1% flat tax sounds great until you realise you lose all ITC. Here's the numerical framework to decide which scheme actually leaves more cash in the business.
The composition scheme is the most over-pitched and under-analysed option in GST. A flat 1% sounds delightful — until a client demands a tax invoice with ITC and you realise you can't issue one. This article gives you the numerical framework, eligibility map and seven scenarios where each scheme wins. If you are still choosing a scheme at the application stage, our GST registration service sets it up correctly the first time.
Composition lets small taxpayers pay a flat percentage of turnover instead of normal output tax. You file a simple quarterly statement (CMP-08) plus an annual return (GSTR-4). You cannot claim ITC, cannot supply inter-state, cannot make exempt supplies (with exceptions) and cannot issue a tax invoice — only a bill of supply marked 'composition taxable person, not eligible to collect tax'.
| Business type | Turnover limit |
|---|---|
| Traders / manufacturers (goods) | ₹1.5 Cr (₹75L in special states) |
| Restaurants (without alcohol) | ₹1.5 Cr |
| Service providers (mixed) | ₹50L |
| Category | CGST | SGST | Total |
|---|---|---|---|
| Manufacturers / traders | 0.5% | 0.5% | 1% |
| Restaurants | 2.5% | 2.5% | 5% |
| Service providers | 3% | 3% | 6% |
Composition wins when (a) your buyers are end consumers who don't care about ITC, and (b) your value addition is high enough that 1% on turnover beats normal tax minus ITC on inputs. Use this rough formula:
Composition wins if: 1% × Turnover < (Output tax − ITC available)
Annual turnover ₹80L, GST output at average 12% = ₹9.6L. ITC available on purchases ≈ ₹7.5L. Net cash tax under Regular = ₹2.1L. Under Composition = 1% × 80L = ₹80,000. Composition wins by ₹1.3L per year.
Same ₹80L turnover, but 80% of sales are B2B. Buyers refuse to purchase without a tax invoice carrying ITC. Composition isn't even on the table — you'd lose the customer base.
Crossing the threshold mid-year automatically takes you out of composition from the next day. You must file CMP-04 (intimation of withdrawal) within 7 days, switch to regular invoicing, and start filing GSTR-1 / 3B. Many businesses get this wrong and end up with retrospective demand notices.
You can switch from Composition to Regular any time by filing CMP-04. Switching back from Regular to Composition is only allowed at the start of a financial year via CMP-02.
Under Composition, every rupee of GST charged by your suppliers becomes part of your purchase cost. That cost flows into your selling price, on top of which the next person in the chain again pays GST. This 'cascading' is exactly what GST was designed to eliminate. Whether composition still wins depends on margins — but the cascading effect is real and often missed in spreadsheet comparisons.
'Composition taxable person, not eligible to collect tax' printed on every bill of supply signals a smaller, less professional operation. Some B2B buyers won't onboard a vendor in composition at all. If your growth path involves enterprise clients, factor that in.
Composition is a brilliant scheme — for the right business. A pure B2C retailer with thin margins and local supply will almost always save money. A B2B supplier, an online seller or anyone planning to scale into enterprise sales should stay on Regular and master the monthly cycle. Run the math, don't pick on instinct.
Senior contributor at Taxpex Consultancy. Reviewed by a practising Chartered Accountant. Published on 18 April 2026 · Updated on 18 April 2026.
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