Tax Laws and Practice · Levy and Collection of GST

Composition Scheme under GST: Section 10 Explained

Updated 11 October 2026 · Fact-checked

The composition levy under Section 10 of the CGST Act lets a small registered person pay tax at a low flat percentage of turnover instead of regular GST. You solve questions by checking the turnover limit, then eligibility bars, then the rate, and finally the consequences: no tax collection and no input tax credit.

Understand Composition Levy under Section 10

The composition levy is an optional scheme for small taxpayers. Under regular GST, you charge tax on every supply, claim input tax credit and file detailed returns. Under composition, you pay a small percentage of your turnover in the State or Union territory, and the compliance load is lighter.

The trade-off is important. A composition taxpayer cannot collect tax from the buyer and cannot claim input tax credit. So the scheme suits a small seller with low input tax and mostly unregistered or end-consumer customers.

Section 10(1) allows the option to a registered person whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees. The Government may, on the Council's recommendation, raise this limit by notification, but not beyond one crore and fifty lakh rupees. The Act sets the ceiling; the notified limit and the exact rates come from the rules and notifications.

The Act fixes maximum rates on turnover in the State or Union territory: 1% for a manufacturer, 2.5% for persons making supplies referred to in clause (b) of paragraph 6 of Schedule II (restaurant and food supplies), and 0.5% for other suppliers. The actual rate is prescribed, but cannot exceed these.

Section 10(2A) adds a second route for service providers and others not eligible under sub-sections (1) and (2). They may pay up to 3% of turnover if their aggregate turnover in the preceding year did not exceed fifty lakh rupees and they meet the listed conditions.

Key rules to remember

Turnover limit for opting: Aggregate turnover in preceding financial year ≤ ₹50,00,000 (can be raised by notification up to ₹1,50,00,000); Section 10(1). The test is on the preceding financial year, not the current year.
Maximum rates under Section 10(1): Manufacturer: up to 1% | Supplies under Schedule II para 6(b): up to 2.5% | Other suppliers: up to 0.5%; Applied on turnover in State or turnover in Union territory. The actual rate is prescribed.
Maximum rate under Section 10(2A): Up to 3% of turnover in State or Union territory; For a person not eligible under sub-sections (1) and (2), with aggregate turnover up to ₹50 lakh in the preceding year.
Tax payable: Composition tax = Turnover in State or UT × Prescribed rate; Turnover excludes supplies made before liability for registration and exempt interest, discount on deposits, loans or advances (Explanation 2).
Services allowance: Services (other than Schedule II para 6(b)) ≤ higher of 10% of preceding-year State/UT turnover or ₹5,00,000; Second proviso to Section 10(1). Lets a composition dealer make some incidental services.
Lapse of option: Option lapses from the day aggregate turnover in a financial year exceeds the limit; Section 10(3).

How to solve Composition Levy under Section 10 questions

Use this order for any question on composition levy. It follows the structure of Section 10 and keeps your answer in provision, analysis, conclusion form.

1Identify the person: registered or not, one PAN or several, casual or non-resident taxable person, manufacturer, trader, restaurant or service provider.
2Test the turnover: compare aggregate turnover of the preceding financial year with ₹50 lakh (or the notified higher limit). Include the Explanation 1 inclusions and exclusions.
3Apply the eligibility bars in Section 10(2) or 10(2A): services, exempt or non-leviable supplies, inter-State outward supplies, supplies through an e-commerce operator collecting tax under Section 52, notified goods, and casual or non-resident status.
4Check the same-PAN proviso: if several registered persons share a PAN, all must opt, or none is eligible.
5Pick the rate cap from Section 10(1)(a), (b), (c) or 10(2A) and apply it to turnover in the State or Union territory, after the Explanation 2 exclusions.
6State the consequences under Section 10(4): no tax collected from the recipient and no input tax credit.
7Check lapse and penalty: the option lapses when turnover exceeds the limit (Section 10(3)); wrongful opting attracts tax and penalty under Section 10(5).
8Write a clear conclusion: eligible or not, tax amount, and effect.

Quickest way: Four-gate eligibility check

When to use it: Use for short 'can he opt?' questions where time is tight.

Gate 1: Preceding-year aggregate turnover within ₹50 lakh (or notified limit)?
Gate 2: Any inter-State outward supply, exempt or non-taxable supply, or e-commerce supply where tax is collected at source?
Gate 3: Casual or non-resident taxable person, or notified goods manufacturer?
Gate 4: Services (apart from the allowed limit and restaurant supplies) or different PANs not all opting?
If any gate fails, write 'not eligible' and name the clause. If all pass, apply the rate cap and state no ITC and no tax collection.

Common mistakes in Composition Levy under Section 10

Testing eligibility on current-year turnover.
Students assume the limit is checked as the year goes on.
Fix: Section 10(1) tests the preceding financial year. Current-year turnover matters only for lapse under Section 10(3).
Allowing a composition dealer to make inter-State outward supplies.
Students focus on turnover and forget the supply-type bars.
Fix: Section 10(2)(c) bars inter-State outward supplies. Memorise this with the other bars before attempting any case.
Letting the dealer collect tax and claim input tax credit.
Students treat composition like a lower rate of regular GST.
Fix: Section 10(4): no tax collection from the recipient and no ITC. It is a levy on turnover, not on value added.
Ignoring the same-PAN proviso.
The proviso is short and sits at the end of the sub-section.
Fix: If one PAN has several registrations, all of them must opt. If one stays regular, none of them can use the scheme.
Saying the option cancels at the end of the year when turnover crosses the limit.
Students link it to annual filing.
Fix: The option lapses from the very day aggregate turnover exceeds the limit during a financial year (Section 10(3)).
Applying the same rate to every taxpayer.
Students remember only one percentage.
Fix: Match the person to clause (a), (b) or (c) of Section 10(1), or to Section 10(2A), and state the cap for that clause.

Worked examples

Example 1

Ravi Traders, a registered trader of garments in Jaipur, had aggregate turnover of ₹42,00,000 in the preceding financial year. He makes only intra-State supplies of taxable goods. His turnover in Rajasthan in the current year is ₹30,00,000. Assuming the prescribed rate equals the cap for other suppliers, is he eligible for composition, and what is the tax?

Show the solution

Provision: Section 10(1) lets a registered person with preceding-year aggregate turnover up to ₹50 lakh opt for composition. A trader falls under clause (c), with a cap of 0.5% of turnover.
Turnover test: ₹42,00,000 does not exceed ₹50,00,000, so the limit is met.
Bars under Section 10(2): he supplies only goods, makes no inter-State outward supplies, and has no exempt or non-taxable supplies. No bar applies on the facts given.
Tax: 0.5% × ₹30,00,000 = ₹15,000.
Effect under Section 10(4): he cannot collect tax from customers and cannot claim input tax credit.

Answer: Ravi Traders is eligible. The composition tax is ₹15,000, with no tax collection from customers and no input tax credit.

Example 2

Meera Foods, a registered manufacturer in Pune, opted for composition. Its preceding-year aggregate turnover was ₹38,00,000. During the current year, it made an inter-State outward supply of goods worth ₹2,00,000 to a buyer in Goa. Discuss the position.

Show the solution

Provision: Section 10(2)(c) makes a person eligible to opt only if he is not engaged in making any inter-State outward supplies of goods or services.
Turnover test: ₹38,00,000 is within ₹50 lakh, so turnover is not the issue.
Analysis: The supply to Goa is an inter-State outward supply. The person is therefore engaged in an activity barred for composition.
Consequence: Meera Foods was not eligible while making such supplies. If the officer has reason to believe tax was paid under Section 10(1) despite ineligibility, Section 10(5) applies: tax is determinable under Section 73 or 74 (or 74A) and a penalty is also leviable.
Meera Foods should therefore move to regular GST and not rely on composition for this supply.

Answer: Meera Foods is not eligible for composition because of the inter-State outward supply under Section 10(2)(c). It faces tax and penalty under Section 10(5) for the period it wrongly paid under composition.

Exam tips

Write the section number: Section 10(1), 10(2), 10(2A), 10(3), 10(4) or 10(5) as relevant. ICSI answers score on the provision followed by analysis and conclusion.
In case-based questions, scan the facts for traps: inter-State supply, e-commerce sale, same PAN, casual taxable person, exempt supply. One of these usually decides the answer.
Always state the two consequences of composition: no tax collection from the recipient and no input tax credit.
When a question gives a rate, use it. When it does not, say 'not exceeding' the Act's cap and name the clause.
For lapse questions, name the exact day the limit is crossed and cite Section 10(3).

Practice questions from Levy and Collection 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

What is the turnover limit for the composition scheme under Section 10?

Under Section 10(1), a registered person whose aggregate turnover in the preceding financial year did not exceed ₹50 lakh may opt. The Government may raise this limit by notification, but not above ₹1 crore 50 lakh. The limit applicable to a particular case is as notified.

Who cannot opt for the composition scheme?

A person cannot opt if he makes inter-State outward supplies, supplies not leviable to tax, or supplies through an e-commerce operator who collects tax under Section 52. Casual taxable persons, non-resident taxable persons and manufacturers of notified goods are also barred. Persons sharing one PAN can opt only if all of them do.

What is the difference between composition and regular taxpayer GST?

A regular taxpayer collects tax from the recipient and claims input tax credit. A composition taxpayer pays a percentage of turnover, cannot collect tax from the recipient and cannot claim input tax credit. Composition suits small businesses with low input costs.

When does the composition option lapse?

It lapses from the day on which aggregate turnover during a financial year exceeds the applicable limit. This is stated in Section 10(3). The person then follows the regular scheme from that day.

Can a composition dealer supply services?

Generally not, but the second proviso to Section 10(1) allows services other than restaurant-type supplies of value up to the higher of 10% of the preceding-year turnover in the State or Union territory or ₹5 lakh. Section 10(2A) separately provides a route for service providers at up to 3%.