Composition Scheme for Goods – Section 10(1) & 10(2)
# Composition Levy – Section 10(1) & 10(2)
The composition scheme is a simplified GST scheme for small taxpayers. A registered person whose aggregate turnover is within the prescribed threshold can pay tax at flat rates on turnover without availing ITC and without collecting tax from customers.
## 1. Threshold (Aggregate Turnover in preceding FY)
₹1.5 crore — for most States.
₹75 lakh — for Special Category States (Manipur, Mizoram, Nagaland, Tripura — remember as 'MTNM Nahi', etc.).
### What is 'Aggregate Turnover'?
```
Aggregate TO = Taxable supplies + Exempt supplies + Exports + Inter-State supplies (of same PAN)
(all on All-India basis, on same PAN)
— Excludes inward supplies on which RCM is paid, CGST, SGST, IGST, Cess.
```
## 2. Rates of Tax under Section 10(1)
Category of Registered Person
Rate (CGST + SGST = Total)
Manufacturer (other than of notified goods)
0.5% + 0.5% = 1% of turnover in State
Restaurant service (food/drink for human consumption other than alcoholic liquor)
2.5% + 2.5% = 5% of turnover in State
Other suppliers (traders)
0.5% + 0.5% = **1% of taxable turnover in State**
## 3. Marginal Supply of Services Allowed
A composition supplier of goods can also supply services up to:
10% of turnover in the State/UT in the preceding FY, OR
₹5,00,000, whichever is higher.
Services in the form of interest/discount on deposits, loans or advances are excluded — they don't eat into this limit.
## 4. Persons NOT eligible for Composition Scheme [Sec 10(2)]
1. Suppliers engaged in supply of services other than restaurant services (subject to the marginal-services limit above).
2. Suppliers of non-taxable / exempt goods (e.g. alcohol for human consumption).
3. Persons making inter-State outward supplies.
4. Persons supplying goods/services through an Electronic Commerce Operator required to collect TCS u/s 52.
5. Casual Taxable Persons (CTP) and Non-Resident Taxable Persons (NRTP).
6. Manufacturers of notified goods — Ice-cream and other edible ice (whether or not containing cocoa), Pan masala, Tobacco and manufactured tobacco substitutes, Aerated waters, Fly-ash bricks, etc.
## 5. Key Conditions
The composition supplier must NOT collect tax from the recipient.
No ITC is available.
Must mention 'composition taxable person' on every notice/signboard at the principal place of business and on every bill of supply.
Must file quarterly statement CMP-08 and annual return GSTR-4.
Worked example
### Example 1
Q. Mr. A, a trader in Gujarat, had an aggregate turnover of ₹1.40 crore in FY 2024-25 (taxable supplies ₹1.10 crore, exempt supplies ₹30 lakh). All supplies are intra-State. Is he eligible for composition under Section 10(1) in FY 2025-26?\nA. Aggregate turnover ₹1.40 crore is below ₹1.5 crore and supplies are intra-State → eligible. Tax = 1% on taxable turnover (i.e. 1% × ₹1.10 crore = ₹1,10,000), since he is a trader.
### Example 2
Q. A restaurant in Manipur had aggregate turnover of ₹70 lakh in the preceding FY. Composition rate?\nA. Manipur is a Special Category State, threshold is ₹75 lakh → eligible. Restaurant rate = 5% on entire turnover.
### Example 3
Q. A manufacturer with turnover of ₹80 lakh wants to start supplying services worth ₹15 lakh in the current FY. Can he remain in composition?\nA. Marginal services limit = higher of (10% of ₹80 lakh = ₹8 lakh) or ₹5 lakh = ₹8 lakh. Services of ₹15 lakh exceed this — he will be ineligible to continue under the composition scheme.
⚠️ Common exam mistakes
Applying 1% on aggregate turnover instead of on taxable turnover for traders.
Forgetting that even one inter-State outward supply disqualifies the supplier from the composition scheme.
Treating ice-cream / pan masala / tobacco manufacturers as eligible — they are specifically barred.
Ignoring the 10% / ₹5 lakh marginal services limit; any breach of this limit knocks the dealer out of composition.
Collecting GST separately on the invoice while paying composition tax — composition dealers cannot collect tax.
Bare-Act text Section 10(1) & 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 in State or turnover in Union territory in case of other suppliers, subject to such conditions and restrictions as may be prescribed. [The threshold of fifty lakh has been notified at ₹1.5 crore (₹75 lakh for special category States) by Notification No. 14/2019-CT.] 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.