Indirect Tax Laws · Charge of GST

Composition Levy under Section 10 of the CGST Act

Updated 5 October 2026

The composition levy under Section 10 CGST lets a small registered person pay tax as a flat percentage of turnover instead of regular GST. To solve a question, test the turnover limit, the eligibility bars and the conditions, then apply the rate to turnover in the State. There is no input tax credit, and breaking a condition ends the scheme.

Understand Composition Levy under Section 10

Regular GST asks a supplier to charge tax on each sale, claim input tax credit (ITC) on purchases and pay the difference. For a small trader this is heavy compliance. The composition scheme is a simplified option. You pay a small percentage of your turnover and file fewer returns.

The trade-off is simple. You pay tax out of your own pocket at a low rate. You cannot charge GST to your customers, so you issue a bill of supply, not a tax invoice. You also cannot claim ITC. Your buyers get no credit from you, which is why the scheme suits sellers to final consumers.

Two routes exist. Under the main route (Section 10(1)), a registered person whose aggregate turnover in the preceding financial year did not exceed ₹1.5 crore can opt in. The limit is lower, at ₹75 lakh, in the notified special category States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. Other States, including Jammu & Kashmir, Uttarakhand and Himachal Pradesh, have the ₹1.5 crore limit. This route covers manufacturers and traders at 1%, and restaurant suppliers (supplies under Para 6(b) of Schedule II) at 5% where no alcohol is served. The bar on non-restaurant services (Section 10(2)(a)) applies to this main route. Section 10(2A) is the separate route for other eligible persons, who are not eligible under Section 10(1), at 6%. The other bars (such as inter-State outward supply, e-commerce supply and notified goods) still apply to them. In practice these are mainly service providers and mixed suppliers of goods and services. They can opt if aggregate turnover in the preceding year did not exceed ₹50 lakh.

Opting in is not automatic. You must meet every eligibility bar and every condition, and the option applies to all registrations under the same PAN. The turnover limit is one test. The bar on inter-State outward supplies is a separate test, and you must pass both. If you break a condition or cross the turnover limit, you leave the scheme from that day. You then pay regular GST and can claim ITC on your stock under the ITC rules for a switch from composition to regular.

The exam tests this as a checklist. Read the facts, tick or cross each bar, and then compute tax.

Key rules to remember

Turnover limit (main route): Aggregate turnover of preceding FY ≤ ₹1.5 crore (₹75 lakh in the notified special category States: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura); Other States, including Jammu & Kashmir, Uttarakhand and Himachal Pradesh, have the ₹1.5 crore limit. Aggregate turnover is on an all-India basis and includes exempt supplies and exports. It excludes taxes and inward supplies on which tax is payable under reverse charge. This turnover test is separate from the bar on inter-State outward supplies. Exports and supplies to an SEZ are treated as inter-State supplies, so a person making them is barred even if turnover is within the limit.
Turnover limit (Section 10(2A)): Aggregate turnover of preceding FY ≤ ₹50 lakh; Section 10(2A) is the separate route for registered persons not eligible under Section 10(1), mainly service providers and mixed suppliers. The bar on non-restaurant services does not stop them, but the other bars still apply. A person eligible under Section 10(1) uses the main route, not this one. All registrations under the same PAN must opt in.
Composition tax (notified rates): Tax = Rate × Turnover in the State or Union Territory; Notified rates: under Section 10(1), manufacturers and traders 1% (0.5% CGST + 0.5% SGST) and restaurant suppliers under Para 6(b) of Schedule II not serving alcohol 5% (2.5% + 2.5%); under Section 10(2A), other eligible persons such as service providers 6% (3% + 3%). Check the rate in the question.
Eligibility bars (Section 10(2)): No to: non-restaurant services (main route only), non-taxable (non-GST) goods, inter-State outward supply, supply through an e-commerce operator liable to collect TCS, manufacture of notified goods (ice cream, pan masala, tobacco), and a casual taxable person or non-resident taxable person; One breach means no composition. The bar on non-restaurant services (Section 10(2)(a)) applies to the main route under Section 10(1). Section 10(2A) is the separate route for service providers. Inward inter-State purchases are allowed. Only outward supplies matter. A casual taxable person or non-resident taxable person cannot opt in at all.
Core conditions: No tax collected from buyers + no ITC + bill of supply + 'composition taxable person' notice and mention + all same-PAN registrations opt in; Reverse charge tax on inward supplies is still payable by the composition person.
Procedure: Opt-in: Form CMP-02; intimation of stock held on the day before opting: CMP-03 (within 90 days of the day the person opts for composition during the year); quarterly payment: CMP-08; annual return: GSTR-4; withdrawal or exit on ceasing to be eligible: CMP-04 (within 7 days of the event); A person who opts in at the start of the year files CMP-02 before the year begins. CMP-03, the intimation of stock held on the day before opting, is required only from a person switching from the regular scheme to composition during the year, and it is filed within 90 days of the day the person opts for composition. Tax is paid quarterly, and the return is annual. CMP-04 covers withdrawal and ceasing to be eligible. A person who ceases to be eligible must file CMP-04 within 7 days of the event and issue tax invoices from that date.
Loss of scheme: Ceases from the date of breach; CMP-04 within 7 days of the event; regular GST applies from that day; ITC on stock held on the day before the switch (Form ITC-01); Inputs, semi-finished and finished goods in stock qualify if tax-paid invoices are within one year. The credit is for stock actually held, or contained in semi-finished or finished goods, on that day. ITC-01 must be filed within 30 days of the date the option is withdrawn or lapses. Capital goods ITC is reduced by 5 percentage points for each quarter or part of a quarter from the invoice date.

How to solve Composition Levy under Section 10 questions

Use this checklist for any composition question. It keeps you from missing a disqualifier and gives you the answer in a fixed order.

1Identify the supplier: manufacturer, trader, restaurant or service provider. This decides the route, the turnover limit and the rate.
2Test the preceding-year aggregate turnover against the limit (₹1.5 crore, ₹75 lakh or ₹50 lakh). Use aggregate turnover on an all-India basis. Include exempt supplies and exports, and exclude taxes and inward supplies on reverse charge. Remember this test is separate from the inter-State bar: exports and supplies to an SEZ count as inter-State supplies.
3Run through the Section 10(2) bars: non-restaurant services, non-taxable goods, inter-State outward supply, supply through e-commerce operators, notified manufactured goods, and casual taxable persons or non-resident taxable persons. Check only outward supplies.
4Check conditions: same-PAN registrations all opting, no tax collected from buyers, bill of supply issued, notices displayed, and no ITC claimed.
5If eligible, compute tax as the rate times turnover in the State. Add reverse charge tax separately. Split the tax equally into CGST and SGST.
6If a condition is breached, state the date of exit, the CMP-04 filing within 7 days, regular tax on supplies from that day, and the ITC on stock available through Form ITC-01, filed within 30 days.
7Write the answer as provision, facts and conclusion: the rule, the key facts applied, and the final result in a single line.

Quickest way: Four-gate scan

When to use it: Use this when the case is long and you only need to decide eligibility or the consequence of a breach.

Gate 1: Is the preceding-year aggregate turnover within ₹1.5 crore, ₹75 lakh or ₹50 lakh? If no, stop.
Gate 2: Does the facts section mention inter-State sales, exports, supplies to an SEZ, e-commerce sales, non-restaurant services, non-GST goods or a notified product? If yes, stop.
Gate 3: Does any same-PAN registration stay outside the scheme? If yes, stop.
Gate 4: If all gates are passed, apply the rate to State turnover. Do not subtract purchases and do not claim ITC. Add reverse charge tax separately.

Common mistakes in Composition Levy under Section 10

Applying the turnover limit to the current year instead of the preceding year.
Students read the case numbers for the current year and test those.
Fix: Eligibility to opt in is tested on the preceding year's aggregate turnover. The current year matters for loss of the scheme once the limit is crossed.
Treating inter-State purchases as a bar.
The word 'inter-State' triggers an automatic disqualification.
Fix: Only outward inter-State supplies bar the option. Inward inter-State purchases are allowed.
Allowing ITC on purchases under composition.
Students carry over the regular GST logic.
Fix: A composition person cannot claim ITC, and cannot collect tax from buyers. The tax is a cost to the supplier.
Letting one same-PAN registration opt in while another stays regular.
Each registration seems separate because it has a separate GSTIN.
Fix: All registrations under the same PAN must opt in. If one is not eligible, none can opt in.
Computing composition tax on profit or on value added.
Students subtract purchases out of habit.
Fix: Tax is the rate times turnover in the State. Purchases are ignored.
Forgetting reverse charge tax and the loss of ITC on exit.
Students think composition removes all other GST obligations.
Fix: A composition person still pays tax on notified reverse charge supplies. On exit, claim ITC on stock through Form ITC-01.

Worked examples

Example 1

Sharma Traders, Jaipur, is a registered trader in stationery. Its aggregate turnover in the preceding year was ₹1.3 crore. It has opted in for composition for the year from 1 April. For April to June, all its sales were intra-State taxable goods of ₹30,00,000. Its purchases in the quarter were ₹20,00,000 plus GST of ₹3,60,000. Compute the tax payable for the quarter.

Show the solution

Eligibility: the preceding-year aggregate turnover of ₹1.3 crore is within ₹1.5 crore. Sharma is a trader, and all outward supplies are intra-State goods. There is no bar.
Rate: for traders the notified composition rate is 1% (0.5% CGST + 0.5% SGST).
Tax: 1% × ₹30,00,000 = ₹30,000. This is ₹15,000 CGST and ₹15,000 SGST.
ITC: the ₹3,60,000 of GST on purchases cannot be claimed, because a composition person gets no ITC. Purchases do not reduce the tax base.
Collection: Sharma must issue a bill of supply and cannot charge GST to customers.

Answer: Sharma Traders pays composition tax of ₹30,000 for the quarter (₹15,000 CGST and ₹15,000 SGST). The ₹3,60,000 of input GST is a cost and is not claimed as ITC.

Example 2

Bright Furniture, Pune, is a manufacturer under composition. On 10 August it makes an inter-State outward supply of ₹2,00,000 to a buyer in Goa. On 9 August the full inputs bought on tax-paid invoices of ₹5,00,000 plus GST of ₹90,000, all dated within the last year, are still in stock. What is the effect on its composition status and ITC?

Show the solution

Provision: an inter-State outward supply is barred for composition. A person who makes one cannot stay in the scheme.
Facts: Bright Furniture makes an inter-State outward supply on 10 August.
Exit date: the scheme ceases from 10 August, the date of the breach, and not from the start of the year or the end of the quarter.
Tax on the Goa supply: it is taxed at normal rates, as IGST, with a tax invoice. Supplies from 10 August onward follow regular GST.
Compliance: it must file the intimation in Form CMP-04 within 7 days of the event (the inter-State supply on 10 August), that is by 17 August. The earlier supplies of the year are still subject to composition tax.
ITC: credit is computed on stock held on the day before the switch, which is 9 August. The ₹90,000 is available only because the full inputs of ₹5,00,000 remain in stock (or are contained in semi-finished or finished goods) on 9 August and the invoices are within one year. Any part already used and sold would not qualify. It claims the credit in Form ITC-01, filed within 30 days of the date the option is withdrawn or lapses. Capital goods, if any, would get a reduced credit.
Conclusion: Bright Furniture becomes a regular taxpayer from 10 August and can claim ₹90,000 of ITC on the stock held on 9 August.

Answer: The scheme ceases on 10 August. The Goa supply is taxed as IGST at normal rates. Bright Furniture files Form CMP-04 within 7 days of the event (by 17 August) and claims ITC of ₹90,000 on the stock held on 9 August through Form ITC-01, filed within 30 days.

Exam tips

Write the checklist in your answer: limit, bars, conditions. Examiners give marks for each gate you show.
Highlight the date of exit in loss-of-scheme cases. The answer is 'from the date of the breach', not the start of the year.
In computation questions, apply the rate to turnover in the State and ignore purchases. Show the CGST and SGST split.
Read for traps: inter-State outward supply, exports, supplies to an SEZ, e-commerce sales, services other than restaurants and notified goods like ice cream or pan masala.
State only the rate given in the question if it differs from the notified rate. Mention which route applies, Section 10(1) or Section 10(2A).

Practice questions from Charge of GST

Composition Levy under Section 10: frequently asked questions

What is the turnover limit for the composition scheme?

The main route allows a registered person with aggregate turnover of up to ₹1.5 crore in the preceding year. The limit is ₹75 lakh in the notified special category States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura. Persons under Section 10(2A), mainly service providers, can opt in if aggregate turnover in the preceding year was up to ₹50 lakh. The limit is tested on the preceding year, on an all-India basis.

What is the difference between a regular and a composition taxpayer?

A regular taxpayer charges GST on a tax invoice, claims ITC and files monthly or quarterly returns. A composition taxpayer pays a flat percentage of turnover, issues a bill of supply, cannot collect tax from buyers and cannot claim ITC. A composition taxpayer pays tax quarterly and files an annual return.

Can a service provider opt for composition?

Yes, under Section 10(2A), if the person is not eligible under Section 10(1), is not otherwise barred, and aggregate turnover in the preceding year did not exceed ₹50 lakh. The bar on non-restaurant services applies only to the main route under Section 10(1), so it does not stop this route. The notified rate is 6% (3% CGST + 3% SGST). Restaurant suppliers (Para 6(b) of Schedule II) are covered under Section 10(1) at 5% where no alcohol is served.

Can a composition taxpayer make inter-State supplies?

No. An outward inter-State supply bars the scheme, and exports and supplies to an SEZ are treated as inter-State supplies. If it happens during the year, the person leaves the scheme from the date of that supply and pays regular GST from then on.

What happens when a composition taxpayer loses the scheme?

The person pays regular GST from the date of the breach or the date the limit is crossed. The person files the withdrawal form CMP-04 within 7 days of the event, issues tax invoices and can claim ITC on stock held on the day before the switch through Form ITC-01, filed within 30 days. The credit on capital goods is reduced for each quarter that has passed.