Imagine you run a small kirana store in Delhi with annual sales of ₹90 lakhs. Under normal GST, you'd file monthly returns, maintain invoice-level records, and reconcile Input Tax Credit (ITC) every month — a compliance nightmare for a small business owner. Section 10 of the CGST Act, 2017 solves this through the Composition Levy — a simplified scheme where eligible small businesses pay GST at a flat rate on their turnover, skip the monthly filing grind, and avoid the ITC maze entirely.
Who can opt in? A registered person whose aggregate turnover in the preceding financial year did not exceed ₹50 lakhs (enhanced by Government notification to ₹1.5 crores for most states — use this in exams) can opt for composition. The rates apply on turnover in the State/UT (not all-India turnover): Manufacturers pay 1%, restaurant services (food/drink for consumption — Schedule II, Para 6(b)) pay 2.5%, and other suppliers (traders) pay 0.5%. There is also a separate window under sub-section (2A) for pure service providers ineligible under the main scheme — they pay up to 3% of State/UT turnover, same ₹50 lakh preceding-year threshold. Six categories cannot opt: those making inter-State outward supplies of goods, suppliers through e-commerce operators collecting TCS under Section 52, manufacturers of notified goods, casual or non-resident taxable persons, and those supplying non-taxable goods. Critical add-on: if two registrations share the same PAN (e.g., Mr. Sharma is registered in both Delhi and Haryana), both must opt in together — partial adoption is not allowed.
Composition dealers can supply services up to 10% of their preceding year's State/UT turnover OR ₹5 lakhs — whichever is higher. Beyond that, the scheme lapses. Two non-negotiable trade-offs: you cannot collect GST from customers (you absorb the tax yourself), and you cannot claim any ITC. The scheme also lapses the moment turnover crosses the limit during the year — not at year-end, but from that very day. Misuse attracts penalty under Section 73 or 74. This section is a very frequently tested 4–6 mark topic — eligibility conditions, applicable rates, and practical scenarios are all fair game.
📊 Worked example
Example 1 — Trader opting for composition
Ms. Iyer runs a retail textile shop in Tamil Nadu. Her aggregate turnover in FY 2024-25 was ₹90,00,000. In FY 2025-26, her turnover in Tamil Nadu is ₹1,05,00,000. Calculate her composition tax liability.
Step 1 — Check eligibility:
Preceding year turnover = ₹90,00,000 < ₹1,50,00,000 (enhanced notification limit) ✓
Category = trader (other supplier) → Rate = 0.5%
Step 2 — Calculate tax:
Composition tax = 0.5% × ₹1,05,00,000
= ₹52,500
Ms. Iyer cannot show this ₹52,500 on her customer's bill — she pays it from her own pocket. No ITC can be claimed.
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Example 2 — Service supply limit breach
Mr. Verma is a composition dealer (manufacturer) in Maharashtra. His turnover in Maharashtra in FY 2024-25 was ₹80,00,000. In FY 2025-26, he sells goods worth ₹85,00,000 and also provides repair services worth ₹9,50,000. Can he remain in composition?
Step 1 — Maximum services permitted:
10% of preceding year's State turnover = 10% × ₹80,00,000 = ₹8,00,000
OR ₹5,00,000 — whichever is higher = ₹8,00,000
Step 2 — Compare with actual services supplied:
Actual services = ₹9,50,000 > ₹8,00,000 ✗
Conclusion: Mr. Verma has breached the service supply limit. His composition option lapses from the day services crossed ₹8,00,000. He must register under the regular scheme from that date and pay normal GST going forward.
⚠️ Common exam mistakes
- Don't use ₹50 lakhs as the eligibility threshold in your answers. The Government has enhanced this to ₹1.5 crores by notification for most states (₹75 lakhs for special category states). Always use the enhanced limit unless the question explicitly says to apply the bare Act limit.
- Don't calculate composition tax on total all-India turnover. The rates apply only to turnover in the State or Union territory — inter-State supplies disqualify you from the scheme altogether, so they never form part of the base.
- Don't show GST as a separate charge on the customer's invoice. Composition dealers cannot collect tax from recipients — the dealer bears it from their own pocket. Showing '0.5% GST' on the buyer's bill is a legal violation.
- Don't assume any ITC is available under the composition scheme. It is a complete bar — zero ITC, no exceptions. Students sometimes think ITC flows in at a lower rate; it does not flow in at all.
- Don't forget the same-PAN rule. If the same person has GST registrations in two different states, both registrations must opt for composition together. One cannot stay regular while the other opts in — the examiner loves testing this condition.
📖 Bare Act text — Section 10, CGST Act 2017
(click to expand)
(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 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 in State or turnover in Union territory in case of other suppliers,
subject to such conditions and restrictions as may be prescribed:
Provided that the Government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding [one crore and fifty lakh rupees], as may be recommended by the Council:
[Provided further that a person who opts to pay tax under clause (a) or clause (b) or clause (c) may supply services (other than those referred to in clause (b) of paragraph 6 of Schedule II), of value not exceeding ten per cent. of turnover in a State or Union territory in the preceding financial year or five lakh rupees, whichever is higher].
[Explanation.––For the purposes of second proviso, the value of exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account for determining the value of turnover in a State or Union territory].
(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 which are not leviable to tax under this Act;
(c) he is not engaged in making any inter-State outward supplies of goods;
(d) he is not engaged in making any supply of goods 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:]
Provided that where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.
[(2A) 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, not eligible to opt to pay tax under sub-section (1) and sub-section (2), 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 three per cent. of the turnover in State or turnover in Union territory, if he is not––
(a) engaged in making any supply of goods or services which are not leviable to tax under this Act;
(b) engaged in making any inter-State outward supplies of goods or services;
(c) 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;
(d) a manufacturer of such goods or supplier of such services as may be notified by the Government on the recommendations of the Council; and
(e) a casual taxable person or a non-resident taxable person:
Provided that where more than one registered person are having the same Permanent Account Number issued under the Income-tax Act, 1961, the registered person shall not be eligible to opt for the scheme under this sub-section unless all such registered persons opt to pay tax under this sub-section.]
(3) The option availed of by a registered person under sub-section (1) [or sub-section (2A), as the case may be,] shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1) [or sub-section (2A), as the case may be.]
(4) A taxable person to whom the provisions of sub-section (1) [or, as the case may be, sub-section (2A)] apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) [or sub-section (2A), as the case may be,] despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.
[Explanation 1.––For the purposes of computing aggregate turnover of a person for determining his eligibility to pay tax under this section, the expression ―aggregate turnover‖ shall include the value of supplies made by such person from the 1st day of April of a financial year up to the date when he becomes liable for registration under this Act, but shall not include the value of exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.
Explanation 2.––For the purposes of determining the tax payable by a person under this section, the expression ―turnover in State or turnover in Union territory‖ shall not include the value of following supplies, namely:––
(i) supplies from the first day of April of a financial year up to the date when such person becomes liable for registration under this Act; and
(ii) exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.]
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