Direct and Indirect Taxation · Composition Levy

Compliance and Consequences under GST Composition Scheme

Updated 10 October 2026 · Fact-checked

A composition taxpayer pays a small flat percentage of turnover instead of normal GST. In return, you cannot collect tax from customers, cannot claim input tax credit, and must issue a bill of supply. You pay quarterly using CMP-08 and file an annual return in GSTR-4. If you lose eligibility, you move to regular GST from that date.

Understand Consequences and Compliance under Composition Scheme

The composition scheme is a simplified option for small registered suppliers. Instead of charging GST on each invoice and offsetting input tax credit (ITC), you pay tax at a fixed percentage of your turnover of taxable supplies in the State or Union territory. The rate is in Rule 7 of the CGST Rules and is covered in its own topic. This page covers what you must do, and what happens, once you are in the scheme.

The logic is a trade-off. You get low tax cost and few returns. You give up the ITC chain. Regular GST works because tax paid on inputs is set off against tax on outputs. A composition taxpayer pays tax on turnover, not on value added. So the law blocks both sides: you cannot collect tax from your customer, and you cannot claim credit on your purchases. The GST you pay on purchases becomes part of your cost.

Because you do not charge tax, you cannot issue a tax invoice. You issue a bill of supply. You must also show the words "composition taxable person" on the notice board at your place of business and on every bill of supply, with a statement that you are not eligible to collect tax on supplies. Your customer sees that no tax is charged and cannot take ITC.

On returns, you file a quarterly statement-cum-challan in FORM GST CMP-08 and pay tax with it. After the financial year, you file an annual return in FORM GSTR-4. You do not file monthly GSTR-1 and GSTR-3B like a regular taxpayer.

You can lose the scheme in two ways. You may voluntarily withdraw, or you may cross a limit or break a condition. Then you become a regular taxpayer. You start issuing tax invoices, and you follow regular returns. You can claim ITC on inputs held in stock, and on inputs contained in semi-finished or finished goods, as on the day before the date of exit. You do this in FORM GST ITC-01, filed within 30 days of the date from which you become liable to pay regular tax. For capital goods, ITC is allowed after reducing the tax by 5 percentage points for every quarter or part of a quarter from the date of the invoice. Filing CMP-04 does not replace ITC-01. If you wrongly stayed in the scheme, the department can recover tax and penalty under the Act.

Key rules to remember

Tax payable under composition: Tax = Turnover of taxable supplies in the State/UT × Rule 7 rate; Rates are total rates, split equally between CGST and SGST/UTGST: 1% for traders (0.5% + 0.5%), 2% for manufacturers (1% + 1%), 5% for restaurants not serving alcohol (2.5% + 2.5%), and 6% for service providers under Section 10(2A) (3% + 3%). The base is turnover of taxable supplies in the State/UT, not profit.
ITC position: ITC on inputs = Nil; tax collected from customers = Nil; Both are barred while you are in the scheme. Tax on purchases is a cost.
Document to issue: Bill of supply (not tax invoice); It must carry the words "composition taxable person, not eligible to collect tax on supplies".
Returns and due dates: CMP-08: 18th of the month after each quarter. GSTR-4: 30 April after the financial year; CMP-08 is the quarterly statement-cum-challan. GSTR-4 is the annual return. Late payment attracts interest, and late GSTR-4 attracts late fee.
Reverse charge: Reverse charge tax on inward supplies at the normal rate, paid in cash, no ITC; Composition does not remove your liability under reverse charge.
Ceasing to be eligible: Intimation in FORM GST CMP-04 within 7 days of the date of contravention; claim ITC on stock in FORM GST ITC-01 within 30 days of the date you become liable to regular tax; You are a regular taxpayer from the date of the contravention, for example when turnover crosses the limit. For capital goods, ITC is allowed after reducing tax by 5 percentage points per quarter or part thereof from the invoice date.

How to solve Consequences and Compliance under Composition Scheme questions

Use this order for any question on composition compliance or consequences.

1Identify the status. Check whether the person is in the composition scheme or has just lost eligibility, and note the date.
2List the restrictions: no tax collection, no ITC, bill of supply instead of tax invoice, and the notice board and bill wording.
3For a tax computation, take turnover of taxable supplies in the State/UT for the period and apply the Rule 7 total rate (1% traders, 2% manufacturers, 5% restaurants, 6% Section 10(2A) service providers). Split the tax equally into CGST and SGST/UTGST halves.
4Treat input tax paid as a cost. Do not set it off. Add reverse charge tax separately at the normal rate, with no ITC on it.
5State the return and due date: CMP-08 by the 18th after the quarter, and GSTR-4 by 30 April after the year.
6If eligibility is lost, fix the date from which regular rules apply, then give the CMP-04 time limit of 7 days, tax invoices from that date, and ITC on stock through ITC-01 within 30 days.
7Close with a clear one-line answer in rupees or with the legal consequence.

Quickest way: Four-point composition check

When to use it: Use it for MCQs and short notes where you must decide quickly what a composition taxpayer can or cannot do.

Ask: does this need tax to be charged or credit to be claimed? If yes, a composition taxpayer cannot do it.
Document: bill of supply, never a tax invoice.
Return: quarterly CMP-08 (18th after quarter) and annual GSTR-4 (30 April).
Exit: regular taxpayer from the date of the breach, intimate within 7 days, claim ITC on stock in ITC-01 within 30 days.

Common mistakes in Consequences and Compliance under Composition Scheme

Claiming ITC on purchases because the supplier charged GST.
Students think ITC depends on the supplier's invoice only.
Fix: ITC is barred for the composition taxpayer himself. The tax paid on purchases is simply part of cost.
Showing GST separately on the customer bill.
Students confuse paying tax with collecting tax.
Fix: A composition taxpayer pays from his own pocket at a flat rate. He issues a bill of supply with no tax shown.
Mixing up CMP-08 and GSTR-4 due dates.
Both are composition forms, so students blur them.
Fix: CMP-08 is quarterly, due on the 18th after the quarter. GSTR-4 is annual, due on 30 April after the financial year.
Ignoring reverse charge for a composition taxpayer.
Students assume the scheme removes all normal GST.
Fix: Reverse charge liability continues at normal rates and ITC on it is not available.
Applying the composition rate to turnover after the exit date.
Students forget the status changes from the date of breach.
Fix: Split the year. Supplies before the date attract the composition rate, and later supplies are taxed under regular rules with tax invoices.
Forgetting ITC-01 after exit, or filing it late, or treating CMP-04 as enough.
Students think the CMP-04 intimation also claims credit on stock.
Fix: CMP-04 is only the intimation. File ITC-01 separately within 30 days of the date you become liable to regular tax. For capital goods, reduce the tax by 5 percentage points per quarter or part thereof from the invoice date.

Worked examples

Example 1

Ramesh Traders, Pune, is a composition trader (rate 1%). Turnover for April to June is ₹18,00,000. Purchases of the quarter include GST of ₹1,20,000. Compute the tax payable, state the form and due date, and the treatment of the purchase GST.

Show the solution

Composition tax = 1% × ₹18,00,000 = ₹18,000.
Split: CGST 0.5% = ₹9,000 and SGST 0.5% = ₹9,000.
Tax is paid using FORM GST CMP-08, the quarterly statement-cum-challan, by 18 July.
The GST of ₹1,20,000 on purchases cannot be claimed as ITC because he is a composition taxpayer.
It is treated as part of the cost of purchases.

Answer: Tax payable is ₹18,000 (CGST ₹9,000 and SGST ₹9,000), paid with CMP-08 by 18 July. The input GST of ₹1,20,000 is not claimable and forms part of cost.

Example 2

Meera Foods, a composition manufacturer, crosses the turnover limit for the scheme on 10 November. State the consequences.

Show the solution

It ceases to be eligible from 10 November, the date of breach.
It must file the intimation in FORM GST CMP-04 within 7 days of that date, that is by 17 November.
Supplies up to the day before 10 November remain taxed under composition at the Rule 7 rate.
From 10 November it must issue tax invoices, collect GST from customers and follow the regular return system.
It can claim ITC on inputs held in stock, and on inputs contained in semi-finished or finished goods, on the day before the exit date, by filing FORM GST ITC-01 within 30 days of 10 November, that is by 10 December. For any capital goods, the ITC is allowed after reducing the tax by 5 percentage points per quarter or part thereof from the invoice date.

Answer: Meera Foods becomes a regular taxpayer from 10 November. It files CMP-04 by 17 November, issues tax invoices from that date, and claims ITC on stock through ITC-01 within 30 days, that is by 10 December.

Exam tips

Write the answer to a 'why no ITC' question in two lines: flat tax on turnover with no tax chain, and no tax collected from the buyer.
For return questions, always give form name, frequency and due date together.
In a computation, show the CGST and SGST split and say input tax is not set off.
For exit questions, state the date from which regular rules apply before listing consequences, and mention both CMP-04 (7 days) and ITC-01 (30 days).
Use the exact words 'bill of supply' and 'composition taxable person' in written answers.

Practice questions from Composition Levy

Consequences and Compliance under Composition Scheme in other exams

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

Consequences and Compliance under Composition Scheme: frequently asked questions

Why can a composition dealer not claim input tax credit?

A composition dealer pays tax at a flat rate on turnover and does not charge tax to customers. ITC works only when tax collected on output is set off against tax paid on input. Since there is no output tax collected, the law bars credit.

What is the difference between a regular taxpayer 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 claim ITC and files CMP-08 quarterly and GSTR-4 annually.

What are the due dates for CMP-08 and GSTR-4?

CMP-08 is due by the 18th of the month following each quarter. GSTR-4 is due by 30 April following the financial year. Late payment carries interest and late filing of GSTR-4 carries a late fee.

Can a composition taxpayer issue a tax invoice?

No. A composition taxpayer issues a bill of supply that states he is a composition taxable person and not eligible to collect tax. If he loses the scheme, he issues tax invoices from the date he becomes a regular taxpayer.