GST Composition Scheme 2026: Limit, Rates, Rules and Bill of Supply

Most small shop owners hear about the GST composition scheme the same way: someone says "you only pay 1%, and no monthly returns." Both parts are roughly true, and both leave out the detail that decides whether the scheme is right for you. Pay 1% of what, exactly? What do you give up in exchange? And is 1% of your sales actually less than the GST you would pay under the regular scheme?

This guide covers the turnover limits and rates for 2026, who cannot opt in, what the scheme forbids, the forms and due dates, and how a bill of supply differs from a tax invoice. It then works through the numbers for a typical kirana shop, because the honest answer to "is composition cheaper?" depends on what you sell.

What is the GST composition scheme?

Under the regular scheme, a registered business charges GST on each sale, collects it from the customer, claims credit for the GST it paid on purchases (input tax credit, or ITC), and pays the difference to the government. That needs a tax invoice for every sale and regular returns: GSTR-1 for sales and GSTR-3B for the tax summary, every month or every quarter.

The composition scheme swaps all of that for a simpler deal. You pay a small flat percentage of your turnover, you do not charge GST to your customers, and you do not claim any credit. The government gets a predictable amount with little paperwork; you get a simple compliance routine.

It was designed for small businesses that sell mainly to consumers: kirana stores, small retailers, local manufacturers and small restaurants. For them, the customer cannot use input tax credit anyway, so a tax invoice adds little value.

Who can opt in: the turnover limits

Eligibility depends on your aggregate turnover in the previous financial year, counted across all registrations under the same PAN.

For this scheme, the special category states with the ₹75 lakh limit are Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.

A trader or manufacturer under the main scheme may also supply a small amount of services, up to 10% of turnover or ₹5 lakh, whichever is higher, without losing eligibility. A business that mainly supplies services uses the separate service-provider option under Section 10(2A).

If your turnover crosses the limit during the year, you must leave the scheme. The point at which you cross is what matters, not the end of the year.

Composition scheme rates

The rate is a percentage of your turnover in the state, split equally between CGST and SGST.

Two points worth noting:

• For traders, the 1% applies to turnover of taxable supplies. Exempt items such as fresh vegetables or loose grain do not attract the composition tax.
• The September 2025 rate reform moved most goods into the 5% and 18% slabs, with 40% for luxury and sin goods. Composition rates are separate and stayed the same. The regular rates do still matter, though, because they decide whether composition saves you money. More on that below.

Who cannot opt in

Some businesses are barred regardless of turnover:

• Anyone making inter-state outward supplies. If you sell to a customer in another state, you cannot be a composition dealer. Buying from other states is fine.
• Manufacturers of notified goods: ice cream, pan masala, tobacco and tobacco products, aerated water, fly ash bricks and a few other notified items.
• Suppliers of goods outside GST, such as alcohol for human consumption.
• Casual taxable persons and non-resident taxable persons.
• Businesses supplying services through an e-commerce operator that collects tax at source.

E-commerce for goods used to be barred as well. Since 1 October 2023, composition dealers may sell goods through e-commerce operators, but only within their own state.

There is one more rule that catches people out: all registrations under one PAN must opt together. If you hold two GSTINs, say a shop in one state and a godown in another, you cannot put one in composition and keep the other on the regular scheme.

What you give up

The low rate comes with restrictions. Read these carefully before you opt in, because they affect how customers see you as well as how much tax you pay.

1. You cannot collect GST from your customers. Your bill cannot show any tax. The composition tax comes out of your own margin.
2. You cannot claim input tax credit. The GST you pay on purchases becomes part of your cost.
3. You must issue a bill of supply, not a tax invoice. It must carry the words "composition taxable person, not eligible to collect tax on supplies" at the top.
4. You must display "composition taxable person" on your signboard at the shop.
5. Your registered buyers cannot claim ITC on what they buy from you. A business customer who wants credit will often prefer a regular supplier.
6. You still pay reverse charge tax where it applies, such as on certain services you buy, at the normal rates.

The second and fifth points are the ones that make composition a poor choice for businesses that sell mostly to other businesses.

Bill of supply vs tax invoice

A bill of supply is the document a composition dealer issues in place of a tax invoice. Regular taxpayers use it too, when they sell exempt goods or services.

Under Rule 49 of the CGST Rules, a bill of supply must contain:

• Supplier's name, address and GSTIN
• A consecutive serial number, unique for the financial year (letters, numbers, hyphens and slashes are allowed)
• Date of issue
• Recipient's name, address and GSTIN, if the recipient is registered
• HSN code for goods or SAC for services
• Description of the goods or services
• Value of the supply, after any discount
• Signature or digital signature of the supplier or an authorised person

For a composition dealer, add the declaration line "composition taxable person, not eligible to collect tax on supplies" at the top.

A regular taxpayer who sells both taxable and exempt items to an unregistered customer can issue a single invoice-cum-bill of supply covering both. For the full list of what a tax invoice needs, see our guide to the GST invoice format. If HSN codes are new to you, our explainer on what an HSN code is covers the digit rules.

Forms and due dates

A new business can choose composition while applying for registration, without a separate CMP-02.

Late fees and interest. A late CMP-08 attracts a late fee of ₹50 per day (₹20 per day for a nil statement), subject to a cap, plus interest at 18% a year on any tax paid late. Using the scheme when you were not eligible is treated more seriously: the tax difference becomes payable with interest, and penalties can follow.

Compare this with the regular scheme, which needs GSTR-1 and GSTR-3B every month, or every quarter under QRMP with monthly tax payments. Four short statements and one annual return is a lighter load, and it is the main reason small shops choose composition.

Is composition cheaper? A worked example

The rate is low, but it is charged on your whole turnover. Regular GST is charged only on the value you add, because input tax credit removes the tax already paid on purchases. Which one is smaller depends on your margin and the GST rate on what you sell.

Take a kirana shop with these figures for a year. The assumptions are simple on purpose:

• Sales: ₹60,00,000, all to consumers, at the same shelf prices under either scheme (MRP includes any tax)
• Purchases: ₹50,00,000 including GST
• Everything bought and sold is taxable at one GST rate
• Compliance costs such as an accountant's fee are left out

Case 1: goods at 5% GST (packaged food, edible oil, soap, toothpaste and most daily essentials after the 2025 reform)

At 5%, the regular scheme costs ₹12,381 less in tax for this shop. The composition dealer pays more, but files far less. Whether that trade is worth it depends on what the extra filing would cost you in time or accountant fees.

Case 2: the same shop, goods at 18% GST (for example bulbs, electrical goods or some cosmetics)

At 18%, composition saves ₹92,542 a year.

The rule of thumb. Under the regular scheme, a shop pays roughly rate ÷ (100 + rate) of its value added. Under composition it pays 1% of sales. In this example, value added is ₹10 lakh on ₹60 lakh of sales, about 16.7%:

• At 5%: 5/105 × 16.7% ≈ 0.8% of sales, less than composition's 1%
• At 18%: 18/118 × 16.7% ≈ 2.5% of sales, more than composition's 1%

So composition saves the most for shops that sell higher-rate goods at a healthy margin, mostly to consumers. For a shop selling mainly 5% essentials on thin margins, the tax saving can disappear, and the real benefit is the lighter paperwork.

When each scheme makes sense

Composition usually suits you if:

• Most of your customers are consumers who do not need a tax invoice
• You sell only within your state
• Your goods carry 18% GST, or your margins are healthy
• You want the simplest possible compliance

The regular scheme usually suits you if:

• You sell to registered businesses that want to claim input tax credit
• You sell, or plan to sell, to customers in other states
• Your purchases carry a lot of GST that you would like to claim back
• You are close to the ₹1.5 crore limit and expect to cross it soon
• You sell mostly low-rate goods on thin margins

If your turnover is below the registration threshold, you may not need GST registration at all. Our guide to the GST registration limit explains who must register and when.

Billing as a composition dealer with BillZap

BillZap is a free GST billing app for Android. It works offline, needs no sign-up, and keeps your bills, customers and items on your phone.

For composition dealers, here is what it does and what it does not:

• What it does: you can switch GST off on a bill, so the bill prints without any tax lines. Bills are numbered in sequence, and each item keeps its HSN code and price, so the details Rule 49 asks for are there on every bill.
• What it does not do: it does not print the title "Bill of Supply" or the composition declaration automatically. Add the line "composition taxable person, not eligible to collect tax on supplies" in the notes field of the bill.

If you are on the regular scheme, BillZap creates full GST invoices with CGST, SGST or IGST worked out from the place of supply, and exports a summary laid out for GSTR-1. You can download BillZap from Google Play.

FAQ: GST composition scheme

The bottom line

The composition scheme is a trade. You pay a flat rate on your whole turnover and accept tight limits: no GST on your bills, no input tax credit, no inter-state sales. In return, you get a quarterly statement and one annual return instead of the regular cycle.

For a small shop selling mainly to consumers, it is often a good deal, especially if the goods carry 18% GST. For a shop selling 5% essentials on thin margins, the regular scheme can cost less in tax, and the case for composition rests on the lighter paperwork. Run the numbers with your own sales, purchases and margins before 31 March, and decide with your accountant.

Whichever scheme you choose, clean, numbered bills make every return easier. If you want a free app that keeps your bills, items and HSN codes in order, BillZap is on Google Play. It works offline with no sign-up.

This guide explains the GST composition scheme in plain language and is not tax advice. Limits, rates and eligibility depend on your business and can change by notification; confirm with your chartered accountant before opting in or out.