Direct and Indirect Taxation · Composition Levy

Composition Levy Rate of Tax under Rule 7 CGST Rules

Updated 10 October 2026 · Fact-checked

Rule 7 of the CGST Rules, 2017 fixes the rate a composition dealer pays on turnover in the State or Union territory. Manufacturers pay half per cent, restaurant-type suppliers two and a half per cent, other suppliers half per cent of taxable turnover, and section 10(2A) suppliers three per cent. Identify the category, then multiply.

Understand Rate of Tax under Composition Levy (Rule 7)

Under normal GST you charge tax on each sale and claim input tax credit on purchases. Composition levy replaces this with a small flat tax on turnover. You pay it from your own pocket and do not collect it from customers.

Section 10 of the CGST Act sets the ceiling on the rate: not more than one per cent for a manufacturer, two and a half per cent for persons making supplies under clause (b) of paragraph 6 of Schedule II, and half per cent for other suppliers. Under section 10(2A), the ceiling is three per cent. Rule 7 then says what rate is actually charged. For Rows 1 to 3 the prescribed rate can be below the ceiling (a manufacturer pays half per cent against a one per cent ceiling). For Row 4 the prescribed rate, three per cent, is the same as the section 10(2A) ceiling.

The Table in Rule 7 has four rows. Row 1: manufacturers, other than manufacturers of goods notified by the Government, pay half per cent of the turnover in the State or Union territory. Row 2: suppliers making supplies referred to in clause (b) of paragraph 6 of Schedule II pay two and a half per cent of the turnover in the State or Union territory. Row 3: any other supplier eligible under sub-sections (1) and (2) of section 10 pays half per cent of the turnover of taxable supplies of goods and services in the State or Union territory. Row 4: persons not eligible under section 10(1) and (2) but opting under section 10(2A), such as service providers or suppliers of mixed goods and services, pay three per cent of the turnover of supplies of goods and services in the State or Union territory.

Clause (b) of paragraph 6 of Schedule II covers supply, by way of or as part of any service, of goods (other than alcoholic liquor for human consumption) for cash, deferred payment or other valuable consideration. In practice, this is the restaurant-type supply, which is why students link it to restaurants. The 2.5% rate applies to this category.

The turnover on which the rate applies is the turnover in the State or Union territory. Under Explanation 2 to section 10, it excludes supplies made from 1 April up to the date the person becomes liable for registration, and exempt supply of services by way of extending deposits, loans or advances, so far as the consideration is interest or discount.

Key rules to remember

Composition tax payable: Tax = Rate × Turnover in the State or Union territory (as defined for composition); The tax is a single amount. Do not split it into CGST and SGST unless the question asks. It is payable in lieu of tax under section 9(1).
Rule 7 Row 1: Manufacturers: 0.5% of turnover in the State or Union territory; Does not apply to manufacturers of goods notified by the Government, who are not eligible under section 10(2)(e).
Rule 7 Row 2: Clause (b) of paragraph 6 of Schedule II suppliers: 2.5% of turnover in the State or Union territory; Restaurant-type supplies of goods as part of a service.
Rule 7 Row 3: Any other supplier under section 10(1) and (2): 0.5% of turnover of taxable supplies of goods and services in the State or Union territory; Traders fall here. The base is taxable supplies only.
Rule 7 Row 4: Section 10(2A) suppliers: 3% of turnover of supplies of goods and services in the State or Union territory; For persons not eligible under section 10(1) and (2), such as service providers or mixed suppliers. Aggregate turnover in the preceding financial year must not exceed fifty lakh rupees.
Statutory ceilings in section 10: Manufacturer 1%; clause (b) of paragraph 6 of Schedule II supplier 2.5%; other suppliers 0.5%; section 10(2A) 3%; These are maximums. Rule 7 rates are what apply. Manufacturers pay 0.5% against a 1% ceiling. For Row 4, the prescribed rate of 3% equals the ceiling.
Turnover limit for opting: Aggregate turnover in the preceding financial year ≤ ₹50 lakh (can be raised by notification up to ₹1.5 crore); Section 10(1) proviso. Eligibility is tested on aggregate turnover of the preceding financial year; Explanation 1 to section 10 adds supplies made from 1 April up to the date the person becomes liable for registration. The tax is levied on turnover in the State or Union territory, as defined in Explanation 2.

How to solve Rate of Tax under Composition Levy (Rule 7) questions

Use this sequence for any question that asks for tax under composition levy. The key is to pick the right Rule 7 row before you calculate anything.

1Confirm the person is eligible: aggregate turnover of the preceding financial year within the limit, and no bar such as inter-State outward supplies or supplies through an e-commerce operator who must collect tax under section 52.
2Classify the person: manufacturer, supplier making clause (b) of paragraph 6 of Schedule II supplies, other supplier under section 10(1) and (2), or a section 10(2A) supplier.
3Write the Rule 7 rate for that row: 0.5%, 2.5%, 0.5% or 3%.
4Work out the correct turnover base: turnover in the State or Union territory. Remove the pre-registration period supplies and exempt interest or discount on deposits, loans and advances. For Row 3, use taxable supplies only.
5Multiply the rate by the turnover to get the tax.
6If the question mixes activities, compute each activity separately only if the rules support it. Otherwise, apply the rate for the category the person falls into.
7Add a closing note: no tax is collected from the recipient and no input tax credit is available (section 10(4)).

Quickest way: Row-and-base shortcut

When to use it: Use this in MCQs and short numerical questions where you must pick a rate and compute tax within a minute.

Spot the keyword: manufacturer means 0.5%; restaurant or food served as a service means 2.5%; trader or other supplier means 0.5%; service provider under section 10(2A) means 3%.
Strike out anything outside the base: exempt interest, pre-registration sales, and for traders non-taxable supplies.
Multiply: for 0.5%, divide the turnover by 200; for 2.5%, divide by 40; for 3%, multiply by 3 and divide by 100.
Write the answer with a one-line reason naming the Rule 7 row.

Common mistakes in Rate of Tax under Composition Levy (Rule 7)

Using 1% for manufacturers because section 10 says one per cent.
Section 10 gives the maximum ceiling and students confuse it with the prescribed rate.
Fix: Rule 7 is the operative rate for the question. Use 0.5% for manufacturers. Remember: section 10 is the ceiling, Rule 7 is the rate.
Applying 2.5% to all service-related businesses.
Students link 2.5% with anything that sounds like a restaurant or service.
Fix: 2.5% applies to supplies of goods as part of a service under clause (b) of paragraph 6 of Schedule II. A general service provider under section 10(2A) pays 3%.
Taking the whole year's turnover as the base.
Students ignore Explanation 2 to section 10 and the pre-registration period.
Fix: Exclude supplies made from 1 April up to the date of becoming liable for registration, and exempt interest or discount on extending deposits, loans and advances.
Adding tax on top of the invoice value or claiming input tax credit.
Students carry over regular GST habits.
Fix: Under section 10(4) the composition dealer collects no tax from the recipient and cannot take input tax credit. The tax is paid out of the dealer's own pocket.
Mixing up the eligibility limit and the tax base.
Both use the word turnover.
Fix: Eligibility uses aggregate turnover of the preceding financial year (Explanation 1 to section 10 adds supplies made from 1 April up to the date the person becomes liable for registration). Tax is charged on turnover in the State or Union territory, as defined in Explanation 2.
Treating non-taxable supplies as part of the Row 3 base.
Row 3 sounds like total turnover.
Fix: Row 3 refers to turnover of taxable supplies of goods and services. Read the exact words of the row and exclude non-taxable supplies.

Worked examples

Example 1

Mahesh Traders, Indore (registered, eligible for composition under section 10(1) and (2)), is a trader of stationery. Its turnover of taxable supplies in Madhya Pradesh for the quarter is ₹18,00,000. Compute the tax payable and state whether it can collect tax from customers.

Show the solution

Classification: a trader is an 'other supplier eligible under sub-sections (1) and (2) of section 10', so Row 3 of Rule 7 applies.
Rate: half per cent of the turnover of taxable supplies of goods and services in the State.
Tax = 0.5% × ₹18,00,000 = ₹9,000.
Under section 10(4), it cannot collect tax from recipients and cannot claim input tax credit.

Answer: Tax payable is ₹9,000. Mahesh Traders cannot collect tax from customers or claim input tax credit.

Example 2

Anand Foods, Pune, is eligible for composition under section 10(1) and (2) and supplies food and drinks as part of its restaurant service, being supplies under clause (b) of paragraph 6 of Schedule II. Its turnover in Maharashtra for the quarter is ₹12,40,000. This figure includes ₹40,000 of interest it received on a loan it extended to a vendor, which is an exempt supply of services by way of extending loans, the consideration being interest. Compute the tax payable.

Show the solution

Classification: supplies under clause (b) of paragraph 6 of Schedule II fall in Row 2 of Rule 7, so the rate is two and a half per cent.
Base: under Explanation 2 to section 10, the exempt supply of services by way of extending deposits, loans or advances, so far as the consideration is interest or discount, is excluded from turnover in the State. The ₹40,000 interest on the loan extended is such a supply.
Turnover for tax = ₹12,40,000 − ₹40,000 = ₹12,00,000.
Tax = 2.5% × ₹12,00,000 = ₹30,000.

Answer: Tax payable under composition levy is ₹30,000.

Exam tips

In MCQs, the trap is nearly always the rate. Memorise the four Rule 7 rows: 0.5%, 2.5%, 0.5%, 3%.
In written answers, name the row and the source, for example 'Rule 7 of the CGST Rules, 2017, Row 3', then show the multiplication. This earns step marks even if the figures slip.
Read the facts for exclusions: pre-registration supplies and exempt interest. Examiners hide these in a line of the question.
Distinguish the section 10 ceiling from the Rule 7 rate if the question asks for the maximum rate versus the prescribed rate.
Always close with the consequence under section 10(4): no tax collection from the recipient and no input tax credit.

Practice questions from Composition Levy

Rate of Tax under Composition Levy (Rule 7) in other exams

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

Rate of Tax under Composition Levy (Rule 7): frequently asked questions

What is the composition levy rate for a manufacturer under Rule 7?

Half per cent of the turnover in the State or Union territory. This applies to manufacturers other than those making goods notified by the Government. Section 10 allows up to one per cent as a ceiling, but Rule 7 sets the rate at half per cent.

What rate applies to restaurants under the composition scheme?

Suppliers making supplies referred to in clause (b) of paragraph 6 of Schedule II pay two and a half per cent of the turnover in the State or Union territory. This is the Rule 7 row that students commonly call the restaurant rate.

What rate applies to traders?

A trader is an 'other supplier' eligible under section 10(1) and (2). The rate is half per cent of the turnover of taxable supplies of goods and services in the State or Union territory.

What is the three per cent rate in Rule 7?

It applies to registered persons who are not eligible under section 10(1) and (2) but may opt under section 10(2A), such as service providers or suppliers of mixed goods and services. The tax is three per cent of the turnover of supplies of goods and services in the State or Union territory. This equals the three per cent ceiling in section 10(2A).

Can a composition dealer collect tax from customers?

No. Under section 10(4), a person paying tax under the composition levy cannot collect tax from the recipient and is not entitled to input tax credit. The dealer bears the tax and issues a bill of supply rather than a tax invoice.