Composition Scheme under Section 10(2) - Eligibility and Tax Rates
# Composition Scheme under Section 10(2) of CGST Act
The Composition Scheme is a simplified tax compliance mechanism designed for small taxpayers. Instead of paying GST at standard rates with full compliance obligations, eligible persons can pay tax at a low fixed rate on their turnover.
## Eligibility - Aggregate Turnover Threshold
A registered person is eligible to opt for the composition scheme under Section 10(2) only if the aggregate turnover in the preceding financial year (PFY) does not exceed:
Rs. 1.5 crore - for most States/UTs (Normal States)
Rs. 75 lakh - for Special Category States (e.g., Manipur, Mizoram, Nagaland, Tripura, Meghalaya, Sikkim, Arunachal Pradesh, Uttarakhand)
## What is Aggregate Turnover?
Aggregate Turnover (computed on All-India PAN basis) includes:
Include
Exclude
All Taxable supplies (outward)
Inward supplies on which tax is paid under RCM
Exempt supplies
GST (CGST, SGST, IGST, UTGST, Cess)
Exports
Inter-State supplies
## Tax Rates under Section 10(1) read with Rule 7
Category of Registered Person
CGST
SGST
Total
Manufacturers (other than notified goods)
0.5%
0.5%
1% of turnover in State/UT
Restaurant Service (food/drink for human consumption, other than alcohol)
2.5%
2.5%
5% of turnover in State/UT
Other Suppliers (Traders)
0.5%
0.5%
1% of taxable turnover in State/UT
> Memory tip: Manufacturers and Traders = 1%; Restaurants = 5%. Note: For traders, tax is on TAXABLE turnover only (exempt turnover excluded), while for manufacturers/restaurants it is on TOTAL turnover in the State.
## Persons NOT Eligible for Composition Scheme [Section 10(2)]
A registered person cannot opt for composition if he is:
1. Supplier of services (other than restaurant services) — but limited services allowed up to a cap (10% of T/O of preceding FY or Rs. 5 lakh, whichever higher)
2. Engaged in supply of goods/services not leviable to GST (non-taxable supplies, e.g., petrol, alcohol)
3. Engaged in inter-State outward supplies
4. Supplying goods/services through an Electronic Commerce Operator (ECO) required to collect TCS under Section 52
5. A Casual Taxable Person (CTP) or Non-Resident Taxable Person (NRTP)
6. A manufacturer of notified goods — e.g., ice cream, pan masala, tobacco, aerated waters, fly-ash bricks, etc.
Worked example
### Example 1
Example 1 - Eligibility check:
Mr. A is a trader in Maharashtra. His aggregate turnover in FY 2024-25 was Rs. 1.2 crore. Can he opt for composition scheme in FY 2025-26?
Answer: Yes. Maharashtra is a normal State, so the threshold is Rs. 1.5 crore. Since Rs. 1.2 crore < Rs. 1.5 crore, Mr. A is eligible (provided other conditions of Section 10(2) are satisfied).
### Example 2
Example 2 - Tax computation for a trader:
Mr. B (trader in Gujarat) opted for composition. In a quarter, his turnover was: Taxable goods Rs. 10,00,000 + Exempt goods Rs. 2,00,000. Compute composition tax.
Answer: For other suppliers (traders), tax is 1% on TAXABLE turnover only.
Ms. C is a manufacturer (not of notified goods) in Sikkim. Her aggregate turnover in PFY was Rs. 60 lakh. In Q1, total turnover in Sikkim is Rs. 8,00,000 (including Rs. 1,00,000 exempt). Can she opt and compute tax.
Answer: Sikkim is a Special Category State; threshold is Rs. 75 lakh. Rs. 60 lakh < Rs. 75 lakh — eligible.
For manufacturers, tax @ 1% on TOTAL turnover in State = 1% × Rs. 8,00,000 = Rs. 8,000.
### Example 4
Example 4 - Ineligibility (notified goods):
Mr. D manufactures ice cream. His PFY turnover is Rs. 40 lakh. Can he opt for composition?
Answer: No. Manufacturers of notified goods (ice cream, pan masala, tobacco, aerated waters, etc.) are barred under Section 10(2)(e), regardless of turnover.
⚠️ Common exam mistakes
Confusing aggregate turnover (computed PAN-India for eligibility) with turnover in State (used for computing tax liability).
Including GST collected on outward supplies in aggregate turnover - GST is specifically EXCLUDED.
Forgetting that inward supplies on which RCM is paid are excluded from aggregate turnover.
Applying 1% on total turnover for traders - tax for traders is on TAXABLE turnover only; exempt turnover is excluded.
Confusing the threshold limits: Rs. 1.5 crore for normal states vs Rs. 75 lakh for special category states.
Treating ice cream/pan masala manufacturers as eligible - they are explicitly notified as ineligible.
Bare-Act text Section 10(1) and 10(2) · CGST Act, 2017 · click to expand
Section 10(1): Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9, a registered person, whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, may opt to pay, in lieu of the tax payable by him under sub-section (1) of section 9, an amount of tax calculated at such rate as may be prescribed, but not exceeding,— (a) one per cent. of the turnover in State or turnover in Union territory in case of a manufacturer, (b) two and a half per cent. of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and (c) half per cent. of the turnover of taxable supplies of goods and services in State or Union territory in case of other suppliers.
Section 10(2): The registered person shall be eligible to opt under sub-section (1), if— (a) save as provided in sub-section (1), he is not engaged in the supply of services; (b) he is not engaged in making any supply of goods or services which are not leviable to tax under this Act; (c) he is not engaged in making any inter-State outward supplies of goods or services; (d) he is not engaged in making any supply of goods or services through an electronic commerce operator who is required to collect tax at source under section 52; (e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council; and (f) he is neither a casual taxable person nor a non-resident taxable person.