GST Composition Scheme for FY 2026-27 — eligibility, 1%/5%/6% rates and CMP-08 and GSTR-4 compliance for small traders, manufacturers and services.
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GST Composition Scheme — Eligibility, Rates and Benefits FY 2025-26
If your aggregate turnover in the preceding financial year was below ₹1.5 crore (or ₹50 lakh for services), the GST Composition Scheme under Section 10 of the CGST Act 2017 lets you pay a flat tax of 1%, 5% or 6% on turnover, skip detailed invoice-matching, and replace twelve monthly GSTR-3B filings with four quarterly CMP-08 statements and a single annual GSTR-4. The trade-off is real — no input tax credit, no inter-state sales, and customers cannot claim ITC on your supplies. Whether that trade-off works in your favour depends entirely on your business model.
Who Can Opt for the Composition Scheme
Eligibility is governed by Section 10 of the CGST Act 2017, and by Section 10(2A) for the extended service-provider window introduced in 2019. You must meet all conditions that apply to your category.
Suppliers of Goods and Restaurants
You are eligible if your aggregate turnover in the preceding financial year did not exceed:
- ₹1.5 crore — for most states and union territories
- ₹75 lakh — for the eight special category states: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand
"Aggregate turnover" is calculated across all registrations under a single PAN in India. If you run a trading firm in Delhi and a small manufacturing unit in Haryana, both under the same PAN, you must add both turnovers when testing the limit — they are not judged separately.
Service Providers — Section 10(2A)
Service providers (other than restaurant services) can opt for a separate composition window introduced via the CGST (Amendment) Act, 2018, notified as Section 10(2A). The turnover ceiling here is ₹50 lakh in the preceding FY. The rate is 6% (discussed below). This is the path available to small consultants, repair workshops, event planners, freelancers and similar service businesses.
Mixed Suppliers
If you primarily supply goods but also provide incidental services (e.g., a hardware shop that also charges for installation), you can still opt under the goods composition track, subject to the ₹1.5 crore ceiling. The incidental services do not trigger the separate ₹50 lakh service-composition track.
Who Cannot Opt — The Hard Exclusions
The following categories are categorically barred from the Composition Scheme, regardless of turnover:
- Inter-state suppliers — Composition covers only intra-state outward supplies. The moment you make a single inter-state sale, you are ineligible for that year.
- E-commerce sellers subject to TCS — If an e-commerce operator (Amazon, Flipkart, Meesho, etc.) deducts Tax Collected at Source (TCS) on your supplies, you cannot opt for composition.
- Manufacturers of notified goods — Ice cream, pan masala, tobacco, tobacco products and aerated waters (notified under Section 10(2)(e) of the CGST Act) are excluded from the scheme.
- Casual taxable persons and non-resident taxable persons — These categories must register and file as regular taxpayers.
- Suppliers of goods not taxable under CGST — If any part of your business involves non-taxable or exempt goods that must be handled outside the scheme framework, check eligibility carefully with a practitioner.
A common misconception: even one inter-state outward supply during the year disqualifies you from the scheme for the entire year — not just for that transaction. If you make even a single sale to a customer in another state, you must exit composition from that date.
Composition Tax Rates for FY 2026-27
The rates are fixed, simple, and applied to total turnover — not value added. You cannot reduce the base by subtracting purchases.
| Category | Total Rate | CGST | SGST |
|---|---|---|---|
| Traders (goods, intra-state) | 1% | 0.5% | 0.5% |
| Manufacturers (goods, eligible) | 1% | 0.5% | 0.5% |
| Restaurants (no alcohol service) | 5% | 2.5% | 2.5% |
| Service providers (Sec. 10(2A)) | 6% | 3% | 3% |
Two important points that practitioners regularly have to clarify:
- You pay this tax from your own funds. You cannot print "Composition Tax: ₹X" on your bill of supply and recover it from the customer. The tax is embedded in your price, invisibly.
- Reverse charge still applies. If you receive goods or services on which GST must be paid under Reverse Charge Mechanism (RCM) — for example, freight paid to a GTA, or import of services — you must pay that tax separately and in cash. Composition status does not exempt you from RCM.
How to Opt In (and Opt Out)
Opting In — Form GST CMP-02
Existing taxpayer transitioning from the regular scheme: file Form GST CMP-02 on the GST portal before the start of the financial year in which you wish to be covered. For FY 2026-27, that window was before 1 April 2026. If you missed that window, you must wait until FY 2027-28 unless you are a new registrant.
New registration: You can opt for the composition scheme at the time of applying for registration on the GST portal. Select the composition option in the registration application itself; there is no need to file CMP-02 separately.
After filing CMP-02, you must file Form GST ITC-03 to reverse any input tax credit you had accumulated in your electronic credit ledger as a regular taxpayer. Failure to reverse ITC before transitioning is a common and costly oversight.
Opting Out — Form GST CMP-04
If you cross the turnover threshold mid-year, or make an inter-state supply, or become otherwise ineligible, you must file Form GST CMP-04 within seven days of the event that triggers ineligibility. Voluntary opt-out (when you decide the regular scheme suits you better) also uses CMP-04.
On opting out, you must file Form ITC-01 within 30 days to claim ITC on the stock of goods, semi-finished goods and finished goods held on the date of transition back to the regular scheme.
Compliance Calendar Under the Composition Scheme
This is where the scheme truly earns its name. Two obligations cover the entire year.
CMP-08 — Quarterly Statement of Self-Assessed Tax
CMP-08 is not a return; it is a statement of outward supplies and self-assessed tax payable, filed quarterly. Due date: 18th of the month following the end of the quarter.
| Quarter | Period | Due Date (FY 2026-27) |
|---|---|---|
| Q1 | April – June 2026 | 18 July 2026 |
| Q2 | July – September 2026 | 18 October 2026 |
| Q3 | October – December 2026 | 18 January 2027 |
| Q4 | January – March 2027 | 18 April 2027 |
You report turnover, apply the applicable rate, and pay the resulting tax via challan. There is no invoice-level detail required in CMP-08.
Late filing attracts a late fee of ₹200 per day (₹100 under CGST + ₹100 under SGST), subject to the maximum prescribed under prevailing notifications. Keep this in mind — four missed deadlines in a year can quietly accumulate.
GSTR-4 — Annual Return
GSTR-4 is the single annual return that consolidates turnover details, tax paid through CMP-08, and details of inward supplies attracting reverse charge. Due date: 30 April of the year following the financial year.
- For FY 2026-27: GSTR-4 is due by 30 April 2027.
Late fee for GSTR-4: ₹200 per day (₹100 CGST + ₹100 SGST), subject to a maximum of ₹2,000 as per prevailing CGST notifications. Even a nil GSTR-4 attracts late fee if filed after 30 April — there is no zero-fee grace for composition dealers on annual returns.
Billing and Record-Keeping Obligations
Composition dealers have specific documentation rules that differ from regular taxpayers:
- Issue Bills of Supply, not Tax Invoices. A composition dealer has no authority to issue a tax invoice. Every supply must be evidenced by a Bill of Supply showing: name, address, GSTIN, Bill of Supply number, date, description, and value.
- Display the composition status. Every place of business must display a sign reading: "Composition Taxable Person, Not Eligible to Collect Tax on Supplies." The same phrase must appear on every Bill of Supply. Non-compliance can attract scrutiny during audits.
- Maintain purchase records. You need inward supply registers showing purchase value and GST paid (for RCM purposes), even though you cannot claim ITC on them.
- No GST registration number on invoices from your customers. Your registered B2B buyers will not receive ITC for purchasing from you. Make this clear to B2B customers before they commit to buying from you — discovering this later causes commercial disputes.
Worked Examples: Running the Numbers
Example 1 — Small Trader (Goods)
Scenario: Ramesh runs a stationery shop in Nagpur. His FY 2025-26 turnover was ₹90 lakh, all intra-state B2C sales. He is evaluating whether to stay in composition for FY 2026-27.
Under Composition:
- Tax payable = 1% × ₹90,00,000 = ₹90,000
- Compliance: 4 × CMP-08 + 1 × GSTR-4
- ITC claimed: Nil
Under Regular Scheme (illustrative):
- Purchases = ₹65 lakh (mixed GST rates, average blended ITC assume 12%) = ITC of ₹7,80,000
- Output GST (assume average 12% on sales) = 12% × ₹90 lakh = ₹10,80,000
- Net tax payable = ₹10,80,000 − ₹7,80,000 = ₹3,00,000
- Compliance: 12 × GSTR-3B + 12 × GSTR-1 + GSTR-9
Composition saves Ramesh ₹2,10,000 in tax and at least 100 hours of compliance effort annually, because virtually all his customers are retail walk-ins who neither need nor can use ITC. Composition is the obvious choice.
Example 2 — Service Provider (Section 10(2A))
Scenario: Meera runs a freelance digital-marketing consultancy in Chennai. Her FY 2025-26 services revenue was ₹44 lakh. About 70% of her clients are small B2C brands; 30% are small businesses who might want ITC.
Under Composition (Section 10(2A)):
- Tax payable = 6% × ₹44,00,000 = ₹2,64,000 (paid from her own margin)
- ITC claimed: Nil
Under Regular Scheme:
- Output GST at 18% = ₹7,92,000
- ITC on office rent, software subscriptions, professional fees at ~18% (₹8 lakh input) = ₹1,44,000
- Net tax = ₹7,92,000 − ₹1,44,000 = ₹6,48,000
Composition saves ₹3,84,000. The catch: the 30% B2B clients lose ITC of ₹2,376 per lakh billed (18% × 30% of ₹44 lakh). If those B2B clients walk away because of this, Meera's composition savings get wiped out in lost revenue. This is the central decision every service-provider composition candidate must model before opting in.
Example 3 — Late Filing Cost
Scenario: Kiran, a restaurant owner under the 5% composition track, misses his GSTR-4 for FY 2026-27. He files it 45 days late (15 June 2027 instead of 30 April 2027).
- Late fee = ₹200/day × 45 days = ₹9,000 gross, but capped at ₹2,000 as per prevailing CGST notifications.
- Still costs ₹2,000 for what is essentially a data-entry exercise on a pre-filled portal. Avoidable entirely with a calendar reminder.
When the Regular Scheme Beats Composition
The Composition Scheme is not universally better for small businesses. Choose the regular scheme if:
- Your customers are predominantly B2B. They need ITC. A composition supplier makes you commercially uncompetitive, because your customer's effective cost is higher by the GST rate they would have reclaimed.
- You have high-value input purchases with significant ITC. Manufacturers buying materials at 18% GST and selling finished goods at 5% or 12% often find their ITC pool exceeds 1% of turnover. Regular scheme nets out better.
- You sell or want to sell inter-state. Even occasional Amazon or Flipkart orders (where TCS is collected) bar you from composition.
- You are near the threshold. If your turnover is ₹1.3–1.5 crore, one good quarter can breach the ceiling mid-year, forcing a disruptive mid-year exit. Build in a buffer or opt for regular from the outset.
Common Mistakes — and How to Fix Them
1. Charging GST on Bills of Supply Composition dealers routinely issue invoices with "GST @ 1%" printed on them. This is illegal. The tax is borne by you, not your customer. Fix: update your billing template immediately. Remove any GST line from your Bill of Supply.
2. Making a Single Inter-State Sale Without Exiting One IGST invoice does not just create a tax liability — it retrospectively invalidates your composition status for the entire year. Fix: if you need to make even one inter-state supply, exit via CMP-04 before making the supply.
3. Forgetting to Reverse ITC (Form ITC-03) on Transition Taxpayers switching from regular to composition carry forward an ITC balance, which must be fully reversed and paid back via ITC-03. Failing to do this results in demand notices with interest at 18% per annum on the un-reversed credit.
4. Missing CMP-08 for a Nil Quarter Even if you have zero turnover in a quarter, CMP-08 must be filed. A nil filing is still a filing. Many small traders skip it assuming "nothing to report, nothing to file" — the late fee disagrees.
5. Ignoring Reverse Charge Composition dealers who pay freight on trucks, purchase from unregistered suppliers of notified goods, or import services (e.g., cloud subscriptions billed from overseas) must self-assess and pay GST under RCM via a separate challan. This tax does not appear in CMP-08 — it must be paid independently and disclosed in GSTR-4.
6. Crossing the Threshold Without Exiting If your turnover breaches the ceiling mid-year, you must file CMP-04 within seven days and switch to the regular scheme. Every sale made as a composition dealer after crossing the threshold is technically non-compliant. The liability — tax plus interest at 18% — is on you.
Key Takeaways
- Eligibility rests on PAN-level aggregate turnover, not entity-level. Add up all your GSTINs under one PAN before concluding you qualify.
- Opt in using Form CMP-02 before the start of the financial year; for FY 2027-28, that means filing before 1 April 2027. New registrants can opt at the point of registration.
- File CMP-08 by the 18th of the month after each quarter — four times a year. File GSTR-4 by 30 April after the financial year ends.
- You cannot charge GST from customers, issue tax invoices, or make inter-state supplies. Violating any of these triggers retrospective ineligibility.
- Reverse charge is not waived. Pay RCM tax separately on freight, unregistered purchases and imported services.
- The break-even decision is essentially about your customer mix: B2C businesses with low input-intensive purchases almost always benefit; B2B-heavy businesses usually do not.
- Exit cleanly via Form CMP-04 if you breach the threshold or make an inter-state supply — and file ITC-01 within 30 days to reclaim ITC on your transition-day stock.
