Composition Scheme vs Regular Scheme under GST: Which One is Right for Your Business?

Introduction

GST registration opens up two major pathways for businesses in India: the Composition Scheme and the Regular Scheme. Choosing the right one is crucial for compliance, tax burden, and operational flexibility. In this article, we break down both options in simple terms to help you make an informed decision, especially if you are a small business, trader, or restaurant owner.

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1. What is the Composition Scheme?

The Composition Scheme is a simplified GST scheme designed for small taxpayers to reduce compliance burden. It allows eligible businesses to pay GST at a fixed percentage of their turnover and file fewer returns.

Eligibility Criteria:

Annual turnover up to Rs. 1.5 crore (Rs. 75 lakhs in some special category states).

Only intra-state sales allowed.

Cannot supply goods through e-commerce platforms.

Not available for service providers (except for restaurants and certain notified services).

Tax Rates under Composition Scheme:

* Traders: 1% (0.5% CGST + 0.5% SGST)

* Manufacturers: 1%

* Restaurants: 5% (2.5% CGST + 2.5% SGST)

Key Features:

* Cannot collect GST from customers.

* Cannot claim Input Tax Credit (ITC).

* Fewer returns: CMP-08 (quarterly), GSTR-4 (annual).

Example:

A small grocery store with an annual turnover of Rs. 40 lakhs can opt for the composition scheme and pay just 1% GST (Rs. 40,000 annually), with minimal compliance obligations.

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2. What is the Regular Scheme?

The Regular Scheme is the default option under GST. It requires standard compliance but allows full input tax credit and wider business scope.

Who should opt for it:

* Businesses with turnover above Rs. 1.5 crore.

* E-commerce sellers, interstate traders.

* Service providers and businesses requiring ITC.

Features:

* Charge GST as per applicable rates (5%, 12%, 18%, or 28%).

* Can claim ITC on purchases.

* Must file GSTR-1 and GSTR-3B (monthly or quarterly).

* Can make inter-state and online sales.

Example:

A clothing brand selling products across India through Flipkart and Amazon must opt for the Regular Scheme to meet GST compliance and claim input tax credit on purchases.

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3. Why Choose Composition Scheme Despite Losing ITC?

Many small businesses still choose the Composition Scheme due to:

* Simpler compliance and reduced paperwork.

* No need for detailed invoice matching or monthly filings.

* Customers are mostly end-consumers who don’t claim ITC anyway.

* Input purchases may have negligible GST (e.g., perishable goods).

**Practical Scenario:**

A local salon buying basic beauty products with little or no GST from nearby suppliers can avoid ITC complexities by paying 1% tax on total turnover.

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4. Common Use Case: Restaurants

Restaurants are one of the biggest users of the Composition Scheme.

* Small local eateries prefer fixed 5% GST and minimal returns.

* Their customers don’t need GST invoices.

* Inputs are usually fresh items with minimal input tax.

Note: Even under the Regular Scheme, restaurants can opt for 5% GST (without ITC). However, only Regular Scheme allows them to operate on delivery platforms like Swiggy or Zomato and expand interstate.

Example:

A standalone dosa shop serving local customers within a city with Rs. 30 lakhs annual turnover can opt for the Composition Scheme for simplicity. A chain with delivery operations must use the Regular Scheme.

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5. Key Differences at a Glance

| Feature | Composition Scheme | Regular Scheme |

| GST Rate | Fixed (1% or 5%) | As per slabs (5% to 28%) |

| ITC Allowed | No | Yes |

| Invoice | Bill of supply | Tax invoice with GSTIN |

| Return Filing | CMP-08 & GSTR-4 | GSTR-1, GSTR-3B, etc. |

| E-commerce | Not Allowed | Allowed |

| Interstate Sales | Not Allowed | Allowed |

| Who Should Choose | Small local businesses | Medium/large, scaling businesses |

6. Frequently Asked Questions (FAQs)

Q1. Can I switch from Composition to Regular Scheme later?

Yes. You can switch anytime by filing the appropriate form on the GST portal.

Q2. Can I claim ITC if I move from Composition to Regular Scheme?

Yes, you can claim input on stock held on the date of switching if proper documents are available.

Q3. Can I sell online under Composition Scheme?

No. Composition dealers are not allowed to sell goods via e-commerce platforms.

Q4. Is there a penalty for wrong scheme selection?

Yes. If you wrongly opt for the Composition Scheme when ineligible, your registration can be canceled, and penalties may apply.

Q5. Which scheme is better for service providers?

Most service providers must use the Regular Scheme unless they fall under notified categories (like restaurant services).

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7. Final Thoughts

Choosing between Composition and Regular GST schemes is a balance between simplicity and flexibility. If your business is small, local, and you don’t need ITC, the Composition Scheme offers peace of mind. For growing or e-commerce businesses, the Regular Scheme provides better scope and credit benefits.

Still confused Reach out to Stox n Tax for personalized GST registration and compliance support.

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Need Help ?

We at Stox n Tax help businesses make the right tax choices. Contact us today for a free consultation on GST, Income Tax, and more.