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.