The two schemes in one minute
Under the regular scheme, you charge GST at the applicable rate on every sale, claim input tax credit (ITC) on purchases, and pay the difference. Under the composition scheme, you skip all of that: you pay a small flat percentage of your turnover out of your own pocket, cannot charge GST to customers, cannot claim any ITC, and file far fewer returns. The scheme is meant for small businesses whose turnover is within the notified limit — historically around ₹1.5 crore for traders and manufacturers (lower in special category states) and a smaller limit for the services composition option; verify the current limits on gst.gov.in.
For the full eligibility rules and how to opt in, see our composition scheme tutorial.
Head-to-head comparison
| Composition scheme | Regular scheme | |
|---|---|---|
| Tax on sales | Flat % of turnover, paid by you (typically 1% for traders/manufacturers, 5% for restaurants, 6% for the services option — verify current rates) | Full GST rate (5/12/18/28%) charged to the customer |
| Can you collect GST from customers? | No — issue a "bill of supply" | Yes — issue a tax invoice |
| Input tax credit | Not allowed at all | Allowed on eligible purchases |
| Returns | Quarterly payment statement (CMP-08) + one annual return | Monthly/quarterly GSTR-1 and GSTR-3B + annual return |
| Inter-state sales | Not permitted (goods) | Permitted with IGST |
| E-commerce marketplace sales | Restricted — check current rules | Permitted |
| B2B customers' ITC | They get nothing | They claim full credit |
| Compliance effort | Minimal | Significant — invoice-level reporting, 2B reconciliation |
A worked example: same shop, two schemes
Take Lakshmi, who runs a mobile-accessories shop in Coimbatore. Annual sales ₹80 lakh (all local, all B2C), purchases ₹60 lakh + 18% GST = ₹10.8 lakh of tax paid to suppliers.
Under composition (trader, 1%)
- Tax = 1% × ₹80,00,000 = ₹80,000 per year, from her own margin
- The ₹10.8 lakh GST on purchases is a cost — it is baked into her pricing
- Paperwork: four quarterly challans and one annual return
Under regular scheme
- Output GST = 18% × ₹80,00,000 = ₹14,40,000 (collected from customers)
- Less ITC = ₹10,80,000 → net cash outgo ₹3,60,000 — but this came from customers, not her margin
- Her sticker prices are 18% higher, though — in a price-sensitive B2C market that may cost her sales
For a retailer selling to consumers who cannot claim credit, composition keeps prices sharp and life simple. The calculus flips completely when your buyers are businesses.
When composition is usually the right call
- B2C-heavy businesses: kirana stores, salons, small restaurants, tailors — customers don't care about tax invoices.
- Low input-tax businesses: if your main cost is labour or exempt inputs, there is little ITC to forgo anyway.
- Owner-operated setups with no accountant: quarterly CMP-08 is dramatically lighter than the monthly cycle.
- Thin bookkeeping capacity: fewer returns means fewer chances of late fees piling up.
When you should stay (or go) regular
- Your customers are registered businesses. A composition dealer's invoice carries no credit — a B2B buyer effectively pays 18% more dealing with you. Most wholesalers and manufacturers selling B2B have no real choice but regular.
- You sell inter-state or on marketplaces. Composition (for goods) is confined to intra-state supply.
- High GST-paid purchases with decent margins: forgoing ITC can cost more than the compliance you save. In Lakshmi's example, if her customers were shops rather than consumers, composition would make her uncompetitive overnight.
- You export or plan to. Exporters need the regular scheme to claim refunds of input taxes.
- Growth trajectory: if you'll cross the composition limit mid-year, you must switch to regular from that day — planning for it early avoids a messy transition.
Traps composition dealers walk into
- Charging GST on invoices. A composition dealer collecting tax from customers faces penalties — the bill of supply must state "composition taxable person, not eligible to collect tax".
- Reverse charge still applies. Composition does not exempt you from paying tax on notified inward supplies under reverse charge — and you can't claim credit for it either.
- The 10% services window (for goods dealers). A trader providing some incidental services has a limited allowance; exceeding it can knock you out of the scheme.
- Crossing the turnover limit silently. Track turnover monthly; the scheme lapses the day you cross, not at year-end.
Decision checklist
Ask three questions, in order: (1) Do registered businesses buy from me? If yes → regular. (2) Do I sell inter-state or online via marketplaces? If yes → regular. (3) Is my GST-on-purchases small relative to the compliance cost I'd save? If yes → composition is likely the winner. Revisit the choice every year before the opt-in window — the scheme is elected financial-year-wise. And whichever route you take, keep your registration details current per our registration guide.