Composition Scheme 2026: Eligibility, Exit and Common Mistakes

The composition scheme lets eligible small businesses — typically traders, manufacturers, and restaurants (not serving alcohol) with turnover up to ₹1.5 crore — pay GST at a flat, low rate on turnover instead of the standard rate structure, and file quarterly instead of monthly returns. In exchange, composition taxpayers cannot claim input tax credit, cannot make interstate outward supplies, and cannot issue a tax invoice showing GST separately to customers.

The interstate sales restriction is the most common trap: a composition dealer who makes even a single interstate sale — sometimes without realising a customer is based in another state, particularly for online or cross-border-adjacent sales — becomes ineligible for the scheme from that point and is liable to switch to regular GST retrospectively for that period, with associated interest.

Exiting the scheme is mandatory, not optional, once turnover crosses the threshold or an ineligible transaction occurs — a composition dealer is required to file an intimation and switch to regular scheme compliance within a defined window. Continuing to operate under composition rates after becoming ineligible is a compliance failure that compounds the longer it continues, since each subsequent invoice is technically issued incorrectly.

Small business owners considering the composition scheme, or already on it and expanding into new markets, should have their eligibility reassessed whenever the nature of sales changes, not just when turnover changes. Our GST & Tax practice advises small traders and restaurants across Chennai and Tamil Nadu on composition scheme eligibility and transition.