GST Composition Scheme Declaration

A GST Composition Scheme Declaration in India is a formal document submitted by a registered small business taxpayer when opting into or communicating compliance with the Composition Scheme under Section 10 of the Central Goods and Services Tax (CGST) Act 2017. The declaration accompanies Form GST CMP-02 (the intimation to opt for Composition Levy) filed on the GST portal, and confirms that the business meets all eligibility conditions prescribed by Section 10 of the CGST Act and the CGST Rules 2017.

The Composition Scheme under Section 10 of the CGST Act 2017 allows registered taxpayers with aggregate annual turnover not exceeding ₹1.5 crore (₹75 lakh for manufacturers and other taxpayers in special category states — Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand) to pay GST at a concessional flat rate on their turnover instead of the standard GST rate. A separate special composition scheme for service providers with turnover up to ₹50 lakh per year was introduced via Notification No. 2/2019-CT(R).

Composition dealers pay tax at the following flat rates: manufacturers (other than notified excluded categories) pay 1% of turnover; restaurants not serving alcoholic liquor for human consumption pay 5% of turnover; traders and retailers pay 1% of turnover; service providers under the special composition scheme pay 6% of turnover. The entire composition tax is borne by the dealer — it cannot be collected from customers separately, and composition dealers must issue a Bill of Supply (not a GST Tax Invoice).

The critical restriction of the Composition Scheme is the inability to claim Input Tax Credit (ITC). Composition dealers pay the flat rate on their entire turnover and cannot offset any GST paid on their purchases against their output tax liability. For businesses with high input costs and significant ITC potential, this makes the standard GST regime more attractive despite the higher compliance burden.

Section 10(5) of the CGST Act provides that if a composition taxpayer violates any conditions of the scheme — for example, by making inter-state supplies of goods, by exceeding the turnover threshold, or by manufacturing an excluded category of goods — the tax authority may cancel the composition registration and demand the tax, interest, and penalty applicable under the regular regime for the entire period during which the person was purportedly under composition. This retrospective demand risk makes compliance with composition conditions critically important.

The GST Council periodically revises the composition scheme parameters. The e-commerce restriction (composition dealers cannot supply goods through e-commerce operators collecting TCS under Section 52) has been a point of concern for small businesses trying to reach national markets through platforms like Flipkart, Amazon, and Meesho.

The legal framework governing the GST Composition Scheme Declaration in India draws on several key statutes and regulatory bodies. Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). The Industrial Disputes Act 1947 and state labour commissioners govern employment disputes. The Information Technology Act 2000 and IT (Reasonable Security Practices) Rules 2011 protect personal data. The Income Tax Act 1961 and Goods and Services Tax Act 2017 govern tax obligations through the Central Board of Direct Taxes (CBDT) and GST Council. Parties executing a GST Composition Scheme Declaration in India should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Central Goods and Services Tax Act, 2017 sets the foundational requirements.

A GST Composition Scheme Declaration is required in India when a small business with aggregate annual turnover below the threshold decides to opt into the Composition Scheme at the start of a financial year, or when a new business registers under GST and chooses the Composition Scheme at registration.

Small manufacturers, traders, and retailers with annual turnover below ₹1.5 crore who deal primarily with retail consumers (B2C supplies) and do not need to issue GST Tax Invoices for their customers to claim ITC should consider the Composition Scheme. Kirana stores, local garment retailers, small food processors, handloom weavers, and artisans producing and selling locally benefit most from the scheme's simplified compliance framework.

Restaurants and eateries (excluding those serving alcohol) with turnover below ₹1.5 crore are the primary beneficiaries of the 5% flat rate under the Composition Scheme. The absence of monthly GSTR-1 and GSTR-3B filing requirements significantly reduces accounting and compliance costs for small food service businesses.

Service providers with turnover up to ₹50 lakh per year — independent consultants, freelancers, small repair shops — can benefit from the special composition scheme under Notification 2/2019-CT(R) at 6% of turnover, compared to the standard 18% GST on professional and other services. This substantially reduces the effective tax burden for micro service businesses.

New GST registrants who qualify for the Composition Scheme should opt in at the time of registration (via Form GST REG-01's composition option) rather than switching later — switching from the regular scheme to composition requires reversal of all accumulated ITC (filed in Form GST ITC-03), which can be a significant financial burden for businesses that have accumulated ITC on capital goods or inventory.

Existing regular GST taxpayers who have seen their turnover decline below the composition threshold during a difficult business period — post-COVID recovery, seasonal businesses — may consider switching to composition at the start of the next financial year (by filing CMP-02 by 31 March) to reduce their GST compliance costs during the recovery period.

A GST Composition Scheme Declaration must accurately represent the business's eligibility, the nature of its supplies, and its undertaking to comply with the restrictions of the Composition Scheme throughout the financial year.

Business identification and GSTIN states the full legal name of the taxpayer (as registered with GST), the GSTIN (15-digit Goods and Services Tax Identification Number), the principal place of business address, and the financial year for which the Composition Scheme is being opted. If the business has additional places of business or branches in other states, the multi-state supply restriction must be addressed.

Eligibility declarations confirm all conditions of Section 10 of the CGST Act 2017: (a) the aggregate annual turnover in the preceding financial year did not exceed ₹1.5 crore (or ₹75 lakh for special category states); (b) the business is not engaged in the manufacture of goods notified as ineligible (ice cream, pan masala, tobacco products, and aerated water under the Composition Scheme Exclusion Notification); (c) the business does not make inter-state supply of goods; (d) the business does not supply goods not leviable to tax under the CGST Act; (e) the business is not an e-commerce operator required to collect TCS under Section 52; and (f) the business has not been prosecuted for tax evasion above the specified threshold in the preceding financial year.

Category of supply declaration specifies whether the taxpayer's supplies are: manufacturing (flat rate 1%), restaurant/food service not serving alcohol (flat rate 5%), trading/retail (flat rate 1%), or services under the special composition notification (flat rate 6%). Mixed supply businesses — a manufacturer who also provides installation services — must assess whether the entire business qualifies or whether a portion falls outside composition eligibility.

Undertaking regarding Bill of Supply: The declaration must include an undertaking that the taxpayer will issue only Bills of Supply (not GST Tax Invoices) to customers, will not collect GST separately from customers, will not claim Input Tax Credit on any inward supply, and will display the words 'Composition Taxable Person, not eligible to collect tax on supplies' on every Bill of Supply and every prominent place at the principal place of business as required under Rule 9 of the CGST Rules.

ITC reversal acknowledgement: For businesses switching from the regular scheme to Composition, the declaration must acknowledge that all ITC available in the electronic credit ledger on the date of opting into Composition must be reversed by filing Form GST ITC-03. Any stock of inputs, work-in-progress, and finished goods held on the transition date also requires ITC reversal proportionate to the composition tax rate under Rule 44 of the CGST Rules.

Quarterly compliance undertaking: The declaration should confirm that the taxpayer will file Form CMP-08 (quarterly statement-cum-payment) by the 18th of the month following each quarter, and Form GSTR-4 (annual return) by 30 April following the financial year. Non-filing of CMP-08 attracts a fee of ₹200 per day (₹100 CGST + ₹100 SGST) subject to a cap of 0.25% of quarterly turnover. The forms-legal.com GST Composition Scheme Declaration template covers the mandatory elements under Central Goods and Services Tax Act, 2017.