Key takeaways
What this article covers, in order:
- So what is composition, really?
- Side by side
- Three businesses, three answers
- Ask yourself these before deciding
- How do you switch either way?
- Quick decision checklist
Somebody at the wholesale market told you composition is "only 1%, no headache". Your CA's junior said regular GST is better "for growth". Both are right, for different businesses. Composition suits you if you sell mostly to end consumers, buy mostly local, low-GST stock and want very little paperwork. Regular GST suits you if you sell to other businesses, pay a lot of GST on purchases, sell outside your state, or expect to grow quickly.
Let's work out which one you are.
So what is composition, really?
Under composition you pay GST as a small flat percentage of your turnover. You don't charge GST on your bills, and you don't claim credit on what you buy. Less work, but the GST you pay on purchases becomes a straight cost.
For FY 2026-27, the main rules look like this. Manufacturers, traders and restaurants can opt in if last year's aggregate turnover was up to ₹1.5 crore (₹75 lakh in certain special category states). Service providers have a separate scheme with a ₹50 lakh limit. The rates are typically 1% for traders and manufacturers, 5% for restaurants that don't serve alcohol, and 6% under the services scheme. Check the rate for your exact category on the GST portal before you plan around it.
You issue a bill of supply, not a tax invoice. You can't sell goods to customers in other states. You can sell goods through e-commerce platforms only within your own state, and only on the conditions the rules set. And instead of GSTR-1 and GSTR-3B, you pay tax quarterly through CMP-08 (by the 18th after each quarter) and file one annual GSTR-4 (for FY 2026-27, due by 30 Jun 2027).
A few businesses can't opt in at all, such as manufacturers of ice cream, pan masala and tobacco products, plus casual and non-resident taxable persons.
Side by side
| Composition scheme | Regular GST | |
|---|---|---|
| Who can opt in | Turnover up to ₹1.5 crore (goods, restaurants) or ₹50 lakh (services scheme); lower in some states | Anyone registered |
| Tax on sales | Flat % of turnover, paid from your margin | Rate per item (0%, 5%, 18%, 40%), collected from the customer |
| Credit on purchases | None | Yes, on eligible purchases |
| Bill you issue | Bill of supply | Tax invoice |
| Selling goods to other states | Not allowed | Allowed |
| Can your B2B buyer claim credit? | No | Yes |
| Returns | CMP-08 quarterly, GSTR-4 yearly | GSTR-1 and GSTR-3B (monthly or QRMP), GSTR-9 above ₹2 crore |
| Effort | Low | Moderate |
Three businesses, three answers
These are round-number illustrations, not advice for your specific case.
Suresh's kirana store in Nagpur
Sales of about ₹60 lakh a year, nearly all to families in the colony. Most of what he buys is staples on low or nil rates.
At 1%, composition costs Suresh roughly ₹60,000 a year out of his margin. Under regular GST he'd collect tax from customers and claim ITC, but nobody walking in for atta and soap needs a tax invoice, and he'd be filing GSTR-1 and GSTR-3B and juggling item rates. He has little ITC to lose.
Composition probably fits Suresh, if simplicity is what he values.
Farhan's furniture workshop in Hyderabad
About ₹1.2 crore of sales, mostly to interior designers and contractors who are GST-registered. He buys plywood, laminates and hardware, mostly at 18%.
Here's where composition hurts. Farhan would pay 1% on turnover and lose all the credit on 18% raw material. Worse, his designer clients couldn't claim credit on his bills, so a regular-GST competitor looks cheaper to them even at the same price.
Regular GST, clearly.
Neha, a consultant in Gurugram billing ₹40 lakh
Mostly to companies, a couple of them in other states.
The services composition scheme would cost her 6% of turnover with no credit at all. Her corporate clients want a proper tax invoice so they can claim the 18% back. Under regular GST, they can.
Regular GST again, and it isn't close.
Ask yourself these before deciding
Who buys from you? If a meaningful share of your customers are GST-registered businesses, composition makes you less attractive to them. That alone settles it for many.
How much GST do you pay when you buy? If your inputs carry 18% and your margins are thin, losing that credit can cost more than composition saves. Pull last year's purchase register and actually add it up.
Do you ship goods outside your state, or want to? Composition shuts that door for goods.
Are you close to ₹1.5 crore? If you cross the limit mid-year, you have to leave composition from that point, switch to tax invoices, start filing GSTR-1 and GSTR-3B, and work out ITC on your stock. Doing that in a rush, halfway through the year, is not fun.
And honestly, how scared are you of monthly returns? With decent software, regular GST compliance is a lot lighter than it was five years ago. For many owners the "headache" is mostly memory of 2017.
How do you switch either way?
To opt into composition for the next year, file CMP-02 on the GST portal before the financial year starts. For FY 2027-28 that means by 31 Mar 2027. You'll also file ITC-03 to reverse credit on stock you're holding.
To leave voluntarily, file CMP-04. You may then claim credit on stock held the day before you became a regular taxpayer, through ITC-01, subject to conditions.
If you've crossed the limit, you have to withdraw within the time allowed. Because each of these involves stock calculations and specific forms, get a CA to look over the switch, particularly if it's happening mid-year.
Quick decision checklist
- [ ] Last year's turnover was within the composition limit for my category and state
- [ ] Most customers are consumers, not GST-registered businesses
- [ ] I don't sell goods to other states
- [ ] I pay little GST on purchases, or my inputs are mostly exempt or low-rated
- [ ] I don't depend on selling outside my state through marketplaces
- [ ] I'm not expecting to cross the limit this year
All six ticked? Composition may well suit you. Missed two or more? You're probably better off on regular GST.
How HelloBooks helps
HelloBooks is built for regular GST taxpayers. On the Free plan you file GSTR-1 and GSTR-3B for one GSTIN directly to the GST portal from inside HelloBooks, reconcile purchases with GSTR-2B to see which credits you can actually claim, and keep invoices, bills and reports together. HelloBooks doesn't file CMP-08 or GSTR-4, so if you go with composition you'll file those on the GST portal yourself or through your CA. If you're moving from composition to regular GST, it gives you a clean place to start issuing tax invoices and tracking ITC. Plans are on the pricing page; you can also read how GSTR-2B reconciliation works and see the GST returns HelloBooks covers.
FAQs
Can a composition dealer issue a tax invoice?
No. You issue a bill of supply and can't charge GST to the customer, which is why business buyers can't claim credit on your bills.
Is composition always cheaper for a small business?
No. If you pay a lot of GST on purchases, losing that credit can cost more than the low rate saves. Compare it against last year's actual purchases.
Can I sell to a customer in another state under composition?
Not goods. Inter-state outward supply of goods isn't allowed under composition. Check the current rules if you supply services across states.
What if my turnover crosses ₹1.5 crore during the year?
You exit composition from the point you cross the limit and start working as a regular taxpayer: tax invoices, GSTR-1 and GSTR-3B.
When do I opt in for next year?
File CMP-02 before the year starts. For FY 2027-28, that's by 31 Mar 2027.
Does HelloBooks file GSTR-4 or CMP-08?
No. HelloBooks files GSTR-1 and GSTR-3B for regular taxpayers. Composition returns go through the GST portal directly or your CA.
Whichever way you go, decide it on your own numbers, not on what worked for the shop next door.
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