Direct and Indirect Taxation · Composition Levy

Composition Levy Eligibility and Conditions under GST

Updated 10 October 2026 · Fact-checked

Composition levy under section 10 of the CGST Act lets a small registered person pay tax at a low flat rate on turnover instead of regular GST. To check eligibility, test the preceding-year turnover limit of ₹50 lakh (higher limit if notified, up to ₹1.5 crore), then the excluded-person list, then the Rule 5 conditions.

Understand Composition Levy Eligibility and Conditions

Normal GST works on output tax minus input tax credit. For a small trader this means invoices, credit matching and monthly work. The composition levy is a simpler option. You pay a small percentage of your turnover as tax, and you stop collecting tax from customers.

Section 10 sets out who may opt. The first test is size. A registered person whose aggregate turnover in the preceding financial year did not exceed ₹50 lakh may opt. The Government may notify a higher limit by notification on the Council's recommendation, but not above ₹1.5 crore. The test looks at the previous year, not the current year.

The second test is the nature of business. Under section 10(2), the person must not be engaged in supplying services (except as the second proviso to section 10(1) allows), must not make supplies that are not leviable to tax, must not make inter-State outward supplies, and must not supply through an e-commerce operator who has to collect tax at source under section 52. The person must not manufacture goods notified by the Government, and must not be a casual taxable person or a non-resident taxable person.

There is a limited allowance for services. A person opting under section 10(1) may supply services (other than restaurant-type supplies under clause (b) of paragraph 6 of Schedule II) of value up to 10% of the preceding year's turnover in the State or Union territory, or ₹5 lakh, whichever is higher. Interest or discount on deposits, loans and advances, if exempt, is left out of the turnover for this purpose.

Section 10(2A) is a separate window for service providers and others who cannot use sub-sections (1) and (2). They may opt if their preceding-year turnover is up to ₹50 lakh, at a rate of up to 3%. The same type of exclusions applies. Once you opt, you cannot collect tax from the recipient and you cannot claim input tax credit. Rule 5 adds working conditions such as the wording on your bill of supply and signboard.

Key rules to remember

Turnover limit: Aggregate turnover in preceding financial year ≤ ₹50,00,000; Section 10(1) and 10(2A). The Government may notify a higher limit, not above ₹1,50,00,000, for section 10(1). Aggregate turnover includes supplies made from 1 April up to the date you become liable for registration, but excludes exempt interest or discount on deposits, loans and advances.
Maximum rate ceilings in the Act: Manufacturer: up to 1% | Restaurant-type supplies (Sch II para 6(b)): up to 2.5% | Other suppliers: up to 0.5% | Section 10(2A): up to 3%; These are ceilings in the Act. The rate you actually pay is the one prescribed in Rule 7.
Rates prescribed by Rule 7: Manufacturers: 0.5% | Para 6(b) suppliers: 2.5% | Other eligible suppliers: 0.5% of turnover of taxable supplies | Section 10(2A) persons: 3%; Rate applies to turnover in the State or Union territory. Turnover before becoming liable for registration and exempt interest services are excluded from this turnover.
Services allowance: Services value ≤ higher of (10% of preceding-year turnover in the State/UT, ₹5,00,000); Second proviso to section 10(1). It does not cover restaurant-type supplies under clause (b) of paragraph 6 of Schedule II.
Excluded persons (section 10(2)): No non-taxable supplies | No inter-State outward supplies | No supply through an e-commerce operator liable to collect tax under section 52 | No notified goods manufacture | Not casual taxable or non-resident taxable person; Also, save as provided, you must not be engaged in the supply of services.
Same PAN rule: All registered persons with the same PAN must opt together; Proviso to section 10(2) and 10(2A). If one of them does not opt, none is eligible.
Effect of opting: No tax collected from recipient; no input tax credit; Section 10(4).
Lapse of option: Option lapses from the day aggregate turnover in the financial year exceeds the limit; Section 10(3).

How to solve Composition Levy Eligibility and Conditions questions

Use this order for any eligibility question. It follows section 10 and Rule 5, so you cover every point an examiner may test.

1Identify the type of person: manufacturer, trader, restaurant-type supplier or service provider. This decides the sub-section (10(1) or 10(2A)) and the rate.
2Check the turnover limit. Compare the preceding financial year's aggregate turnover with ₹50 lakh, or the higher notified limit (not above ₹1.5 crore) if the question mentions one. Remember to include supplies from 1 April up to the date of liability for registration where relevant.
3Run the section 10(2) exclusion list one by one: services, non-taxable supplies, inter-State outward supplies, supply through an e-commerce operator liable under section 52, notified goods, casual taxable or non-resident taxable person.
4If services are supplied, apply the services allowance: the higher of 10% of preceding-year turnover or ₹5 lakh.
5Check the PAN rule. If more than one registered person shares a PAN, all must opt.
6Check the Rule 5 conditions: not casual or non-resident, stock rules, tax under section 9(3) or 9(4) on inward supplies, wording on the bill of supply and signboard.
7State the conclusion clearly (eligible or not eligible) with the reason, then mention the consequences: no tax collection, no ITC, lapse if turnover crosses the limit.
8If asked for tax, apply the Rule 7 rate to the relevant turnover in the State or Union territory.

Quickest way: Three-gate check for MCQs

When to use it: Use it for 2-mark MCQs and short case-based questions where you must decide eligibility in under a minute.

Gate 1, size: is the preceding-year turnover within ₹50 lakh (or the notified higher limit)? If not, stop: not eligible.
Gate 2, red flags: look for inter-State sales, e-commerce operator supply under section 52, non-taxable supplies, notified goods, or a casual or non-resident taxable person. Any one means not eligible.
Gate 3, services and PAN: if services appear, compare them with the higher of 10% of turnover or ₹5 lakh. If there are other registrations on the same PAN, check they all opt.
If all three gates pass, the person is eligible. Then pick the rate from Rule 7 if the question asks for tax.

Common mistakes in Composition Levy Eligibility and Conditions

Testing the current year's turnover for eligibility to opt.
Students link turnover with the year in which the tax is paid.
Fix: Eligibility to opt uses the preceding financial year. The current year matters only for lapse under section 10(3), when turnover exceeds the limit.
Allowing a composition person to make inter-State outward supplies.
The word 'small' makes students think only turnover matters.
Fix: Section 10(2)(c) bars inter-State outward supplies of goods or services. One such supply means the person is not eligible.
Saying a composition person can charge tax on the invoice and claim ITC.
Students mix up the composition scheme with regular GST.
Fix: Under section 10(4), no tax is collected from the recipient and no input tax credit is available. The person issues a bill of supply carrying the words 'composition taxable person, not eligible to collect tax on supplies'.
Treating the Act's rate ceilings as the actual rates.
The Act says up to 1% for manufacturers, while Rule 7 prescribes 0.5%.
Fix: Use section 10 for ceilings and Rule 7 for the actual rate. Use the Rule 7 rate in computations.
Ignoring the services allowance, or applying it to restaurant-type supplies.
Students remember only 'no services' and miss the second proviso.
Fix: Services are allowed up to the higher of 10% of preceding-year turnover or ₹5 lakh. Restaurant-type supplies under clause (b) of paragraph 6 of Schedule II are outside this allowance.
Forgetting the same-PAN condition.
The proviso sits at the end of the sub-section and is easy to skip.
Fix: If one PAN holder has several registrations, all must opt for the scheme. If one does not, none can.

Worked examples

Example 1

Shree Ganesh Traders, a trader of stationery in Nagpur (Maharashtra), had aggregate turnover of ₹46,00,000 in the preceding financial year. During the current year it also sold goods to a registered dealer in Hyderabad (Telangana). It wants to opt for the composition scheme under section 10. Is it eligible?

Show the solution

Type of person: a trader of goods, so it would opt under section 10(1) and 10(2).
Turnover test: ₹46,00,000 is within ₹50,00,000, so the size condition is met.
Exclusion test: section 10(2)(c) says the person must not be engaged in making any inter-State outward supplies of goods or services.
The sale to Hyderabad is an inter-State outward supply, so the condition is not met.
Conclusion: even though turnover is within the limit, the firm fails the exclusion test.

Answer: Shree Ganesh Traders is not eligible for the composition scheme because it makes inter-State outward supplies, which section 10(2)(c) prohibits. It must continue under regular GST.

Example 2

Anand Hardware, a trader in Jaipur with no inter-State supplies and no e-commerce operator sales, had aggregate turnover of ₹45,00,000 in the preceding financial year. In the current year it has taxable turnover of goods of ₹40,00,000 and services of ₹4,00,000 in Rajasthan. It has no other registration on its PAN. Check eligibility for the services supplied and compute the composition tax at the Rule 7 rate for other suppliers.

Show the solution

Turnover test: ₹45,00,000 ≤ ₹50,00,000, so the size condition is met.
No exclusion applies: no inter-State supplies, no e-commerce operator sales, and there is no other registration on its PAN.
Services allowance: 10% of ₹45,00,000 = ₹4,50,000. Compare with ₹5,00,000. The higher is ₹5,00,000.
Services of ₹4,00,000 are within ₹5,00,000, so the services do not disqualify it.
Rate: Rule 7 prescribes 0.5% of the turnover of taxable supplies of goods and services in the State for any other eligible supplier.
Turnover for tax: ₹40,00,000 + ₹4,00,000 = ₹44,00,000.
Tax = 0.5% × ₹44,00,000 = ₹22,000.

Answer: Anand Hardware is eligible, since its services of ₹4,00,000 are within the allowed ₹5,00,000. Its composition tax is ₹22,000. It cannot collect tax from customers or claim input tax credit.

Exam tips

In case studies, write the answer as a short checklist: turnover limit, exclusion list, services, PAN, Rule 5 conditions. Give one line of reasoning for each so you earn step marks.
For MCQs, scan first for the red flags: inter-State supply, e-commerce operator under section 52, non-taxable supplies, casual or non-resident person. These usually decide the answer.
Keep the limit and rates straight: ₹50 lakh preceding-year limit, ceilings in section 10, actual rates in Rule 7, and 3% for section 10(2A). Do not mix them up.
Quote section 10(3) and 10(4) in your conclusion: the option lapses when turnover crosses the limit, and there is no tax collection or ITC.
When a question gives a notified higher limit, use it for section 10(1), but never above ₹1.5 crore.

Practice questions from Composition Levy

Composition Levy Eligibility and Conditions 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 Eligibility and Conditions: frequently asked questions

What is the turnover limit for the composition scheme under GST?

Under section 10, the aggregate turnover in the preceding financial year must not exceed ₹50 lakh. The Government may notify a higher limit, not exceeding ₹1.5 crore, on the Council's recommendation. The test uses the preceding year, not the current year.

Can a composition dealer make inter-State sales?

No. Section 10(2)(c) says an eligible person must not be engaged in making any inter-State outward supplies of goods or services. The same bar applies to persons opting under section 10(2A).

Can a composition dealer supply services?

The general rule is that the person must not supply services. However, a person opting under section 10(1) may supply services (other than restaurant-type supplies) up to the higher of 10% of the preceding year's turnover or ₹5 lakh. Service providers who cannot use section 10(1) may look at section 10(2A) at up to 3%.

Can a composition taxable person claim input tax credit or charge GST?

No. Section 10(4) says such a person shall not collect any tax from the recipient and is not entitled to any credit of input tax. The bill of supply must carry the words 'composition taxable person, not eligible to collect tax on supplies', as Rule 5 requires.

What happens if someone opts for composition despite being ineligible?

Under section 10(5), if the proper officer has reason to believe the person paid tax under the scheme despite being ineligible, the person is liable to a penalty in addition to any tax payable. Sections 73, 74 or 74A apply to determine the tax and penalty.