A business doing ₹80 lakh a year files roughly the same number of GST returns as one doing ₹80 crore. That imbalance is the reason the composition scheme exists.

Section 10 of the CGST Act offers small taxpayers a trade: pay a flat percentage of turnover instead of charging GST at slab rates on every invoice, and in exchange give up input tax credit and accept real restrictions on the business you may do.

Who qualifies

The eligibility limits, tested on aggregate turnover of the preceding financial year:

• Manufacturers, traders of goods, and restaurants not serving alcohol, in normal category States: ₹1.5 crore

• The same categories in Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand: ₹75 lakh

• Service providers and mixed suppliers under Section 10(2A): ₹50 lakh

Turnover is computed PAN-wise on an all-India basis. And note the proviso to Section 10(2): where more than one registration exists on the same PAN, all of them must opt for composition. You cannot run one branch under composition and another under the regular scheme.

The rates

• Manufacturer: 1% (0.5% CGST + 0.5% SGST) of turnover in the State

• Trader: 1% (0.5% + 0.5%) of turnover of taxable supplies of goods in the State

• Restaurant not serving alcohol: 5% (2.5% + 2.5%) of turnover in the State

• Service provider under Section 10(2A): 6% (3% + 3%) of turnover in the State

Note the trader's base carefully: taxable supplies of goods. Exempt goods turnover does not attract the 1%, even though it counted towards your eligibility limit.

The tax is paid out of the dealer's own pocket. It cannot be collected from the customer.

What you give up

A composition dealer cannot collect GST from customers. Cannot claim input tax credit. Cannot make inter-State outward supplies of goods. Cannot supply goods that are outside GST, such as alcoholic liquor for human consumption or petrol. Cannot supply through an e-commerce operator required to collect TCS. Cannot manufacture notified goods — ice cream and other edible ice, pan masala, tobacco and tobacco substitutes, aerated water, fly ash bricks, building bricks and roofing tiles.

He must issue a bill of supply rather than a tax invoice, carrying the words "composition taxable person, not eligible to collect tax on supplies". He must display "composition taxable person" on the signboard at every place of business. And he remains fully liable to pay tax under reverse charge at normal rates — composition gives no shelter there.

The inter-State restriction deserves emphasis. It applies to outward supplies of goods. A composition dealer may purchase from outside the State freely; he simply cannot sell outside it. For a business with any ambition to expand beyond its own State, that is a ceiling, not a concession.

The small service allowance

A goods dealer under composition is not completely barred from services. The second proviso to Section 10(1) permits supply of services up to 10% of turnover in the State in the preceding financial year, or ₹5 lakh, whichever is higher.

A Kolkata trader with ₹90 lakh turnover last year may supply up to ₹9 lakh of services this year and remain in the scheme. A dealer whose last year's turnover was ₹30 lakh gets the ₹5 lakh floor, not ₹3 lakh — the proviso says whichever is higher.

Compliance

• CMP-02: opting in, for an existing taxpayer — before 31 March of the preceding financial year

• ITC-03: reversal of input tax credit on stock when entering the scheme — within 60 days of commencement of the financial year

• CMP-08: quarterly statement-cum-challan — by the 18th of the month following the quarter

• GSTR-4: annual return — by 30 June following the financial year

Five filings a year against roughly twenty-five under the regular regime. In practice this, and not the rate, is the real attraction for most who opt in.

Late filing still bites. CMP-08 filed late attracts a fee of ₹50 per day, ₹20 per day for a nil statement, subject to cap, plus 18% annual interest on unpaid tax.

Is it actually cheaper?

Not always, and the arithmetic is not the point.

A trader paying 1% on turnover forfeits input tax credit on everything he buys, and cannot pass credit on to his buyers. To a registered business customer, a composition supplier is simply a more expensive supplier, because the GST embedded in that price is a dead cost rather than a recoverable credit.

The scheme therefore suits businesses selling to end consumers with low value addition — a retail kirana, a local restaurant, a neighbourhood hardware shop. For a business supplying other registered businesses, composition is frequently a commercial handicap dressed up as a tax saving. You save on compliance and lose your customers.

Decide on the basis of who your customers are, not on the basis of your turnover.

Tomorrow, in Part 5 — the finale: Your running turnover hits ₹1.5 crore on a Tuesday afternoon. Not at year-end. Not at quarter-end. That Tuesday. The composition option lapses that same day, a seven-day clock starts, and a thirty-day clock starts after it — and if you miss the second one, a credit you were entitled to is gone permanently. We close the series with the two moments that cost businesses the most: crossing the composition limit, and crossing the registration limit for the very first time.