Professional Guide On GST Composition Scheme (2025–26)

By CA Surekha S. Ahuja

The GST Composition Scheme was designed as a compliance relief mechanism for small businesses, but over the years, it has become one of the most misunderstood provisions of the GST law — particularly after the inclusion of service providers and mixed suppliers through Section 10(2A).

As of 2025–26, understanding its nuances is critical because:

• Most eligibility failures arise from incorrect turnover computation,

• Taxpayers often misinterpret 10% service limit vs ₹5 lakh condition,

• Composition is a PAN-level scheme, not GSTIN-wise,

• Rental income, commission, interest, and mixed supplies create litigation risks,

• Incorrect opt-in/out results in tax, interest, penalties, and even cancellation.

This guide provides the most comprehensive interpretation of Section 10, Rule 5, Notifications, and department clarifications — with granular, scenario-based, professional guidance.

Section 10 – Law Language + Expert Interpretation

Statutory Text (Simplified Extract)

Section 10(1):
A registered person with aggregate turnover in the preceding FY not exceeding ₹1.5 crore (₹75 lakh in Special Category States) may opt to pay tax under composition.

Section 10(2A):
A registered person not eligible under 10(1) may pay tax under composition if turnover of preceding FY does not exceed ₹50 lakh.

Section 10 Explanation:
“Aggregate Turnover” means total value of

• taxable supplies,

• exempt supplies,

• exports,

• inter-State supplies,
  computed on all-India basis for all GSTINs under same PAN,
  excluding tax and inward supplies under reverse charge.

Interpretation:

• Turnover = PAN-level, not individual GSTIN.

• Includes rental income, interest, mixed supplies, exempt supplies, etc.

• Composition is not available if any GSTIN under the PAN breaches conditions.

Eligibility Conditions (2025–26)

1 Goods Manufacturers / Traders (Section 10(1))

✔ Turnover limit: ₹1.5 crore
✔ Allowed supply: intra-state only
✔ Rate: 1% (0.5% CGST + 0.5% SGST)

2 Restaurant Services (Non-alcoholic)

✔ Turnover: ₹1.5 crore
✔ Rate: 5%

3 Service Providers + Mixed Suppliers (Section 10(2A))

✔ Turnover: ₹50 lakh
✔ Rate: 6%

The Critical Rule:

Eligible only if
service supply ≤ 10% of turnover OR ≤ ₹5 lakh (whichever is higher).

This single condition causes maximum confusion — clarified in detail below.

The Most Critical Concept – Service Limit Test (10% or ₹5 Lakh)

The service component is acceptable if:

Service turnover ≤ higher of:

• 10% of aggregate turnover, OR

• ₹5,00,000

Example 1:
Turnover = ₹35 lakh
10% = ₹3.5 lakh
Higher of 10% or ₹5 lakh = ₹5 lakh
If services ≤ ₹5 lakh → Eligible
If > ₹5 lakh → Not eligible

Example 2:
Turnover = ₹18 lakh
10% = ₹1.8 lakh
Higher value = ₹5 lakh
Services up to ₹5 lakh STILL allowed.

KEY INTERPRETATION:

✔ The ₹5 lakh floor always protects small taxpayers even when 10% is lower.
✔ In higher turnover cases, 10% becomes relevant.

Prohibited Categories (Absolute Restriction)

Composition cannot be opted even if turnover is within limit when:

• Goods supplied inter-State

• Services supplied inter-State

• Supplies made via e-commerce operator requiring TCS

• Supply of non-GST items:

  • alcohol,

  • petrol, diesel, ATF,

  • natural gas

• Ice cream, pan masala, tobacco (Notified vide NN 14/2019)

• Acting as casual or non-resident taxable person

• Engaged in intermediary services involving cross-border customers

• Engaged as an input service distributor

Note: Even one invoice violating the condition results in full-year ineligibility.

Mixed Supply Scenario (Goods + Rental Income)

This is the single biggest litigation zone in 2025–26.
Rental income is classified as service under Schedule II.

Illustration (Your Scenario):

Goods turnover = ₹30 lakh
Rental income = ₹5 lakh
Total = ₹35 lakh
10% of ₹35 lakh = ₹3.5 lakh
Higher of ₹3.5 lakh or ₹5 lakh = ₹5 lakh

✔ If rental income = ₹5 lakh → Eligible
✘ If rental income = ₹6 lakh → Ineligible

Additional Restrictions:

• Composition dealers cannot issue GST tax invoice → only Bill of Supply

• Rental income being a service → cannot charge GST

• Recipient may still be liable under Reverse Charge Mechanism (RCM) in notified cases

• No ITC can be availed on rent-related expenses

PAN-Level Implication (Critical)

If one GSTIN under the same PAN:

• crosses turnover limit, or

• makes an inter-state supply, or

• sells online via e-commerce, or

• supplies exempt + taxable inconsistently,

→ ALL GSTINs under that PAN lose composition.

This is the most ignored but most fatal rule in assessments.

Interest Income, Commission Income, and Service Inclusions

1 Interest Income

✔ Included in aggregate turnover
✔ Does not break service-limit test if under ₹5 lakh
✔ No GST payable (exempt)
✔ Cannot opt if interest income becomes disproportionately large

2 Commission Income

Commission = taxable service
✔ Counted in service turnover
✘ High litigation area — even small commission can break 10% rule

3 Rental Income

✔ Fully counted as service
✔ No tax invoice allowed
✔ RCM may apply (case-to-case)

Opt-In & Opt-Out – Compliance Rules

Opt-In (CMP-02)

• Must be filed before start of FY (deadline: 31 March)

• System freezes all ITC and shifts to composition

Opt-Out

• If turnover crosses limit → system auto-switches to Regular

• Must file ITC-01 within 30 days to claim opening stock credit

Quarterly Payment

• CMP-08 to be filed quarterly

• GSTR-4 annually

Practical Examples (2025–26)

Example A – Goods + Rental Income

Goods: ₹40 lakh
Rent: ₹8 lakh
Total = ₹48 lakh
Service limit = higher of 10% (4.8L) or 5L = ₹5L
Rent 8L > 5L → Not eligible

Example B – Goods + Commission

Goods = ₹20 lakh
Commission = ₹2.2 lakh
Total = ₹22.2 lakh
Service threshold = ₹5 lakh
Commission within ₹5 lakh → Eligible

Example C – Multiple Rentals

If rental properties generate ₹6 lakh and goods turnover is ₹32 lakh → total ₹38 lakh
10% = 3.8 lakh → threshold = ₹5 lakh → ineligible.

Restructuring & Tax Planning Solutions

✔ Shift rental property to HUF / spouse (legally acceptable)
✔ Register goods entity separately as a partnership
✔ Never mix commission income with goods business
✔ Avoid e-commerce platforms entirely
✔ Keep separate bank accounts for dual activities
✔ Rent property under a separate PAN where possible

These restructuring models are used widely by professionals to maintain composition eligibility.

High-Risk Areas Not to Ignore

• Exempt supply value pushes turnover over threshold

• Advance received in March → counted in turnover

• Credit notes reduce turnover only when linked properly

• Late fee, cancellation charges, and ancillary receipts = service

• Income from sale of fixed assets → counted in turnover

Summary Table – Composition Scheme (2025–26)

Category	Turnover Limit	Permitted Service	Rate	Key Restriction
Manufacturer/Trader	₹1.5 crore	Up to 10% or ₹5 lakh	1%	No interstate, no e-commerce
Restaurant	₹1.5 crore	Not applicable	5%	Excluding alcohol
Service Provider (10(2A))	₹50 lakh	Full services	6%	No interstate, no e-commerce
Mixed Supply	₹50 lakh	≤10% or ≤₹5 lakh	6%	PAN-level restriction

Conclusion

The GST Composition Scheme continues to be a high-utility but high-risk compliance framework. The 2025–26 regulatory environment places emphasis on:

• PAN-level integration,

• service-limit strict monitoring,

• mixed supply rationalisation,

• transaction-wise scrutiny,

• rental and commission income classification,

• real-time validation of CMP-02, and

• AI-based compliance monitoring by GSTN.

Choosing composition must be a strategic decision, not merely a compliance shortcut.

For many small businesses, incorrectly opting for composition is costlier than not opting at all. 

RBI and ECB Enter Implementation Phase to Link UPI with Eurozone’s TIPS for Instant Cross-Border Payments

The Reserve Bank of India (RBI) and the European Central Bank (ECB) have formally commenced the implementation phase to link India's Unified Payments Interface (UPI) with the Euro Area’s TARGET Instant Payment Settlement (TIPS) system. This strategic initiative is set to revolutionize cross-border remittances by enabling near-instantaneous, low-cost, and fully transparent payments between India and the Eurozone. Amid ongoing demands for faster, cheaper international payments, this integration marks a pivotal step forward in global payment innovation aligned with G20 priorities.

Strategic Importance and Objectives

Traditional cross-border payments reliant on correspondent banking networks suffer from delays of 1 to 5 business days, high transaction costs ranging from 3% to 7%, and limited operational hours. The UPI–TIPS linkage aims to dismantle these inefficiencies by creating a seamless corridor with:

• Settlement in under 10 seconds, available 24/7/365

• Transaction costs reduced to less than 1%

• Complete transparency with no intermediaries

This initiative supports migrant workers, SMEs, and remittance senders by facilitating immediate fund transfers with minimal cost and friction, enhancing financial inclusion and economic connectivity between India and Europe.

Comparative Snapshot

Feature	SWIFT/Correspondent Banking	UPI Domestic (India)	UPI-PayNow Linkage (Singapore)	Proposed UPI–TIPS Linkage (Euro Area)
Settlement Time	1–5 days	<30 seconds	<30 seconds	<10 seconds
Transaction Cost	3–7%	0%	<1%	<1%
Operational Hours	Banking hours only	24/7/365	24/7/365	24/7/365
Transparency	Limited	Complete	Complete	Complete
Intermediaries Involved	3–5	0–1	0	0
Availability	No	Yes	Yes	Yes

This table highlights the stark improvements the UPI–TIPS integration offers over legacy payment methods, embodying the future of cross-border transactions.

Compliance, Thresholds, and Regulatory Controls

The integration will adopt a robust dual-regulatory approach:

• KYC/AML compliance harmonizing RBI and ECB standards, covering identity verification, sanctions screening, and Politically Exposed Persons (PEPs) checks.

• Transaction thresholds likely capped at around ₹25 lakh (approx. EUR equivalent) with enhanced due diligence on higher-value payments.

• Real-time transaction monitoring enabling immediate rejection of suspicious or non-compliant transactions.

• Suspicious Transaction Reporting (STR) protocols for regulatory escalation.

These measures ensure secure, resilient, and compliant operation across jurisdictions.

Business and User Impact

For remittance senders and recipients, this linkage delivers tangible benefits through faster fund availability and reduced costs. Financial institutions face competitive pressures to innovate, while regulators can leverage the collaboration as a model for future global payment corridors. The ongoing implementation phase will focus on technical integration, liquidity arrangements, legal frameworks, and harmonizing operational protocols.

Conclusion

The RBI–ECB UPI–TIPS linkage signals a landmark transformation in cross-border payments, introducing a seamless, cost-effective, and transparent alternative to traditional remittance pathways. It positions India and the Eurozone at the forefront of financial infrastructure innovation, with broad implications for remittance efficiency, financial inclusion, and international trade facilitation. Industry stakeholders and users alike should prepare for a new era where operational speed and cost-efficiency redefine cross-border payment experiences.