GST Composition Scheme vs Standard GST in 2025: Which Is Better for Your Small Business?

Selecting between the GST Composition Scheme and the Regular GST Scheme is not just a compliance formality; it directly affects your tax outflow, input credit eligibility, and long-term scalability.

An incorrect choice can lead to higher tax payments, blocked ITC, or restrictions on interstate and e-commerce operations.
The right choice, however, can improve cash flow, reduce compliance load, and align your business for sustainable growth.

Before finalising your GST registration, here is a clear, concise comparison to help you determine which scheme best fits your business model.

Key Takeaways

• Go for the Composition Scheme if you want simplicity. You’ll pay a low fixed tax (1% / 5% / 6%), handle minimal paperwork, and stay compliant easily, perfect for small, local B2C businesses with turnover up to ₹1.5 crore (₹75L in special states).
• Choose Regular GST if you want to grow. You get full Input Tax Credit (ITC), can sell interstate and on e-commerce platforms, and issue tax invoices, ideal for B2B brands, high input-cost businesses, and companies planning to scale fast.
• Composition = simplicity and savings. Regular GST = flexibility and expansion. Pick the regime that aligns with your margins, customer type (B2C/B2B), and long-term goals.

What is the GST Composition Scheme?

The Composition Scheme is a simplified tax system in which businesses pay a fixed percentage of their total turnover rather than calculating GST on each transaction. It’s designed for small taxpayers who prioritise simplicity over maximum tax optimisation.

Key Features:

• Fixed tax rates: 1%, 5%, or 6% depending on business type
• Quarterly filing: Only four returns per year (GSTR-4)
• No Input Tax Credit (ITC) available
• Intra-state operations only
• Bill of supply instead of tax invoices

Eligibility Criteria for Composition Scheme in 2025

As per current GST compliance rules, the main turnover limits for opting into the Composition Scheme are:​

• Manufacturers and traders of goods: Annual aggregate turnover up to ₹1.5 crore in normal category states
• Special category states (like Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand): Turnover limit up to ₹75 lakh
• Service providers: Annual aggregate turnover up to ₹50 lakh under the composition option for services
• Mixed suppliers (goods and services): Goods turnover up to ₹1.5 crore and service turnover up to ₹5 lakh or 10% of turnover, whichever is higher

If your turnover crosses these thresholds, you must shift to the regular GST scheme.

Who Cannot Use the Composition Scheme?

The law excludes certain businesses from opting for the Composition Scheme, even if they meet the turnover limits. Major ineligible categories include:​

• Businesses making inter‑state outward supplies
• Exporters of goods or services
• Suppliers selling through e-commerce operators (with limited exceptions)
• Manufacturers of notified goods such as ice cream, pan masala, and tobacco products
• Casual taxable persons and non-resident taxable persons
• Businesses supplying non-taxable or fully exempt goods (for example, alcohol for human consumption, petroleum items)
• Persons liable to pay GST under reverse charge for their outward supplies

If you fall into any of these categories, you must register under the regular GST regime.

What is Standard GST?

Standard GST applies to businesses above composition thresholds or those voluntarily choosing regular registration. It offers a full input tax credit but requires detailed monthly compliance.

Key Features:

• Variable tax rates: 0% to 28% based on goods/services
• Monthly/Quarterly filing requirements
• Full ITC available on all eligible purchases
• Tax invoices with separate GST mention
• Interstate trade and exports permitted
• No turnover ceiling

Eligibility for the Regular GST Scheme

The regular scheme is mandatory for many businesses and optional for others: ​

Mandatory registration:

• Turnover above ₹40 lakh for suppliers of goods in most states (with lower limits in some special states)
• Turnover above ₹20 lakh for service providers in most states (with lower limits in some special states)

Voluntary registration:

• Businesses below the threshold can choose regular GST to claim ITC and access B2B or interstate markets
• There is no upper turnover cap in the regular scheme, so it supports unlimited scale.

Tax Rates Comparison 2025

Composition Scheme Rates

The Composition Scheme offers lower, fixed GST rates on turnover rather than slab-based rates. Indicative rates are:​

• Manufacturers and traders of goods: 1% of turnover (0.5% CGST + 0.5% SGST)
• Service providers under composition: 6% of turnover (3% CGST + 3% SGST)
• Restaurants not serving alcohol: 5% of turnover (2.5% CGST + 2.5% SGST)

These rates apply to the state’s total taxable turnover, making tax planning and monthly or quarterly cash flow forecasting much easier for small taxpayers.

Standard GST Rates

Under regular GST, tax is applied based on the classification of goods or services under HSN/SAC codes. The key rate slabs are:​

• 0%: Zero-rated items and specific essential goods, and exports (exports are zero-rated with ITC/refund eligibility)
• 5%: Many essential items, such as basic food products and some medicines
• 12%: Mid-range goods like processed foods, some textiles, and select electronics
• 18%: A large number of standard goods and services, including packaged foods, cosmetics, and software services
• 28%: Luxury and sin goods like premium automobiles, select electronics, and tobacco products

Under this scheme, you can claim ITC on inputs, capital goods, and eligible services and set it off against your output tax liability. Learn more about blocked credits under GST.

Composition vs Standard GST: Head-to-Head Comparison

Advantages & Disadvantages

Advantages of the GST Composition Scheme

• Lower tax burden: Pay only 1-6% vs 5-28%
• Simplified compliance: Quarterly returns instead of monthly
• Better cash flow: Lower tax outflows improve liquidity
• Minimal record-keeping: Reduced administrative overhead
• Predictable tax planning: Fixed rate enables accurate forecasting

Disadvantages of the GST Composition Scheme

• No ITC: Cannot claim GST on purchases (major drawback for high-cost businesses)
• Interstate ban: Cannot sell across state borders
• E-commerce restrictions: Cannot sell on Amazon, Flipkart, etc.
• Growth ceiling: Must switch to regular GST above ₹1.5 crore
• B2B disadvantage: Cannot issue proper tax invoices

Advantages of the Standard (Regular) GST Scheme

• Full ITC benefits: Claim all GST paid on inputs, reducing effective tax
• Unlimited growth: No turnover ceiling
• Market access: Interstate trade, exports, and e-commerce allowed
• Professional image: Tax invoices convey credibility for B2B
• Product flexibility: No restrictions on goods/services

For businesses that need e-invoicing compliance, Standard GST is mandatory.

Disadvantages of the Standard (Regular) GST Scheme

• Higher compliance: Monthly filing and detailed documentation required
• Complex records: Comprehensive invoice and ITC reconciliation needed
• Higher costs: ₹20,000-50,000/year for accounting resources
• Audit risk: Greater scrutiny and penalty exposure

Real-World Tax Calculation

Example: Retail Trading Business

Business Profile:

• Annual Turnover: ₹1 crore
• Input Cost: ₹70 lakh
• Standard GST Rate: 12%

Under Composition Scheme:

Tax Payable = ₹1 crore × 1% = ₹1,00,000

Under Standard GST:

Output Tax = ₹1 crore × 12% = ₹12,00,000Less: Input Tax Credit = ₹70 lakh × 12% = ₹8,40,000Net Tax Payable = ₹3,60,000

Result: Composition saves ₹2.6 lakh annually

However, if planning B2B sales or interstate expansion, Standard GST enables growth opportunities despite the higher tax cost.

Decision Framework: Which to Choose?

Choose Composition Scheme If:

✅ Turnover under ₹1.5 crore (projected for 3-5 years)
✅ Low input costs (retail, local services)
✅ B2C business (individual consumers)
✅ Intra-state operations only
✅ Simplicity and cash flow priority

Ideal for: Local grocery stores, neighbourhood shops, service consultants, small restaurants, and local manufacturers with no expansion plans

Choose Standard GST If:

✅ High input costs (manufacturing, trading)
✅ B2B business (customers need tax invoices)
✅ Growth plans (interstate, export, e-commerce)
✅ Turnover above mandatory threshold
✅ ITC benefits exceed compliance costs

Ideal for: Manufacturing units, wholesalers, e-commerce businesses, interstate traders, B2B service providers

Consider hiring virtual CFO services to help make this strategic decision.

Simple Decision Steps

1. Calculate your input cost ratio: If inputs are >60% of turnover, Standard GST is likely better
2. Identify customer type: B2B customers need tax invoices = Standard GST mandatory
3. Assess growth plans: Interstate/e-commerce expansion = Choose Standard GST
4. Check turnover: Above ₹40L (goods) / ₹20L (services) = Standard GST mandatory
5. Evaluate cash flow: Tight margins with low inputs = Composition saves money

Conclusion

The right GST scheme depends on your business model, not which is “universally better.” Run the tax calculations with your actual turnover and input costs. For retail businesses with low inputs and local operations, the Composition Scheme offers substantial savings. For companies with high input costs or growth ambitions, the ITC benefits of Standard GST outweigh the compliance complexity.

Recommendation: Start with Composition if eligible and migrate to Standard GST as your business scales beyond ₹1.5 crore or requires interstate operations.

Next Step: Consult a Chartered Accountant with your specific numbers for personalised guidance