By Manu Rao | Updated March 2026
Every business in India with turnover above the GST registration threshold (INR 20 lakh for services, INR 40 lakh for goods in most states) must register under the Goods and Services Tax framework. Once GST registration is complete, the GST law offers two schemes: Regular Registration (the standard route) and the Composition Scheme (a simplified, lower-compliance option under Section 10 of the CGST Act 2017). The schemes differ in tax rates, compliance frequency, input tax credit eligibility, and who can opt in.
Quick Comparison Table
| Criterion | GST Regular Scheme | GST Composition Scheme |
|---|---|---|
| Governing Section | Standard registration under Section 22/24 of CGST Act 2017 | Section 10 of CGST Act 2017 |
| Turnover Limit | No upper limit | INR 1.5 crore for goods (INR 75 lakh in special category states); INR 50 lakh for services |
| Tax Rate | Standard GST rates: 5%, 12%, 18%, or 28% depending on goods/services | 1% for manufacturers, 5% for restaurants, 6% for service providers (CGST + SGST combined) |
| Input Tax Credit (ITC) | Full ITC available on inputs, input services, and capital goods | No ITC — cannot claim credit for GST paid on purchases |
| Interstate Supply | Permitted | Not permitted — composition dealers cannot make interstate outward supplies (Section 10(2)(a)) |
| E-Commerce Supply | Permitted | Not permitted — cannot supply through e-commerce operators (Section 10(2)(d)) |
| Tax Collection | Collects GST from customers on invoices | Cannot collect GST from customers — pays tax from own margin |
| Filing Frequency | Monthly GSTR-1 (outward supplies) + Monthly GSTR-3B (summary return) or Quarterly under QRMP scheme | Quarterly CMP-08 (payment challan) + Annual GSTR-4 |
| Invoice Format | Tax invoice showing GST breakup (CGST, SGST/IGST) | Bill of supply — cannot show GST separately |
| Eligible Businesses | All businesses | Manufacturers, traders, restaurants, service providers (with conditions) |
| Exclusions | None | Cannot be used by: ice cream manufacturers, pan masala/tobacco manufacturers, casual taxable persons, non-resident taxable persons, businesses making interstate supplies |
Why Composition Scheme Exists
The Composition Scheme was designed for small businesses. A local retailer selling goods within one state, a small manufacturer supplying to nearby distributors, a neighborhood restaurant — these businesses benefit from paying a flat low rate (1-6%) on turnover instead of managing GST at 12-18% with monthly returns and ITC tracking.
The trade-off is clear: lower rate and simpler compliance in exchange for giving up input tax credit and interstate supply capability.
Why Foreign-Invested Companies Rarely Use Composition
For a company with foreign investment, the Composition Scheme creates more problems than it solves. Here are the practical issues:
No Input Tax Credit
This is the biggest cost. A company purchasing raw materials, software licenses, professional services, or capital goods pays GST on those purchases. Under the regular scheme, that GST is claimed as Input Tax Credit, reducing the net tax outgo. Under composition, that GST is a sunk cost.
Example: A manufacturing subsidiary imports components worth INR 50 lakh per month, paying 18% IGST (INR 9 lakh). Under regular scheme, this INR 9 lakh is fully creditable against output GST. Under composition, this INR 9 lakh is a pure cost. For any business with significant input costs, the composition scheme's lower rate on output is dwarfed by the lost ITC.
No Interstate Supply
A foreign-invested company typically has customers across India, not just in one state. The composition scheme prohibits interstate outward supplies. You cannot sell goods or provide services to a customer in another state. For an IT company in Karnataka serving clients in Maharashtra, or a manufacturer in Gujarat supplying to retailers in Delhi — composition is a non-starter.
No E-Commerce
If your business involves supplying through Amazon, Flipkart, Swiggy, or any e-commerce operator, composition is not available. Section 10(2)(d) explicitly excludes businesses making supplies through e-commerce operators.
Customer Perspective
A composition dealer issues a "Bill of Supply" instead of a tax invoice. The bill cannot show GST separately. This means the buyer cannot claim ITC on purchases from a composition dealer. Business customers (B2B) prefer buying from regular GST-registered suppliers because they can claim ITC. A composition dealer loses B2B customers who care about their own input credit.
Turnover Threshold
The composition scheme is capped at INR 1.5 crore aggregate turnover for manufacturers and traders, and INR 50 lakh for service providers. "Aggregate turnover" includes all supplies (taxable, exempt, export, interstate) across all registrations under the same PAN.
For a foreign-invested company, crossing INR 1.5 crore in annual revenue is often a first-year milestone, not a distant target. Once you cross the threshold, you must mandatorily switch to the regular scheme. The switchover involves filing Form CMP-04, recalculating ITC on existing stock, and transitioning to monthly filing. Planning for this transition from day one makes less sense than just starting on the regular scheme.
Filing Comparison in Practice
Regular Scheme Filings
- GSTR-1: Details of outward supplies — filed monthly (by 11th of the next month) or quarterly under QRMP scheme for businesses with turnover up to INR 5 crore
- GSTR-3B: Summary return with tax payment — filed monthly (by 20th) or quarterly under QRMP
- GSTR-9: Annual return — filed by December 31 of the following year
- GSTR-9C: Reconciliation statement (if turnover exceeds INR 5 crore) — filed with GSTR-9
Under the QRMP scheme (Quarterly Return Monthly Payment), businesses with turnover up to INR 5 crore can file GSTR-1 and GSTR-3B quarterly instead of monthly. Tax payment is still monthly via PMT-06 challan. This cuts the filing burden for smaller regular-scheme taxpayers by two-thirds.
Composition Scheme Filings
- CMP-08: Quarterly payment challan — filed by 18th of the month following the quarter
- GSTR-4: Annual return — filed by April 30 of the following year
The composition filing load is lighter — 4 quarterly challans + 1 annual return versus the regular scheme's 12 monthly returns + 1 annual return (or 4 quarterly + 12 monthly payments under QRMP). But the difference in filing count does not offset the ITC loss for any business with meaningful input costs.
Special Category States
In special category states (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Sikkim, Himachal Pradesh, Uttarakhand), the composition scheme turnover cap for goods is INR 75 lakh instead of INR 1.5 crore. The lower cap makes composition even less viable for businesses in these states.
Non-Resident Taxable Persons
Here is a critical point for foreign businesses: a non-resident taxable person (NRTP) cannot opt for the composition scheme. Under Section 10(2)(b), NRTPs are explicitly excluded. If a foreign entity is making taxable supplies in India without a fixed establishment (for example, providing remote services that trigger GST), it must register as an NRTP under Section 24(v) and use the regular scheme.
This exclusion reinforces the general principle: the composition scheme was not designed for foreign-invested or cross-border businesses.
Which Scheme Should You Choose?
Choose Regular Scheme if:
- Your company has foreign investment (most likely scenario)
- You have significant input costs where ITC matters
- You serve customers across multiple states
- You sell through e-commerce platforms
- Your turnover exceeds or will soon exceed INR 1.5 crore
- Your B2B customers need tax invoices for their ITC claims
Choose Composition Scheme if:
- You are a small, local business (no foreign investment)
- You supply only within your state
- Your turnover is well below INR 1.5 crore with no growth plan to cross it
- Your customers are end consumers (B2C) who do not need ITC
- Your input costs are low relative to revenue (e.g., a services business with few purchases)
For foreign-invested companies in India — whether a Private Limited Company or a Limited Liability Partnership — the Regular GST scheme is the default. The composition scheme's restrictions on interstate supply, e-commerce, and ITC make it incompatible with how most foreign-invested businesses operate.
Setting up GST registration for your Indian entity? Contact Beacon Filing — we handle GST registration as part of the company incorporation package.