Composition vs Regular GST: Which to Choose

TL;DR

Composition is a turnover-based, simplified regime for small taxpayers up to ₹1.5 crore aggregate turnover (₹75 lakh in special-category states).

The composition scheme under Section 10 of the CGST Act is a simplified tax regime for small taxpayers. The headline rate is 1% for traders and manufacturers, 5% for restaurants, and 6% for other services — but no input tax credit is allowed. Regular registration is the default for any taxpayer wanting ITC, inter-state supply, or e-commerce. This post is the eligibility primer. The companion trap-piece, Composition scheme: trap for services, covers the operational math and the service-business perspective.

Who Can Opt In

Eligibility

• Aggregate turnover up to ₹1.5 crore in the preceding FY (₹75 lakh for special-category states).
• Not making inter-state supplies.
• Not selling through an e-commerce operator that is required to collect TCS.
• Not a manufacturer of pan masala, tobacco, or ice cream (notified excluded categories).
• Not a casual taxable person or non-resident taxable person.
• Not a supplier of online money gaming, online betting, or online gambling (notified under Section 9(5)).
• Not an Input Service Distributor.

Categories and Rates

Category	Tax Rate
Manufacturers (other than the excluded categories)	1% (0.5% CGST + 0.5% SGST, or 1% IGST)
Traders	1% (0.5% CGST + 0.5% SGST, or 1% IGST)
Restaurants (not serving alcohol)	5% (2.5% CGST + 2.5% SGST, or 5% IGST)
Other service providers	6% (3% CGST + 3% SGST, or 6% IGST)

The tax is paid as a percentage of turnover, not as a percentage of the value of supply. “Turnover” includes the full invoice value, including reimbursable expenses — there is no deduction for input costs.

For a service provider, the “turnover” means the full fee invoiced to the client. For a manufacturer / trader, the “turnover” means the gross sale value (before any discount, but after deductions for GST separately charged — although the composition taxpayer cannot charge GST separately on the invoice).

What You Give Up

When you opt in, three things happen on Day 1 that you cannot reverse easily:

1. No collection of GST on invoices

Composition taxpayers bill “inclusive of taxes” — the invoice does not separately show GST. Your customer knows they cannot claim ITC from your invoice. A B2B customer who could otherwise have claimed ITC will negotiate harder on price.

2. No claim of ITC on your purchases

Office rent, stationery, software subscriptions, telephone bills, professional fees — all the GST paid on these inputs is a dead cost. You cannot claim ITC. For a business with significant input GST, this is a meaningful loss.

3. No e-commerce

Section 10(2)(d) read with Rule 6(2B) of the CGST Rules blocks supplies via an e-commerce operator that is required to collect TCS at source. If your growth plan includes Amazon, Flipkart, Zomato, Swiggy, or any marketplace with TCS, you cannot be on composition.

What You Get

1. Simplified return filing

Composition taxpayers file:

• GSTR-4 — annual return, by 30 April of the following FY.
• CMP-08 — quarterly statement for tax payment, by the 18th of the month following the quarter.

No GSTR-1, no GSTR-3B, no GSTR-2B. The compliance load is significantly lighter than regular registration.

2. No audit

Composition taxpayers are not subject to audit under Section 65 (GST audit). The annual return GSTR-4 is a self-declaration.

3. Lower working capital

The tax is paid on the CMP-08 on a quarterly basis. For a business with seasonal cash flow, this is helpful — you pay tax after the quarter is over, not every month.

4. No reversal of input tax credit

If you switch from regular to composition, the ITC on stock must be reversed (Section 18(4)). If you switch from composition to regular, you start with a fresh ITC balance. The composition regime avoids the ITC reversal on the way in.

The Reverse Charge Trap

The biggest hidden trap is reverse charge. As a composition taxpayer, you must pay GST on:

• Rent paid to a registered landlord under Section 9(3).
• Services imported from outside India under Section 9(4).
• Legal services from an advocate (any amount).
• GTA from an unregistered transporter.

But you cannot claim that tax as ITC — composition taxpayers cannot claim ITC, ever. The full 18% on rent is a dead cost.

For a small consultancy paying ₹1 lakh per month rent, the reverse-charge hit is ₹18,000 per month, or ₹2,16,000 per year — pure tax cost. On the regular scheme, this would be ITC and recoverable against the output tax. The hidden trap erases the headline “6% vs 18%” saving.

The Threshold Traps

1. Auto-exit on crossing ₹1.5 crore

If your aggregate turnover crosses ₹1.5 crore in a FY (₹75 lakh for services in special-category states), you are auto-exited from composition. You must file FORM GST REG-01 as a regular taxpayer within 30 days of crossing the threshold.

If you had stock at the time of crossing, the ITC on that stock (which you had not been claiming, since you were on composition) is now lost. There is no retrospective ITC claim.

2. Inter-state supply auto-exit

If you make any inter-state supply, you are auto-exited from composition. The inter-state supply is a single event — even one consignment triggers the exit.

3. E-commerce auto-exit

If you start selling through an e-commerce operator with TCS, you are auto-exited from composition. The e-commerce operator will demand a regular GSTIN.

4. Notified excluded categories auto-exit

If your business falls into a notified excluded category (pan masala, tobacco, ice cream, online gaming, etc.), you cannot opt in. You are on the regular scheme from the start.

The Decision Matrix

Scenario	Recommended Choice
Manufacturer with ₹1 crore turnover, B2B customers who want ITC	Regular
Trader with ₹50 lakh turnover, B2C only, low input costs	Composition
Service provider with ₹40 lakh turnover, no rent, no sub-contractors	Composition
Service provider with ₹40 lakh turnover, ₹10 lakh rent	Regular (RCM on rent erases the saving)
Restaurant with ₹80 lakh turnover, low input costs	Composition (5% rate)
Restaurant selling through Zomato / Swiggy	Regular (e-commerce blocks composition)
Trader with ₹1.4 crore turnover, growing fast	Plan migration to regular at ₹1.5 crore
Service provider with ₹20 lakh revenue but plans to grow to ₹80 lakh	Plan for the regular scheme early — composition will trap you at the threshold

The Opt-Out Process

If you are on composition and want to switch to regular, you can opt out by filing FORM GST CMP-04 before the start of the next FY. Once opted out, you cannot opt back in for one year.

If you are auto-exited (crossed the threshold, inter-state supply, e-commerce, excluded category), you file FORM GST REG-01 as a regular taxpayer within 30 days of the event.

The opt-out is a one-way door for the FY. There is no mid-year opt-out.

The Migration Math

For a small service business with ₹30 lakh annual revenue, ₹5 lakh in tools and software, ₹6 lakh in rent, and minimal sub-contractor fees:

Composition (6% on turnover, no ITC)

• Composition tax: ₹30,00,000 × 6% = ₹1,80,000.
• RCM on rent (no ITC under composition): ₹6,00,000 × 18% = ₹1,08,000.
• Tools and sub-contractor GST (no ITC under composition): ₹5,00,000 × 18% = ₹90,000.
• Total tax cost: ₹3,78,000 (no ITC recoverable).

Regular (18% output, ITC on inputs)

• Output GST collected: ₹30,00,000 × 18% = ₹5,40,000.
• ITC on tools / software: ₹5,00,000 × 18% = ₹90,000.
• RCM on rent (eligible for ITC): ₹6,00,000 × 18% = ₹1,08,000.
• Total ITC available: ₹90,000 + ₹1,08,000 = ₹1,98,000.
• Net cash-out: ₹5,40,000 − ₹1,98,000 = ₹2,34,000.

Composition is ₹3,78,000 − ₹2,34,000 = ₹1,44,000 more expensive than regular in this scenario. The headline “6% vs 18%” suggests a saving; the actual saving is negative once the lost ITC on rent RCM and input GST is counted.

For a service business, the trap is that the headline “6% vs 18%” suggests a 12% saving, but the actual saving is negative when the rent and sub-contractor ITC is considered. The companion trap-piece covers this in detail.

When to Get Help

The composition scheme is a compliance simplification, not a tax incentive. The decision requires a calculation specific to your revenue mix and your input costs.

We routinely run composition-vs-regular calculations for our clients. Our GST registration and GST return filing services cover both paths. Share your turnover mix and your input cost estimate on WhatsApp for a no-charge assessment.

For the service-business math (the trap), see our Composition scheme: trap for services guide. For the underlying GST registration mechanics, see our GST registration guide.

Sources

• CBIC — CGST Act Section 10; CGST Rules Rule 6, 6A, 7
• GST Portal — Composition Scheme