracket. The safest approach is to check the specific state against Notification 14/2019 rather than relying on a general description.

Aggregate turnover for this purpose is computed on a PAN-India basis, not GSTIN-wise. This has a further consequence under the proviso to Section 10(2): where a single PAN holds multiple GST registrations across states, the composition option is available only if every registration under that PAN opts in together. A business cannot selectively run the composition scheme in one state and the regular scheme in another.

Applicable Tax Rates

Rule 7 of the CGST Rules prescribes the composition rates by category of taxpayer:

Two nuances are easy to miss. First, the manufacturer rate is 1%, not the 2% figure that appears in older material — it was reduced by Notification No. 1/2018-Central Tax with effect from 1 January 2018. Second, the base on which the rate is applied differs by category: a trader pays composition tax only on taxable supplies, so exempt goods sold by that trader fall outside the computation, whereas a manufacturer's 1% is levied on total turnover in the state, exempt supplies included.

The Separate Scheme for Service Providers — Section 10(2A)

Service providers were originally shut out of the composition scheme entirely, with restaurant services as the sole exception. Following the 32nd GST Council meeting, a dedicated scheme for small service providers was introduced through Notification No. 2/2019-Central Tax (Rate) and later given statutory backing via the insertion of Section 10(2A) by the Finance (No. 2) Act, 2019, effective 1 January 2020. Under this provision, a service provider with aggregate turnover up to ₹50 lakh in the preceding year may opt for composition at a combined 6% rate (3% CGST + 3% SGST).

Separately, a composition dealer primarily dealing in goods is also permitted a limited amount of incidental service supply under the second proviso to Section 10(1) — up to 10% of the preceding year's turnover in that state, or ₹5 lakh, whichever is higher. Notably, interest or discount income earned on deposits, loans, or advances is explicitly excluded from this computation by the accompanying Explanation, so such income does not eat into the 10%/₹5 lakh headroom.

Who Cannot Opt for the Scheme

Section 10(2) and Rule 5, along with the notified list of excluded goods, bar the following from the composition scheme:

1. Service providers exceeding the applicable thresholds described above.
2. Suppliers of goods not leviable to GST at all — for example, alcoholic liquor for human consumption.
3. Any person making inter-State outward supplies (inter-State inward supplies/purchases remain permitted).
4. Casual taxable persons and non-resident taxable persons.
5. Suppliers making supplies through an e-commerce operator that is required to collect tax at source under Section 52 — this restriction now applies specifically to services, not goods (see below).
6. Manufacturers of certain notified goods.

The current list of notified goods excluded from composition eligibility covers ice cream and other edible ice, pan masala, tobacco and manufactured tobacco substitutes, aerated water (added with effect from 1 October 2019), and — more recently — fly ash bricks, building bricks, bricks of fossil meals, and earthen or roofing tiles, added with effect from 1 April 2022. Brick manufacturers were simultaneously given their own separate concessional levy (6% without ITC, or 12% with ITC) under a distinct notification; this operates independently of, and outside, the Section 10 composition framework, even though it is sometimes loosely called a "composition scheme" for bricks.

A word of caution on e-commerce : guidance published before October 2023 commonly states that composition dealers cannot supply through e-commerce platforms at all. That position changed with the Finance Act, 2023, which amended Sections 10(2)(d) and 10(2A)(c) to remove the reference to goods, with effect from 1 October 2023. As things stand, a composition taxpayer may sell goods through an e-commerce operator, provided the supply remains intra-State. The restriction now applies only to services routed through an operator required to collect tax at source under Section 52.

Operating Conditions

A taxpayer under composition operates under a distinct set of constraints for as long as the option remains in effect:

• No tax may be collected from the recipient, and a regular tax invoice cannot be issued — supplies are made against a bill of supply instead, which must carry the specific declaration that the supplier is a composition taxable person not eligible to collect tax on supplies.
• The words "composition taxable person" must be displayed on the signboard at every place of business, not just the principal place.
• Input tax credit is denied in full under Section 10(4), with no exceptions.
• Reverse-charge liability under Sections 9(3) and 9(4) must still be discharged, and must be paid at the normal applicable rate for that supply — not at the composition rate — entirely in cash, since the electronic credit ledger is unavailable to a composition taxpayer.

Compliance Calendar

Practitioners should specifically note the GSTR-4 due date change: following the 53rd GST Council meeting's recommendation, Notification No. 12/2024-Central Tax moved the annual return due date from 30 April to 30 June, applicable from FY 2024-25 onward. This is another point on which older material is now out of date. Late filing of GSTR-4 attracts a fee of ₹50 per day (₹25 CGST + ₹25 SGST), capped at ₹2,000, or ₹20 per day capped at ₹500 for a nil return, plus interest at 18% per annum on any tax remaining unpaid.

It's worth distinguishing CMP-08 clearly from a return: it is a statement of self-assessed tax payment. Interest under Section 50 runs from the quarterly due date regardless of when the annual GSTR-4 is eventually filed — a taxpayer who defers payment to year-end filing will still owe interest for the intervening quarters.

Exiting the Scheme

The composition option lapses automatically, with no grace period, the moment aggregate turnover during the financial year crosses the applicable threshold. From that date, the taxpayer must switch to the regular GST regime — issuing tax invoices and following the standard monthly filing cycle — and must file CMP-04 within seven days to formally intimate the withdrawal.

On exit, whether triggered by crossing the threshold or by a voluntary decision to leave the scheme, the taxpayer becomes entitled to claim input tax credit on inputs held in stock, inputs contained in semi-finished and finished goods, and on capital goods (subject to a pro-rata reduction spread over five years), as on the date of transition — filed via Form ITC-01 within 30 days.

Where the tax department has reason to believe a taxpayer was never eligible for the scheme, or has breached its conditions, proceedings begin with a show cause notice in CMP-05, a reply in CMP-06, and culminate in an order under CMP-07. Tax collected under the composition rate by an ineligible taxpayer can subsequently be recovered under Section 73 or 74 (or Section 74A, for tax periods from FY 2024-25 onward), along with applicable penalty — making the eligibility assessment at the point of opting in a decision with real downstream financial risk if got wrong.

Is the Scheme Actually Worth It? A Practical Lens

The commercial case for composition depends heavily on two factors: who the business sells to, and how much GST is embedded in its own purchases.

• Because a composition dealer cannot issue a tax invoice or pass on credit, any registered business buying from a composition supplier gets no input tax credit on that purchase — a real disadvantage in B2B-heavy supply chains, where buyers routinely factor ITC into their pricing and sourcing decisions.
• The scheme tends to suit businesses selling predominantly to end consumers within a single state, where the buyer has no ITC need in the first place.
• Where a business's own purchases carry significant embedded GST, the input credit forgone by opting for composition can outweigh the savings from the lower rate and reduced filing burden — this needs an actual numerical comparison against the client's purchase and sales data, not a generic recommendation.

It's also worth noting that the broader GST rate rationalisation carried out in September 2025 restructured the principal GST rate slabs applicable under the regular regime, but left Section 10 and Rule 7 untouched — the composition thresholds and rates for FY 2026-27 remain the same as those that have applied since FY 2019-20.

Conclusion

The composition scheme remains a genuinely useful compliance simplification for the right kind of small business — but "right kind" is doing a lot of work in that sentence. Eligibility, rate, and turnover-base rules differ meaningfully across manufacturers, traders, restaurant operators, and service providers, and several rules that applied at the scheme's 2017 launch — the 2% manufacturer rate, the blanket e-commerce bar, the 30 April GSTR-4 deadline — no longer hold. Before advising a client to opt in (or to remain), it's worth re-verifying the current position against the specific notification rather than relying on general summaries, given how frequently this particular provision has been amended in pieces.

Disclaimer : This article is intended for general informational and educational purposes only and does not constitute professional or legal advice. The provisions discussed are based on the CGST Act, 2017, the CGST Rules, 2017, and the notifications referenced herein, as understood to be in force as of the date of writing. GST law is amended frequently through notifications and circulars; readers should independently verify the current position, particularly state-specific thresholds and applicable due dates, before relying on this article, and are advised to consult a qualified professional for advice specific to their facts. The author accepts no liability for any loss arising from reliance on this article.