India’s small businesses face a critical decision under the Goods and Services Tax (GST) system: whether to opt for the Composition Scheme or remain under the Regular Scheme. The choice determines tax rates, compliance requirements, and even how far a business can expand.
Here’s a simple explainer to help small taxpayers understand the difference - and why it matters.
Composition Scheme vs Regular Scheme under GST: What Small Businesses Need to Know
For India’s small and medium businesses, GST compliance is more than just paperwork - it directly impacts cash flow, pricing, and growth plans. One of the most important decisions a GST-registered business must make is choosing between the Composition Scheme and the Regular Scheme.
While both operate under the same GST law, they are designed for very different types of businesses. Understanding the difference can help small businesses save money, reduce compliance stress, and plan smarter.
Why the GST Scheme Choice Matters
The GST scheme you opt for determines:
- How much tax you pay
- Whether you can claim input tax credit
- How often you file returns
- Whether you can expand beyond your state
For small businesses operating on tight margins, this decision can have long-term consequences.
What is the Composition Scheme under GST?
The Composition Scheme is a simplified tax option meant for small taxpayers. Instead of paying GST at standard rates, eligible businesses pay tax at a fixed, lower rate on total turnover.
The idea is simple: less paperwork, fewer returns, and predictable tax outflow.
However, this simplicity comes with restrictions—most notably, the inability to collect GST from customers or claim input tax credit.
What is the Regular GST Scheme?
The Regular Scheme is the default GST system followed by most businesses. Under this model:
- GST is charged on every sale
- Input tax credit (ITC) can be claimed
- Detailed returns must be filed periodically
This scheme is compliance-heavy but offers more flexibility and is better suited for businesses planning to scale.
Eligibility: Who Can Opt for Which Scheme?
Composition Scheme Eligibility
A business can opt for the Composition Scheme if:
- Annual turnover does not exceed ₹1.5 crore
- ₹75 lakh for special category states
- Service providers are eligible under a separate option with turnover up to ₹50 lakh
- The business operates only within one state
It is a trader, manufacturer, or restaurant (non-alcoholic)
Who Cannot Opt for Composition Scheme?
- Businesses making inter-state supplies
- Sellers on e-commerce platforms collecting TCS
- Casual or non-resident taxable persons
- Manufacturers of notified goods like tobacco or ice cream
Regular Scheme Eligibility
The Regular Scheme applies if:
- Turnover exceeds Composition limits
- Inter-state sales are involved
- Input tax credit is required
- The business sells through online marketplaces
There is no maximum turnover limit for the Regular Scheme.
GST Rates: Composition vs Regular Scheme
Composition Scheme Rates
- Traders & Manufacturers: 1% of turnover
- Restaurants: 5% of turnover
- Eligible Service Providers: 6% of turnover
Tax under this scheme is paid from the business’s own pocket—GST cannot be collected from customers.
Regular Scheme Rates
GST rates depend on the type of goods or services:
- 5%, 12%, 18%, or 28%
Businesses can charge GST to customers and offset it using input tax credit.
Return Filing: Compliance Burden Compared
Composition Scheme
- CMP-08: Quarterly tax payment
- GSTR-4: Annual return
- Minimal reporting and fewer disclosures
Regular Scheme
- GSTR-1: Sales details
- GSTR-3B: Monthly tax summary
- GSTR-9: Annual return
This requires stronger accounting systems and regular compliance tracking.
Input Tax Credit: A Key Deciding Factor
- Composition Scheme: Input tax credit is not allowed
- Regular Scheme: Input tax credit is fully available, reducing tax burden
For B2B businesses, ITC often becomes the biggest reason to stay under the Regular Scheme.
Invoicing Rules
Composition Scheme
- Tax invoice cannot be issued
- Only a Bill of Supply is allowed
- Mandatory declaration on invoices stating GST cannot be collected
Regular Scheme
- GST-compliant tax invoices
- GST charged separately on each sale
Which GST Scheme Is Better for Small Businesses?
There is no universal answer.
Composition Scheme suits small, local businesses dealing mostly with end consumers.
Regular Scheme is better for businesses planning to grow, sell online, or work with GST-registered clients.
The choice should align with your business model, customer base, and growth strategy.
| Criteria | Composition Scheme | Regular GST Scheme |
|---|---|---|
| Turnover Limit | Up to ₹1.5 crore (₹75 lakh for special states) | No limit |
| Service Provider Limit | Up to ₹50 lakh | No separate limit |
| GST Rates | 1% Traders/Manufacturers 5% Restaurants 6% Service Providers |
5%, 12%, 18%, or 28% |
| GST Collection from Customers | Not Allowed ❌ | Allowed ✅ |
| Input Tax Credit (ITC) | Not Allowed ❌ | Allowed ✅ |
| Inter-State Sales | Not Permitted ❌ | Permitted ✅ |
| E-commerce Sales | Not Allowed ❌ | Allowed ✅ |
| Returns to be Filed | CMP-08 (Quarterly) GSTR-4 (Annual) |
GSTR-1, GSTR-3B, GSTR-9 |
| Compliance Burden | Low | High |
| Invoicing Type | Bill of Supply | Tax Invoice |
| Ideal For | Small, local, B2C businesses | Growing, B2B, inter-state businesses |
Switching Between Schemes
Businesses are allowed to:
- Switch from Composition to Regular Scheme anytime
- Switch from Regular to Composition at the beginning of a financial year (if eligible)
The switch must be properly reported on the GST portal.
In short: The debate around Composition Scheme vs Regular Scheme under GST is less about which is better and more about which is right for your business stage. For micro businesses, simplicity matters. For growing enterprises, flexibility wins. Making the right choice early can save both money and compliance headaches down the road.