GST composition scheme for small shops: is it right for you?

The composition scheme lets a small business pay GST as a small, fixed share of its turnover instead of working out tax bill by bill — with fewer returns to file. It sounds like an easy win, but it comes with real limits: no input tax credit, no GST on your bills and no sales to other states. This guide explains the rules and, with a worked example, when the scheme saves money and when it costs you.

Who can opt in

• Businesses whose aggregate turnover in the previous financial year was up to ₹1.5 crore.
• The limit is ₹75 lakh in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
• Service providers have a separate composition option, for turnover up to ₹50 lakh.

You cannot opt in if you:

• sell goods or services to other states (outward inter-state supply);
• supply goods that are not taxable under GST;
• are a casual or non-resident taxable person;
• manufacture notified goods such as ice cream, pan masala or tobacco products.

The rates

Tax is a percentage of your turnover in the state, paid from your own pocket:

For traders the 1% applies to taxable turnover, so sales of goods that carry no GST are not taxed.

Rules you must follow

• Give a bill of supply, not a tax invoice, with the words “composition taxable person, not eligible to collect tax on supplies” at the top.
• Do not charge GST to your customers.
• No input tax credit — the GST you pay on purchases becomes part of your cost.
• Write “Composition Taxable Person” on the signboard at every place of business.
• Tax on any purchase that falls under reverse charge is still paid at the normal rate.

Returns and deadlines

• CMP-08 every quarter, to pay the tax — by the 18th of the month after the quarter ends.
• GSTR-4 once a year — by 30 June after the financial year ends (from FY 2024-25; it was 30 April earlier).
• To opt in: file CMP-02 before the financial year starts, that is by 31 March, and file ITC-03 within 60 days to reverse the credit on stock you hold.

If your turnover crosses the limit during the year, your option ends and you move to the regular scheme — speak to your CA as soon as you see it coming.

Is it cheaper? A worked example

Take two shops, each selling goods worth ₹50 lakh in a year before tax, mostly to walk-in customers at printed prices. (Simplified: no stock change, no other costs.)

Shop A — a kirana selling mostly 5% goods, buying at 10% below its selling price

Under the regular scheme the shop pays only the difference between tax collected (₹2,50,000) and tax paid on purchases (₹2,25,000). Under composition it gets no credit and pays 1% of its whole turnover — so it earns ₹27,500 less.

Shop B — selling 18% goods (say, cosmetics or small electronics), buying at 20% below its selling price

Here composition leaves ₹1,21,000 more — because the shop keeps most of the GST gap between its sales and purchases.

The lesson: composition tends to suit shops that sell higher-rate goods with healthy margins to consumers in their own state. It suits less when you sell mainly low-rate goods on thin margins — and it hurts when your buyers are businesses, because they cannot claim input tax credit on your bill of supply.

When it suits, and when it does not

Usually a good fit

• Most sales are to consumers in your own state.
• Your goods carry 18% GST and your margins are healthy.
• You want fewer returns and simpler books.

Think twice

• Many customers are businesses that want input tax credit.
• You want to sell to other states, now or soon.
• You sell mainly nil or 5% goods on thin margins.
• You are about to buy costly equipment — no credit on it under composition.

In ApnaInventory you choose the tax mode once: regular GST bills, a bill of supply for composition, or simple bills if you are not registered. The sales and purchase reports give the turnover for your quarterly payment. For the regular side, see what must be on a GST bill; and for goods on the move, when an e-way bill is required.

FAQ

Can a composition dealer sell online?

Since 1 October 2023 a composition dealer may sell goods through e-commerce platforms, but only within its own state — the platform must not allow sales to other states.

Can I buy goods from another state?

Yes. The restriction is only on selling to other states. You simply cannot take credit for the GST you pay.

Can I show GST separately on my bill?

No. A composition dealer cannot collect tax from customers, so the bill of supply shows no GST.

Do I still have to keep accounts?

Yes — sales, purchases and stock records are still needed, and they are what your quarterly payment is worked out from.

Sources

• Who can opt in, rates, conditions, CMP-08 and how to opt in — Composition levy flyer, GST Council / CBIC (updated November 2022)
• ₹1.5 crore limit and the ₹75 lakh states — Notification 14/2019–Central Tax
• Rates for manufacturers and traders (rule 7) — Notification 50/2020–Central Tax
• GSTR-4 due by 30 June from FY 2024-25 — Notification 12/2024–Central Tax
• Selling goods through e-commerce from 1 October 2023 (Notification 36/2023) — ICMAI summary

Facts checked on 2 November 2026. The example is simplified — work out your own numbers with your CA before you switch.