"We'll just opt for the composition scheme": what Section 10 of the CGST Act actually allows a Pvt Ltd to do

A founder running a ₹90 lakh turnover D2C brand out of Bengaluru told his accountant to move the company to the composition scheme before the new financial year. One percent tax instead of 18%, one quarterly statement instead of two monthly returns — it looked like an obvious win. Three months later the GST officer issued a notice under Section 73. The company had been shipping to customers in Tamil Nadu and Maharashtra, and it sold through a marketplace. Both facts made it ineligible from day one. The 1% it had paid was treated as nothing; the full 18% became payable, with interest at 18% per annum under Section 50 and a 10% penalty.

The composition scheme is not a tax rate you choose. It is a levy you qualify for, and most private limited companies do not.

What the law actually requires

The composition levy sits in Section 10 of the Central Goods and Services Tax Act, 2017, read with Rules 3 to 7 of the CGST Rules, 2017. It is an optional alternative to the normal levy under Section 9. A registered person who opts in pays a flat percentage of turnover, forgoes input tax credit entirely, cannot collect tax from customers, and files a quarterly payment statement plus one annual return instead of the monthly GSTR-1 and GSTR-3B cycle.

The turnover ceiling — Section 10(1)

Eligibility is tested against aggregate turnover in the preceding financial year:

• ₹1.5 crore for most states, including Karnataka, Maharashtra, Delhi, Telangana, Andhra Pradesh, Tamil Nadu and Gujarat
• ₹75 lakh for the special category states — Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand
• ₹50 lakh under the separate service-provider composition scheme in Section 10(2A)

"Aggregate turnover" is defined in Section 2(6) and is where founders miscalculate. It is computed PAN-India across every GSTIN, and it includes taxable supplies, exempt supplies, exports and inter-state supplies. If your company holds registrations in two states and does ₹80 lakh in each, your aggregate turnover is ₹1.6 crore and you are out — even though neither state crosses ₹1.5 crore on its own.

The rates — Rule 7 CGST Rules

Note the difference in base. A manufacturer pays 1% on total turnover in the State, including exempt supplies. A trader pays 1% only on the taxable portion. This distinction has generated repeated demand notices where a manufacturer with a large exempt product line assumed the trader base applied.

The disqualifiers — Section 10(2)

This is the clause that ends most Pvt Ltd composition plans. You cannot opt in if you:

• Make any inter-state outward supply of goods. One invoice to a customer in another state disqualifies you for the entire year.
• Supply through an e-commerce operator required to collect TCS under Section 52. Amazon, Flipkart, Myntra, Zomato, Swiggy — any platform collecting TCS. This alone rules out most D2C companies.
• Supply goods that are not taxable under the Act (for example, alcoholic liquor for human consumption, petroleum products outside GST).
• Manufacture notified goods — ice cream and other edible ice, pan masala, tobacco and manufactured tobacco substitutes, aerated water, fly ash bricks, and bricks of fossil meals, building bricks and roofing tiles (Notification No. 14/2019-Central Tax as amended).
• Are a casual taxable person or a non-resident taxable person.
• Supply services beyond the permitted limit — a goods supplier under Section 10(1) may also supply services up to 10% of turnover in the State in the preceding FY or ₹5 lakh, whichever is higher (proviso to Section 10(1), inserted by the CGST (Amendment) Act, 2018).

There is one more rule that quietly kills group structures: Section 10(2), second proviso — if a person has multiple GSTINs on the same PAN, all of them must opt for composition. You cannot run the Karnataka branch on composition and the Maharashtra branch on the regular scheme.

Nothing in Section 10 excludes a private limited company as an entity type. A Pvt Ltd is as eligible as a proprietorship. It is the operating model — inter-state sales and marketplace listings — that disqualifies almost every venture-track company.

Practical implications

You cannot collect GST, and your B2B customers lose their credit.

Section 10(4) prohibits a composition dealer from collecting tax from the recipient. Rule 5(1)(f) requires you to issue a bill of supply, not a tax invoice, and Rule 5(1)(g) requires the words "composition taxable person, not eligible to collect tax on supplies" on every bill of supply, plus "composition taxable person" displayed at the top of your signboard at the principal place of business and every additional place of business.

The commercial consequence: your B2B buyer gets no ITC. If you sell to a company that was claiming 18% credit, your effective price to them has just risen 18%. Composition works for a B2C retailer or restaurant. It is usually value-destroying for a company with corporate customers.

Existing input tax credit must be reversed.

On opting in, Rule 44(4) requires reversal of ITC on inputs held in stock, inputs contained in semi-finished and finished goods, and capital goods, as on the day immediately preceding the date of opting in. This is declared in Form GST ITC-03 within 60 days of the commencement of the relevant financial year. A company sitting on a large capital-goods credit can find the reversal wipes out several years of composition savings.

If you were never eligible, the whole year unwinds.

Section 10(5) provides that where a person who was not eligible pays tax under the composition levy, the proper officer may recover the tax and a penalty, and the provisions of Section 73 or Section 74 apply. In practice that means the differential tax at the normal rate, interest at 18% per annum under Section 50(1), and a penalty of 10% of the tax or ₹10,000 (whichever is higher) under Section 73(9) — or 100% of the tax under Section 74 if suppression is alleged. The officer initiates this through Form GST CMP-05 (show cause) and confirms denial through Form GST CMP-07 within 30 days of your reply.

Once you cross ₹1.5 crore mid-year, the option lapses automatically under the proviso to Section 10(3) — from the day you cross it, not from the next quarter. You must file Form GST CMP-04 within 7 days of becoming ineligible.

Late filing carries its own cost.

GSTR-4 late fee is ₹50 per day (₹25 CGST + ₹25 SGST), reduced to ₹20 per day for a nil return, capped at ₹2,000 for returns from FY 2021-22 onward (Notification No. 21/2021-Central Tax). CMP-08 attracts interest at 18% under Section 50 on delayed payment.

Step-by-step: what to do

• Compute aggregate turnover correctly for the preceding FY. Add every GSTIN on your PAN. Include exempt supplies, exports and inter-state supplies. Compare against ₹1.5 crore (or ₹75 lakh / ₹50 lakh as applicable).
• Run the Section 10(2) disqualifier checklist. Any inter-state outward supply of goods, any TCS-collecting marketplace, any notified good, any non-taxable good — a single yes ends the analysis.
• Test the 10%-or-₹5-lakh service cap if you are a goods supplier who also bills services (installation, AMC, freight recovered separately).
• Model the B2B impact before anything else. Map your revenue by customer type. If more than roughly a third is B2B to GST-registered buyers, composition will cost you more in lost pricing power than it saves in tax.
• File Form GST CMP-02 on the GST portal before 31 March for the coming financial year. A newly registered company opts in at registration through Part B of Form GST REG-01. There is no mid-year entry.
• File Form GST ITC-03 within 60 days to reverse ITC on stock and capital goods.
• Update invoicing immediately. Switch to bills of supply, add the mandatory Rule 5 declaration, put up the signboard.
• File CMP-08 quarterly by the 18th of the month following each quarter, and GSTR-4 annually by 30 June following the end of the financial year (extended from 30 April by Notification No. 12/2024-Central Tax).
• Monitor turnover monthly. File CMP-04 within 7 days of crossing the threshold and switch to regular returns from that date.

FAQ

Can a private limited company opt for the composition scheme at all?
Yes. Section 10 does not restrict by entity type. Most Pvt Ltd companies fail on the operational conditions in Section 10(2) — inter-state supply and e-commerce sales — not on their corporate form.

We sell only within Karnataka but list on Amazon. Are we eligible?
No. Supply through an e-commerce operator required to collect TCS under Section 52 is an absolute bar under Section 10(2)(d), regardless of where the buyer is.

Can we opt in halfway through the year if turnover is still low?
No. Form CMP-02 must be filed before the start of the financial year. The only mid-year entry point is a fresh registration, via Part B of Form GST REG-01.

What if we cross ₹1.5 crore in November?
The option lapses from the day you cross the threshold under the proviso to Section 10(3). File CMP-04 within 7 days, switch to regular returns, and file ITC-01 to claim credit on stock held on that date.

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