Goods and Services Tax (GST) and Corporate Tax Planning · Supply under GST

Composition Levy under Section 10 of the CGST Act

Updated 11 October 2026 · Fact-checked

Composition levy under section 10 lets a small registered person pay tax at a low flat percentage of turnover instead of normal GST. You must have aggregate turnover up to the limit in the preceding year and meet the eligibility conditions. You cannot collect tax or claim input tax credit.

Understand Composition Levy

Normal GST needs invoice-wise tax, credit claims and detailed returns. For small traders and manufacturers this is heavy. Section 10 offers a simpler option: pay a small percentage of turnover, and skip tax collection and credit.

It is an option, not a compulsion. A registered person whose aggregate turnover in the preceding financial year did not exceed ₹50 lakh may opt in. The Government may, by notification on the Council's recommendation, raise this limit, but not beyond ₹1.5 crore.

The tax is a flat rate in lieu of the tax under section 9(1). The Act caps the rate: not more than 1% of turnover in State or Union territory for a manufacturer; 2.5% for persons making supplies referred to in clause (b) of paragraph 6 of Schedule II (supply of food or drink as part of a service); and 0.5% for other suppliers. The actual rates are prescribed in the rules, so say that the rate is 'not exceeding' these caps unless the question gives the rate.

There is a second route in section 10(2A). If a person is not eligible under sub-sections (1) and (2), for example a service provider, test section 10(2A). It allows tax up to 3% of turnover in the State or Union territory, if aggregate turnover in the preceding year did not exceed ₹50 lakh and the person meets the conditions listed in that sub-section. These conditions are similar to those in section 10(2) but not identical, so check them separately.

The price of simplicity: the composition person cannot charge tax to the buyer and cannot take input tax credit. The option also lapses from the day aggregate turnover in a year exceeds the limit.

Key rules to remember

Turnover limit (section 10(1)): Aggregate turnover in preceding FY ≤ ₹50,00,000; Government may notify a higher limit, not exceeding ₹1,50,00,000, on the Council's recommendation.
Maximum rate caps (section 10(1)): Manufacturer ≤ 1%; Schedule II para 6(b) suppliers ≤ 2.5%; other suppliers ≤ 0.5% of turnover in State or Union territory; Actual rate is as prescribed. Rate applies to turnover in the State or Union territory.
Section 10(2A) option: Tax ≤ 3% of turnover in State or Union territory; For a person not eligible under sub-sections (1) and (2), for example a service provider. Aggregate turnover in the preceding year must not exceed ₹50 lakh, and the conditions listed in section 10(2A) must be met. They are similar to section 10(2) but not identical.
Services allowance (second proviso to section 10(1)): Services value ≤ higher of 10% of preceding-year turnover in the State or Union territory, or ₹5,00,000; Excludes services under Schedule II para 6(b). Interest or discount on deposits, loans or advances (exempt) is not counted.
Eligibility under section 10(2): No services (save the allowance); no non-taxable supplies; no inter-State outward supplies; no supply through an e-commerce operator liable to collect TCS under section 52; not a notified manufacturer; not a casual or non-resident taxable person; Same PAN rule: all registered persons with that PAN must opt.
Effects (section 10(3), (4)): Option lapses when turnover exceeds limit; no tax collected; no ITC; Lapse is from the day turnover exceeds the limit.

How to solve Composition Levy questions

Use this order for any question on composition levy, whether it is a case study or a theory note.

1Identify the person: registered, and whether a manufacturer, restaurant-type supplier, trader or service provider.
2Check the turnover test: aggregate turnover in the preceding financial year against ₹50 lakh (or the notified higher limit). Apply Explanation 1 if the person became liable mid-year.
3Run the section 10(2) conditions one by one: services, non-taxable supplies, inter-State outward supplies, e-commerce operator supplies under section 52, notified manufacturers, casual or non-resident taxable person.
4Check the PAN proviso: if the same PAN has other registrations, all must opt.
5If the person is not eligible under section 10(1) and (2) (for example a service provider), test the section 10(2A) route against its own conditions, which are similar to section 10(2) but not identical.
6State the rate cap that fits the supplier type, then compute tax on turnover in the State or Union territory, excluding items per Explanation 2.
7State consequences: no tax collection, no ITC, lapse on crossing the limit, and penalty with sections 73, 74 or 74A if the person was ineligible.
8Conclude clearly: eligible or not, and tax payable.

Quickest way: Five-check eligibility filter

When to use it: Use it for short case questions where you must decide eligibility in a few lines.

Turnover check: preceding-year aggregate turnover within limit?
Supply check: any inter-State outward supply or non-taxable supply? Either one kills eligibility.
Channel check: any supply through an e-commerce operator who collects tax under section 52?
Status check: casual or non-resident taxable person, or notified manufacturer?
PAN check: do all registrations under the PAN opt in? Then write the conclusion and mention no ITC.

Common mistakes in Composition Levy

Testing the limit against current-year turnover for eligibility.
Students confuse eligibility with lapse.
Fix: Eligibility uses the preceding financial year. Lapse under section 10(3) uses turnover during the current year.
Saying a composition person can never supply any services.
Section 10(2)(a) is remembered, the second proviso is forgotten.
Fix: Section 10(2)(a) says 'save as provided in sub-section (1)'. Services up to the higher of 10% of turnover or ₹5 lakh are allowed, other than Schedule II para 6(b) services.
Quoting the rate as a fixed percentage from the Act.
The Act gives ceilings and the rules prescribe the actual rate.
Fix: Write 'rate as prescribed, not exceeding 1%, 2.5% or 0.5%' unless the question states the rate.
Allowing ITC or showing tax on the invoice.
Students treat composition as a lower rate of normal GST.
Fix: Section 10(4): no collection of tax from the recipient and no input tax credit.
Ignoring the same-PAN proviso.
Case facts about a second branch or firm look unrelated.
Fix: If one registration under the PAN stays in normal scheme, none of them can opt for composition.
Forgetting consequences of wrong opting.
Focus stays on eligibility only.
Fix: Under section 10(5), an ineligible person is liable to tax plus penalty, with sections 73, 74 or 74A applying.

Worked examples

Example 1

Ravi Traders, Jaipur, is a registered trader dealing in taxable goods only. Aggregate turnover in the preceding year was ₹42 lakh. It sells only within Rajasthan and not through any e-commerce operator. Can it opt for composition under section 10(1)? Ravi also holds no other registration on the PAN.

Show the solution

Turnover: ₹42 lakh does not exceed ₹50 lakh, so the limit is met.
Section 10(2) conditions: no services, no non-taxable supply, no inter-State outward supply, no e-commerce supply under section 52 are involved.
Status: a regular registered person, not casual or non-resident, and the PAN has no other registration.
Rate: a trader is an 'other supplier', so the tax is at the prescribed rate not exceeding 0.5% of turnover in the State.
Effect: Ravi cannot collect tax or claim ITC.

Answer: Yes, Ravi Traders may opt under section 10(1). It pays tax at the prescribed rate (cap 0.5%) on Rajasthan turnover, with no tax collection and no ITC.

Example 2

Meera Foods, a manufacturer in Pune, had aggregate turnover of ₹40 lakh in the preceding year. In the current year she makes one outward supply of goods to a registered buyer in Gujarat. Is she eligible to pay tax under composition?

Show the solution

Turnover test is met: ₹40 lakh is within ₹50 lakh.
Section 10(2)(c) requires that the person is not engaged in making any inter-State outward supplies of goods or services.
Meera makes an inter-State outward supply to Gujarat, so she breaches the section 10(2)(c) condition. She is therefore not eligible to pay tax under composition.
Do not use section 10(3) here. The lapse in section 10(3) is triggered only when aggregate turnover exceeds the limit, and her turnover has not. Her problem is failure of an eligibility condition.
If she still pays tax under composition despite being ineligible, section 10(5) applies when the proper officer has reason to believe this. She is then liable to a penalty in addition to any tax payable, and section 73, 74 or 74A applies for determining tax and penalty.

Answer: Meera is not eligible to pay tax under composition, because even a single inter-State outward supply breaches section 10(2)(c). Section 10(3) lapse does not apply, since her turnover is within the limit. If she continues to pay tax under composition despite being ineligible, section 10(5) makes her liable to tax and a penalty, determined under section 73, 74 or 74A.

Exam tips

Always cite section 10(1) for the limit and rate caps, 10(2) for conditions, 10(2A) for the 3% route, 10(3) for lapse and 10(4) for no ITC.
Use the provision-facts-conclusion method. Write each condition against the facts rather than listing them blindly.
Keep the limit-of-turnover point exact: preceding year for eligibility, current year for lapse.
Do not state an actual composition rate as law unless the question gives it. Say 'as prescribed, not exceeding'.
Note the link with section 37: a person paying tax under section 10 is excluded from furnishing outward supply details under that section.

Practice questions from Supply under GST

Composition Levy 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: frequently asked questions

Who cannot opt for the composition scheme under GST?

A person making inter-State outward supplies, supplying non-taxable goods or services, supplying through an e-commerce operator who collects tax under section 52, a casual or non-resident taxable person, or a notified manufacturer cannot opt under section 10(1). A person who mainly supplies services is also not eligible under sub-section (1). The second proviso only lets an otherwise eligible person make limited incidental supplies of services (other than Schedule II para 6(b) services). Such a service provider can check section 10(2A).

Can a composition dealer take input tax credit?

No. Section 10(4) says such a person shall not collect tax from the recipient and shall not be entitled to any input tax credit.

What is the turnover limit for composition?

Aggregate turnover in the preceding financial year must not exceed ₹50 lakh. The Government may notify a higher limit, but not more than ₹1.5 crore, on the Council's recommendation.

What happens when turnover crosses the limit during the year?

Under section 10(3) the option lapses from the day aggregate turnover during the financial year exceeds the limit. The person then comes under the normal levy from that day.