Composition scheme vs regular GST: which one actually costs you less

The composition scheme is cheaper only in a narrow set of cases: your purchases carry little GST, and your buyers are end consumers who do not need input credit from you. Composition charges a flat 1% for manufacturers and traders, 5% for restaurants not serving alcohol, and 6% for eligible service providers, on turnover up to Rs 1.5 crore (Rs 75 lakh in specified states, and Rs 50 lakh for the service provider route). In exchange you give up input tax credit, you cannot collect GST on your bill, and you cannot sell inter state. For a B2B business with GST heavy purchases, the worked example below shows composition costing Rs 4.8 lakh more a year than the regular scheme, at the same turnover.

The short version: the two schemes side by side

If any row in the left column rules you out, the rate comparison is academic. Test eligibility first, then run the cost formula in this article, then decide. Filing dates for both routes sit in one place in the MSME compliance calendar.

Eligibility, tested correctly

Composition is governed by Section 10 of the CGST Act. There are two routes, and mixing them up is the most common eligibility error.

The standard route, Section 10(1). Manufacturers, traders and restaurants not serving alcohol, with aggregate turnover in the preceding financial year up to Rs 1.5 crore. In specified states the ceiling is Rs 75 lakh. A supplier under this route may still supply services up to 10% of turnover in the State in the preceding year, or Rs 5 lakh, whichever is higher. A restaurant with a small goods sideline, or a trader who occasionally installs what he sells, uses this allowance.

The service provider route, Section 10(2A). Other eligible service providers, with aggregate turnover up to Rs 50 lakh, taxed at 6% in total (3% CGST plus 3% SGST). Guides that say service providers cannot use composition at all are out of date: they omit this route entirely.

Aggregate turnover is PAN level. It covers all India turnover of every registration on the same PAN: taxable supplies, exempt supplies, exports and inter state supplies, excluding GST itself and inward supplies taxed under reverse charge. The classic error is testing each GSTIN separately. If your Delhi unit has Rs 90 lakh of turnover and your Maharashtra unit on the same PAN has Rs 80 lakh, your aggregate is Rs 1.7 crore. You are above the Rs 1.5 crore ceiling, whatever each unit looks like alone.

The Section 10 conditions. All of these must hold:

• No inter state outward supplies of goods or services.
• No supply through an electronic commerce operator that is required to collect tax at source under Section 52. Restaurant services supplied through platforms have a separate treatment under Section 9(5), covered below.
• No supply of goods or services that are not taxable under GST, beyond what the provisions permit.
• You are not a manufacturer of notified goods, the category Parliament has kept out of the scheme.
• You are not a casual taxable person or a non resident taxable person.
• Every registration on the same PAN opts in together. One unit cannot be in composition while another stays regular.

If you cross the ceiling during the year, the option lapses from the day your aggregate turnover exceeds it, not from the next financial year. Plan the switch by date, not by year.

The real cost comparison: use this formula, not the headline rate

The 1% headline misleads because it compares two different tax bases. Write the comparison this way:

Regular scheme net tax equals output GST on your sales minus eligible input tax credit on your purchases. What you pay in cash is the difference, and the GST on your purchases is not a cost to you, because you recover it as credit.

Composition total tax cost equals composition tax on turnover plus all the GST on your purchases, absorbed as cost. You pay the flat rate, and every rupee of GST your suppliers charge you stays in your cost line, because Section 10(4) bars input credit and bars you from collecting tax from your buyer.

So the deciding variable is not your turnover. It is the GST sitting in your purchases, relative to your margin. A trader buying mostly exempt or nil rated stock, selling locally to households, has little credit to lose. A manufacturer buying steel, components and taxable services at 18% has a great deal to lose. Both face the same 1% headline. Only one of them should take it.

Compliance savings are real but second order. Composition replaces monthly returns with a quarterly statement and one annual return. Price that saving honestly, as the CA or staff time it actually releases, and put it after the tax arithmetic, not before it.

Restrictions that end the debate early

Inter state sales. Composition is a within State scheme for outward supplies. The day you take an order that requires an inter state outward supply, eligibility ends. A business with a credible plan to sell outside its State in the next 12 months should price that plan into the decision today.

Marketplaces and e commerce operators. Supplying through an operator that must collect tax at source under Section 52 is barred. In practice this is why composition dealers generally cannot sell on the large marketplaces. Before you plan a marketplace launch, read selling on Amazon, Flipkart and Meesho alongside this section. One exception needs care: for restaurant services, CBIC has clarified that food supplied through platforms such as Zomato and Swiggy is treated under Section 9(5), where the platform pays the GST, and that route sits outside the Section 52 bar. If you are a restaurant, take advice on your exact model rather than assuming either answer.

B2B buyers. Your bill of supply gives a business buyer no input credit. A buyer who could have claimed 18% credit on a regular tax invoice will treat your price as 18% heavier, or ask for a discount that hands your saving to him. This commercial cost does not appear in the tax formula, and for many manufacturers it is larger than the formula difference.

Reverse charge still applies, at normal rates. Where a purchase falls under reverse charge, a composition dealer pays that tax at the normal GST rate for the supply, not at 1%, 5% or 6%. Budget it separately so it does not surface as a surprise in a quarterly CMP-08.

Filing, and the cost of switching

Opting in is done in Form GST CMP-02, before the start of the financial year you want composition to apply from. Inside the scheme, you pay tax and file a statement in CMP-08 quarterly, by the 18th of the month after the quarter, and file the annual return GSTR-4 once a year.

On the GSTR-4 date, use 30 June following the financial year. Rule 62 of the CGST Rules gives 30 June from FY 2024-25 onwards. Many CA calendars and guides still show the old 30 April date. If your adviser diary says 30 April, ask which rule it is based on, and file to the current rule.

Switching has a price that incumbents understate. Moving from regular to composition requires reversal of input tax credit on your closing stock and capital goods, through Form GST ITC-03. A business carrying ITC rich stock into the switch can pay back a large sum in the first quarter, which wipes out the expected saving for the year. Moving the other way, out of composition, you re-enter regular filing from the date of the switch or the lapse, with regular invoices and credit from that point.

One middle path is worth knowing before you switch for filing relief alone. Regular dealers with turnover up to Rs 5 crore can file quarterly under the QRMP scheme, with monthly tax payment, and keep input credit, tax invoices and inter state sales. If your only problem with the regular scheme is return frequency, QRMP solves that problem without the composition trade offs. If your problem is the tax itself, run the formula above: QRMP does not change your rate, and composition does not change your filing burden as much as its tax base changes your cost.

As turnover grows towards Rs 5 crore, another threshold enters the picture: e invoicing. See GST e invoicing and the Rs 5 crore rule before you assume your invoicing setup stays unchanged.

A worked example: a B2B manufacturer where composition loses

Take a Ludhiana auto components manufacturer. Turnover is Rs 1.2 crore, all sales to business buyers within Punjab, output GST at 18%. Purchases of steel and services are Rs 70 lakh, plus GST at 18%.

As a regular dealer:

Step 1: Output tax. Rs 1,20,00,000 multiplied by 18% equals Rs 21,60,000.

Step 2: Input tax credit. Rs 70,00,000 multiplied by 18% equals Rs 12,60,000.

Step 3: Net cash tax. Rs 21,60,000 minus Rs 12,60,000 equals Rs 9,00,000.

As a composition dealer at 1%:

Step 4: Composition tax. Rs 1,20,00,000 multiplied by 1% equals Rs 1,20,000.

Step 5: Input GST absorbed as cost. Rs 12,60,000. There is no credit, so the full amount stays in cost.

Step 6: Total tax cost under composition. Rs 1,20,000 plus Rs 12,60,000 equals Rs 13,80,000.

Comparison:

Rs 13,80,000 minus Rs 9,00,000 equals Rs 4,80,000. Composition costs this business Rs 4.8 lakh more per year, before the commercial problem: its B2B buyers also lose the Rs 21,60,000 of credit they would have taken on regular tax invoices. Verdict for this profile: stay regular.

The counterpoint matters. A local B2C trader with low GST inputs, local sales and household buyers reverses this result, because there is little credit to give up and no buyer who needs it. That is why the formula in this article matters more than the headline rate: run your own purchase GST through it before you opt in.

Decision framework

• If more than roughly one third of your sales are B2B, stay regular. The buyer credit problem usually costs more than the filing saving.
• If your purchases are largely exempt, nil rated or low GST, and your sales are local and B2C, test composition with the formula. This is the profile the scheme was built for.
• If marketplace sales or inter state growth are planned within 12 months, stay regular. Switching mid plan is the expensive version of this decision.
• If you are a service provider under Rs 50 lakh, test the 6% route under Section 10(2A) separately. Do not reject composition on a guide that never mentions it.
• If your closing stock carries heavy input credit, cost the ITC-03 reversal before you switch. The reversal can exceed the first year saving.

Common mistakes

1. Testing turnover per GSTIN instead of per PAN. Aggregate turnover is all India, all registrations on the PAN. Multi unit businesses breach the ceiling without noticing.

2. Forgetting reverse charge. Reverse charge tax, where it applies, is payable at normal rates. It is not covered by your 1%, 5% or 6% composition rate.

3. Opting in with ITC rich closing stock. The ITC-03 reversal on stock and capital goods is a real cash cost of switching. Get the figure before CMP-02, not after.

4. Issuing a tax invoice as a composition dealer. You issue a bill of supply, and you do not collect tax from the buyer. A tax invoice issued by a composition dealer creates trouble for you and no valid credit for your buyer.

5. Taking one inter state order. A single inter state outward supply breaks eligibility, and the option lapses from the day you cross the scheme conditions or the ceiling. Decline the order, or exit the scheme properly first.