Composition Scheme Eligibility Under GST: Who Qualifies and Who Is Barred
The Composition Scheme trades input tax credit for a flat, low tax rate and drastically simpler returns — but eligibility rules exclude more businesses than most owners expect, including several categories that look small enough to qualify on turnover alone.
Turnover thresholds
- Goods and mixed suppliers: aggregate turnover up to ₹1.5 crore in the preceding financial year (₹75 lakh in specified special category states).
- Service providers (Section 10(2A)): a separate composition scheme for services, with a lower turnover limit of ₹50 lakh.
"Aggregate turnover" for this purpose is computed on a PAN-wide, all-India basis — every business vertical and branch registered under the same PAN is added together, not assessed state-by-state or vertical-by-vertical.
Who is barred, even if turnover qualifies
A business cannot opt for the Composition Scheme if it:
- Makes any inter-state outward supply of goods (this alone disqualifies many otherwise-eligible small manufacturers and traders who sell even a small amount outside their home state).
- Supplies goods through an e-commerce operator required to collect TCS under Section 52 — this is why sellers on major online marketplaces generally cannot use composition for that channel.
- Is engaged in manufacture of certain notified goods the government has specifically excluded from composition (historically including items like ice cream, pan masala, tobacco products, and specified aerated water — the exact notified list should be checked as it is amended by notification).
- Is a casual taxable person or a non-resident taxable person.
- Supplies goods or services that are not leviable to tax under GST in a way that falls outside the scheme's scope, subject to specific carve-outs.
- Is engaged in supply of ice cream and other edible ice, pan masala, or tobacco/tobacco substitute manufacturing — these are explicitly excluded categories.
What composition dealers give up
- No input tax credit — GST paid on purchases cannot be claimed as credit, unlike regular registration.
- Cannot issue a tax invoice or collect GST separately from customers — must issue a Bill of Supply instead, and the composition tax is absorbed into the price, not charged on top.
- Must mention "composition taxable person, not eligible to collect tax on supplies" on every bill of supply, and "composition taxable person" on the signboard at every place of business.
How to opt in
An existing registered taxpayer opts in for a financial year by filing Form GST CMP-02 before the start of that financial year (or before the specified due date). A new applicant can select the composition option directly at the time of registration in Form GST REG-01. Once opted in, the option continues until the taxpayer either exceeds the threshold, does something that disqualifies them, or voluntarily opts out by filing Form GST CMP-04.