1. How it works
Instead of charging GST on each sale and claiming credit on purchases, a composition dealer pays a flat percentage of turnover, files a quarterly statement and an annual return, and issues a bill of supply rather than a tax invoice. The rates differ by category — traders, manufacturers and restaurant services are treated differently — and there is a turnover ceiling above which the scheme is not available. Your CA will confirm both the rate and the ceiling that apply to you.
2. What you give up
Three things, and they are not small. You cannot collect GST from your customers, which means the tax comes out of your margin rather than being passed on. You cannot claim input credit on your purchases, so the GST you pay suppliers is a cost. And you generally cannot make inter-state outward supplies, which rules out selling to a buyer in another state.
3. Why business customers will not buy from you
This is the consideration that decides it for most shops. A registered buyer needs a tax invoice to claim input credit, and a composition dealer cannot issue one. A contractor, a company or an institution buying from you therefore bears the full cost with no set-off, which makes you more expensive than a regular dealer even at the same price. If a meaningful share of your customers are businesses, the scheme costs you sales.
4. Where it genuinely suits
A purely retail counter selling to end consumers who do not claim credit — a kirana shop, a small general store, a local retail outlet with no business customers and no inter-state sales. For those shops the reduced compliance is real and the restrictions cost nothing, because none of their customers were going to claim credit anyway.
5. Getting the sums right before deciding
The arithmetic is specific to your business: your margin, your purchase GST, the split between consumer and business customers. A shop with thin margins and heavy input GST can lose more on blocked credit than it saves on compliance. Ask your accountant to work it on your actual figures for a full year rather than deciding on the headline rate, because the headline rate is not the number that matters.
6. What it looks like in your billing
A composition dealer issues a bill of supply, not a tax invoice, and it must carry a declaration that the dealer is not eligible to collect tax. Your billing has to produce that document rather than a standard GST invoice. Switching into or out of the scheme mid-year has its own procedure and timing, which is another thing to plan with your CA rather than discover.