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Taxation · Charge of GST

Composition Levy under Section 10 of the CGST Act

Updated 5 October 2026 · Fact-checked

The composition levy under Section 10 CGST lets small registered suppliers pay tax at a low flat rate on turnover instead of regular GST. To solve questions, check the turnover limit, check the barred activities, pick the rate for the category, apply it to turnover, and remember there is no ITC and no tax collection.

Understand Composition Levy under Section 10

Regular GST needs invoices, input tax credit (ITC) tracking and monthly returns. This is heavy for a small shopkeeper. The composition scheme is an optional, simpler route. You pay a small percentage of your turnover as tax and file fewer returns.

The price of simplicity is that you give up two things. You cannot collect tax from your customers, and you cannot claim ITC on your purchases. The tax is a cost to you. Because you charge no tax, you issue a bill of supply, not a tax invoice.

There are two doors into the scheme. Under Section 10(1) (read with Section 10(2)), suppliers of goods, and restaurant service providers, can opt in if their aggregate turnover in the preceding financial year did not exceed ₹1.5 crore. The limit is ₹75 lakh for the special category states. Under Section 10(2A), a registered person who is not eligible under Section 10(1), such as a service provider (including a person making mixed supplies of goods and services), can opt in if turnover in the preceding year did not exceed ₹50 lakh. Section 10(2A) is not a separate list of barred goods. The Section 10(2) type of conditions apply to such a person as well.

The rates are notified by the Government and are a percentage of turnover in the State or Union territory. They are split equally between CGST and SGST (or UTGST). The scheme is meant for small, local, final-stage suppliers. That is why inter-State outward supplies of goods, supplies through certain e-commerce operators and certain products are barred.

Exam questions test three things: whether the person is eligible, which rate applies, and what the person can or cannot do (ITC, invoice, tax collection, returns). Learn these as a checklist.

Key rules to remember

Eligibility limit, goods suppliers and restaurants (Section 10(1))
Aggregate turnover in preceding FY ≤ ₹1.5 crore (₹75 lakh in special category states)
Tested on the preceding financial year. Under Section 2(6), aggregate turnover covers taxable supplies, exempt supplies, exports and inter-State supplies of all persons with the same PAN, on an all-India basis. It excludes central tax, State tax, UT tax, IGST and cess, and inward supplies on reverse charge. The ₹75 lakh limit applies only to the notified special category states: Manipur, Mizoram, Nagaland and Tripura.
Eligibility limit, service providers (Section 10(2A))
Aggregate turnover in preceding FY ≤ ₹50 lakh
For a person not eligible under Section 10(1), such as a service provider (including one making mixed supplies of goods and services).
Rate for manufacturers and traders
1% of turnover (0.5% CGST + 0.5% SGST)
Notified rate under Rule 7 of the CGST Rules. It applies to manufacturers other than those of barred goods, and to traders. Composition tax is computed on turnover in the State or UT. Under the rate notification for manufacturers and traders, the value of exempt supplies is excluded from this turnover. Do not assume the same exclusion for other categories unless the question states it.
Rate for restaurants
5% of turnover (2.5% CGST + 2.5% SGST)
Restaurant service providers not serving alcoholic liquor for human consumption.
Rate for service providers (Section 10(2A))
6% of turnover (3% CGST + 3% SGST)
Applies to those who opt under Section 10(2A). Such a person cannot make supplies of goods or services that are not leviable to tax (interest or discount on deposits, loans or advances is ignored for this bar under a notified relaxation), cannot make inter-State outward supplies of goods, cannot supply goods through an e-commerce operator liable to collect TCS, cannot be a casual taxable person or a non-resident taxable person, and cannot be a manufacturer of notified goods (ice cream, pan masala, tobacco).
Services allowance for goods suppliers
Services value ≤ higher of 10% of turnover in the State/UT in the preceding financial year or ₹5 lakh
A goods supplier may make some supplies of services under the notified relaxation and still stay in the scheme. The relaxation covers supplies of services generally, not only inter-State supplies.
Tax payable
Tax = Turnover in the State/UT × composition rate
No ITC is deducted. Tax is not collected from the buyer.
Conditions under Section 10(2)
No supply of goods or services that are not leviable to tax; no inter-State outward supplies of goods; no supply of goods through an e-commerce operator liable to collect TCS; not a casual taxable person or a non-resident taxable person; not a manufacturer of notified goods (ice cream, pan masala, tobacco)
All conditions must hold. A casual taxable person or a non-resident taxable person cannot opt for composition. Under a notified relaxation, interest or discount on deposits, loans or advances is ignored when testing the bar on supplies not leviable to tax. The bar on inter-State outward supplies applies to goods only. Inter-State outward supplies of goods (including exports, which are treated as inter-State supplies) are barred. A separate notified relaxation lets a goods supplier make supplies of services (any, intra-State or inter-State) up to the higher of 10% of turnover in the State/UT in the preceding financial year or ₹5 lakh. All registered persons with the same PAN must opt for the scheme together. A Section 10(2A) person may make inter-State supplies of services but not inter-State supplies of goods.
Compliance
CMP-08 quarterly (by the 18th after the quarter); GSTR-4 annually (by 30 April)
Tax is paid quarterly. The annual return replaces the regular monthly returns.

How to solve Composition Levy under Section 10 questions

Use this order for any eligibility, rate or compliance question on the composition scheme.

  1. 1Identify the type of supplier: manufacturer, trader, restaurant, or service provider.
  2. 2Compare the preceding year's aggregate turnover (all-India, same PAN) with the limit: ₹1.5 crore, ₹75 lakh for special category states, or ₹50 lakh for Section 10(2A).
  3. 3Check each bar: no supply not leviable to tax, no inter-State outward supplies of goods, no supply of goods through an e-commerce operator liable for TCS, not a casual taxable person or a non-resident taxable person, and not a manufacturer of ice cream, pan masala or tobacco. The goods bar does not by itself bar supplies of services. A goods supplier may make supplies of services within the notified limit, and a Section 10(2A) person may make inter-State supplies of services. Interest on deposits and loans is not a bar under the notified relaxation.
  4. 4Check that every registered person under the same PAN has opted in.
  5. 5Pick the rate: 1% for manufacturers and traders, 5% for restaurants, 6% for Section 10(2A) service providers.
  6. 6Apply the rate to the turnover in the State or UT. Split it equally between CGST and SGST.
  7. 7State the consequences: bill of supply, no tax collection, no ITC, notice 'composition taxable person, not eligible to collect tax on supplies', reverse charge still applies.
  8. 8Conclude clearly: eligible or not, and the amount of tax payable, with a one-line reason.

Quickest way: Five-second checklist for MCQs and written answers

When to use it: Use this for eligibility MCQs and short case-based questions where you must decide fast.

  1. MCQ: look for the disqualifier first. Inter-State outward supply of goods, goods sold through an e-commerce operator liable for TCS, ice cream, pan masala or tobacco, or turnover above the limit kills eligibility at once.
  2. Match the number: 1, 5 or 6. Remember 'goods 1, food 5, service 6'.
  3. Remember the two things not allowed: no ITC and no tax invoice.
  4. Written answer: write the format Provision – Facts – Conclusion. Cite Section 10(1), 10(2) or 10(2A), apply it to the facts, then state the conclusion and the tax figure.
  5. In computations, show turnover × rate, then the CGST and SGST split on separate lines. Each line earns a step mark.

Common mistakes in Composition Levy under Section 10

  • Testing the turnover limit on the current year's turnover.

    Students assume eligibility is based on the year they are opting for.

    Fix: Use the preceding financial year's aggregate turnover for eligibility. The current year's turnover is used only to compute tax, and to see if the limit is crossed during the year.

  • Testing the limit on the turnover of one State or one registration only.

    Tax is on State-level turnover, so students apply the same logic to eligibility.

    Fix: Aggregate turnover is computed on an all-India basis for all registrations under the same PAN. Tax is then charged on turnover in the State.

  • Saying a composition dealer can claim ITC or issue a tax invoice.

    Students mix up regular and composition rules.

    Fix: A composition person cannot take ITC or collect tax. They issue a bill of supply that states they are a composition taxable person.

  • Using 5% for all service providers.

    The restaurant rate is remembered as the 'service' rate.

    Fix: Only restaurant services under Section 10(1) get 5%. A Section 10(2A) service provider pays 6%. Traders and manufacturers pay 1%.

  • Allowing a composition dealer to make inter-State sales of goods or sell goods through an e-commerce operator liable to collect TCS.

    Students focus on turnover and forget the condition list.

    Fix: Inter-State outward supplies of goods (including exports, which are treated as inter-State supplies) and supplies of goods through e-commerce operators liable to collect TCS are barred. Inward inter-State purchases are allowed. A Section 10(2A) person may make inter-State supplies of services, but not inter-State supplies of goods.

  • Opting in for one branch or one State while staying regular in another under the same PAN.

    Students treat each registration as a separate person.

    Fix: All registered persons with the same PAN must opt for the scheme, or none.

Worked examples

Example 1

Ravi Traders is a trader of garments with a single registration in Pune. Its aggregate turnover in the preceding financial year was ₹1,20,00,000. It makes only intra-State taxable supplies of goods and has opted for the composition scheme. Turnover in the current year is ₹80,00,000. Is Ravi eligible, and what is the tax payable? Can he claim ITC on purchases of ₹50,00,000?

Show the solution
  1. Provision: Section 10(1) allows goods suppliers whose preceding-year aggregate turnover does not exceed ₹1.5 crore.
  2. Facts: preceding-year turnover is ₹1,20,00,000, which is below ₹1,50,00,000. The supplies are intra-State taxable goods, with no e-commerce supply.
  3. Rate: a trader pays 1% of turnover (0.5% CGST + 0.5% SGST).
  4. Tax = ₹80,00,000 × 1% = ₹80,000.
  5. CGST = ₹80,00,000 × 0.5% = ₹40,000. SGST = ₹80,00,000 × 0.5% = ₹40,000. Total ₹80,000.
  6. ITC: a composition person is not entitled to ITC, so the tax on purchases of ₹50,00,000 is a cost to him.

Answer: Ravi is eligible. Tax payable is ₹80,000 (CGST ₹40,000 and SGST ₹40,000). He cannot claim ITC on his purchases.

Example 2

Neha Consultants, a firm of tax consultants in Jaipur, had aggregate turnover of ₹42,00,000 in the preceding year. All its supplies are services within Rajasthan. Turnover in the current year is ₹46,00,000. It wants to opt for the composition scheme. Examine eligibility and compute the tax. What changes if its preceding-year turnover had been ₹60,00,000?

Show the solution
  1. Provision: a pure service provider is not covered by Section 10(1). Section 10(2A) allows a person not eligible under Section 10(1) to opt if preceding-year aggregate turnover did not exceed ₹50 lakh.
  2. Facts: preceding-year turnover is ₹42,00,000, which is below ₹50,00,000. All supplies are intra-State services, and there is no e-commerce supply.
  3. Rate: 6% of turnover (3% CGST + 3% SGST).
  4. Tax = ₹46,00,000 × 6% = ₹2,76,000.
  5. CGST = ₹46,00,000 × 3% = ₹1,38,000. SGST = ₹46,00,000 × 3% = ₹1,38,000. Total ₹2,76,000.
  6. Variation: if preceding-year turnover had been ₹60,00,000, it would exceed ₹50 lakh, so Neha would not be eligible and must pay GST under the regular scheme.

Answer: Neha is eligible under Section 10(2A). Tax payable is ₹2,76,000 (CGST ₹1,38,000 and SGST ₹1,38,000). With preceding-year turnover of ₹60,00,000 she would be ineligible and would follow regular GST.

Exam tips

  • Eligibility MCQs are usually decided by one hidden disqualifier: an inter-State sale of goods, goods sold through an e-commerce operator liable for TCS, ice cream or tobacco, or a turnover above the limit. Scan for it first.
  • Learn the three rates as pairs of numbers: 1% (0.5 + 0.5), 5% (2.5 + 2.5) and 6% (3 + 3). A split question can be solved from the total.
  • In theory questions, list the Section 10(2) conditions as short points and apply each to the facts. Do not write only the final conclusion.
  • Compare regular and composition schemes in a table-like list: tax collection, ITC, invoice type, returns, inter-State supply. This is a frequent descriptive question.
  • Check which turnover the question gives. The preceding-year turnover decides eligibility, and the current-year turnover is used for the tax.

Practice questions from Charge of GST

Composition Levy under Section 10 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Composition Levy under Section 10: frequently asked questions

Who can opt for the composition scheme under Section 10?

Registered suppliers of goods and restaurant service providers with preceding-year aggregate turnover up to ₹1.5 crore can opt under Section 10(1). The limit is ₹75 lakh in special category states. Other service providers, and mixed suppliers of goods and services, can opt under Section 10(2A) if turnover is up to ₹50 lakh.

What are the composition scheme rates?

Manufacturers and traders pay 1% of turnover, restaurants pay 5%, and Section 10(2A) service providers pay 6%. Each rate is split equally between CGST and SGST (or UTGST). The tax is on turnover in the State or UT.

What is the difference between the regular and composition schemes?

A regular taxpayer collects tax, issues a tax invoice and claims ITC. A composition person pays tax from his own pocket at a flat rate, issues a bill of supply, and cannot claim ITC. A composition person also cannot make inter-State outward supplies of goods and files fewer returns.

What happens if a composition person crosses the turnover limit during the year?

The person must move to the regular scheme from the day the limit is crossed. After that date he collects tax and issues tax invoices. Under Section 18(1)(c), he can claim ITC on inputs held in stock, inputs contained in semi-finished or finished goods, and capital goods, as on the day immediately preceding the date of the switch, for use in making taxable supplies. ITC on capital goods is allowed with the prescribed reduction, and all claims are subject to Rule 40.

Do composition dealers pay tax under reverse charge?

Yes. A composition person must pay tax under Section 9(3) on notified goods or services, such as legal services from an advocate. Under Section 9(4), he pays only where the notified class of supplies from unregistered persons applies to him. The tax is paid in cash at the normal rate, not the composition rate, and no ITC is available because a composition person cannot claim ITC.