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Direct and Indirect Taxation · Levy and Collection of CGST and IGST

Composition Levy under GST: Section 10 Explained

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 percentage of turnover instead of normal GST under section 9(1). You check turnover limit, eligibility conditions and category, apply the rate cap, and remember that no tax is collected and no input tax credit is allowed.

Understand Composition Levy and Related Provisions

Normal GST works on a chain. You charge tax on sales, claim credit for tax paid on purchases, and pay the difference. This needs invoices, credit matching and monthly records. For small businesses that is a heavy burden.

Composition levy is the relief. Section 10 allows a registered person to pay a small amount of tax on turnover, in lieu of the tax payable under section 9(1). The rate is prescribed but cannot exceed the caps in the Act. You give up input tax credit and the right to charge GST to customers. That is the trade-off.

The option is open only if your aggregate turnover in the preceding financial year did not exceed ₹50 lakh. The Government may notify a higher limit, but not above ₹1.5 crore. The scheme is also subject to section 9(3) and 9(4), so reverse charge tax still applies to you as a recipient.

There are two routes. Under section 10(1) and (2), you can opt if you are mainly a supplier of goods. Under section 10(2A), a person who is not eligible under (1) and (2), such as a service provider, may opt at a rate of up to 3%. Both routes share a ₹50 lakh base limit and similar bars, such as no inter-State outward supplies.

The option lapses from the day your aggregate turnover in a financial year exceeds the limit. If an officer finds you opted despite being ineligible, you face tax and a penalty, with sections 73, 74 or 74A applying.

Key rules to remember

Turnover limit (section 10(1) and 10(2A))
Aggregate turnover in preceding financial year ≤ ₹50 lakh
The Government may notify a higher limit under section 10(1), but not above ₹1.5 crore.
Maximum rate under section 10(1)
Manufacturer: up to 1%; supplies under para 6(b) of Schedule II: up to 2.5%; other suppliers: up to 0.5% of turnover in State or Union territory
These are caps in the Act. The actual rate is prescribed in the rules. Para 6(b) of Schedule II covers supply of food or drink as part of a service.
Maximum rate under section 10(2A)
Up to 3% of turnover in State or Union territory
For a person not eligible under section 10(1) and (2), subject to its own conditions.
Services allowance (second proviso to section 10(1))
Services value ≤ higher of (10% of preceding-year turnover in the State or UT) or ₹5,00,000
Covers services other than para 6(b) of Schedule II. Interest or discount on deposits, loans or advances is ignored in this test.
Key bars under section 10(2)
No services (save as allowed); no non-taxable supplies; no inter-State outward supplies; no supply through e-commerce operator liable for TCS under section 52; not a notified manufacturer; not a casual or non-resident taxable person
Same PAN rule: all registered persons with the same PAN must opt together.
Effect of composition (section 10(4))
No tax collected from recipient; no input tax credit
Option lapses from the day aggregate turnover exceeds the limit (section 10(3)).

How to solve Composition Levy and Related Provisions questions

For any question on composition levy, move from eligibility to rate to consequences. Do not jump to the tax figure first.

  1. 1Note the type of person: manufacturer, trader, restaurant, or service provider.
  2. 2Check the preceding year's aggregate turnover against ₹50 lakh, or the notified higher limit if the question gives one.
  3. 3Test each bar in section 10(2) or 10(2A): inter-State outward supplies, non-taxable supplies, e-commerce supplies under section 52, casual or non-resident status, notified manufacturer.
  4. 4Apply the same-PAN proviso: if the person has other registrations on the same PAN, all must opt.
  5. 5For services, apply the second proviso: higher of 10% of turnover or ₹5 lakh.
  6. 6Pick the rate cap or the rate given, and apply it to turnover in the State or Union territory.
  7. 7State the consequences: no tax collected from customers, no input tax credit, and lapse if turnover exceeds the limit.
  8. 8Write a one-line conclusion that says eligible or not, with the reason.

Quickest way: Four-gate check

When to use it: For MCQs and short eligibility questions where you must decide quickly if a person can opt.

  1. Gate 1: Is turnover within ₹50 lakh (or notified limit)?
  2. Gate 2: Any inter-State outward supply or e-commerce supply under section 52? If yes, not eligible.
  3. Gate 3: Any non-taxable supply, casual or non-resident status, or other registration on the same PAN not opting? If yes, not eligible.
  4. Gate 4: Is the person mostly in services? Then only the service allowance or section 10(2A) applies.
  5. If all gates pass, apply the rate cap to turnover and remember there is no ITC.

Common mistakes in Composition Levy and Related Provisions

  • Saying a composition dealer can charge GST on invoices and still claim ITC.

    Students confuse composition with a lower rate under normal levy.

    Fix: Remember section 10(4): no tax collected from the recipient and no input tax credit.

  • Using current-year turnover for the entry test.

    The word turnover is read loosely.

    Fix: Eligibility to opt is tested on aggregate turnover in the preceding financial year. Lapse is tested on the current year under section 10(3).

  • Treating the rates as fixed numbers in the Act.

    Rate caps look like rates.

    Fix: The Act says the rate is prescribed but not exceeding 1%, 2.5% or 0.5%. Use the rate given in the question, otherwise state the cap.

  • Allowing an inter-State seller to opt.

    Students focus on turnover alone.

    Fix: Inter-State outward supply bars the option under section 10(2)(c) and 10(2A)(b), whatever the turnover.

  • Ignoring the same-PAN proviso.

    It sits at the end of the section.

    Fix: If a person has several registrations on one PAN, all must opt, or none is eligible.

  • Applying the ₹5 lakh services allowance as a cap on total services.

    Students forget it is the higher of 10% or ₹5 lakh.

    Fix: Compute both and take the higher figure.

Worked examples

Example 1

Ramesh Traders, Pune, a trader of goods, had aggregate turnover of ₹42,00,000 in the preceding financial year. All his supplies are intra-State and taxable. Current year turnover in the State is ₹46,00,000. Assuming a rate of 0.5%, can he opt for composition and what is his tax?

Show the solution
  1. Preceding-year turnover ₹42,00,000 is not more than ₹50 lakh, so the limit test is met.
  2. All supplies are intra-State and taxable, he is a trader and no bar applies.
  3. He is not a casual or non-resident taxable person, and no other registration on the same PAN is stated.
  4. Tax = 0.5% × ₹46,00,000 = ₹23,000.
  5. He cannot collect tax from customers or claim ITC.

Answer: Ramesh is eligible. Tax payable is ₹23,000, with no tax collected from customers and no input tax credit.

Example 2

Sundaram Foods, a manufacturer in Chennai, had preceding-year turnover of ₹38,00,000 and sells only within Tamil Nadu. It wants to also provide catering services (other than para 6(b) of Schedule II) worth ₹4,20,000 this year. Is it within the services allowance?

Show the solution
  1. 10% of preceding-year turnover = 10% × ₹38,00,000 = ₹3,80,000.
  2. The alternative figure is ₹5,00,000.
  3. The allowance is the higher of the two, so ₹5,00,000.
  4. Services of ₹4,20,000 are less than ₹5,00,000.

Answer: Yes. The allowed limit is ₹5,00,000, and services of ₹4,20,000 are within it, so composition under section 10(1) is not lost on this ground.

Exam tips

  • Write the section number: 10(1) for goods, 10(2) for conditions, 10(2A) for service providers, 10(3) for lapse, 10(4) for effect.
  • In MCQs, look for the trap: inter-State supply, e-commerce supply or preceding-year turnover.
  • In written answers, list conditions as short numbered points and then apply them to the facts.
  • Show the rate used. If the question gives no rate, say the cap is stated and the actual rate is as prescribed.
  • Link the answer to section 9(1): composition replaces that tax, but section 9(3) and 9(4) reverse charge still applies.

Practice questions from Levy and Collection of CGST and IGST

Composition Levy and Related Provisions 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 and Related Provisions: frequently asked questions

What is the turnover limit for composition under GST?

Under section 10(1), the preceding-year aggregate turnover must not exceed ₹50 lakh. The Government may notify a higher limit, not above ₹1.5 crore. Section 10(2A) also uses ₹50 lakh.

What is the difference between regular and composition scheme?

Under the regular scheme you charge GST on invoices and claim ITC. Under composition you pay a small percentage of turnover, collect no tax from the recipient and get no ITC. Composition is open only to eligible small taxpayers.

What are the composition rate caps for manufacturers and traders?

Section 10(1) caps the rate at 1% for manufacturers, 2.5% for para 6(b) of Schedule II supplies, and 0.5% for other suppliers. The actual rate is prescribed. Section 10(2A) allows up to 3%.

When does the composition option lapse?

It lapses from the day your aggregate turnover during a financial year exceeds the limit. After that you must follow normal levy and collection.

What happens if someone opts without being eligible?

The proper officer can determine tax under section 73, 74 or 74A, and the person is liable to a penalty in addition to tax.