Case study: should a small shop choose regular GST or composition?
A worked example comparing GST cost and profit for a retail shop under the regular scheme and composition.
The situation
Ravi runs a hardware shop in Jaipur. He buys goods worth ₹1 crore a year from registered suppliers, paying 18% GST (₹18 lakh). Almost all customers are walk-in consumers. Customers pay ₹1.40 crore a year in total, whatever the scheme, because his shelf prices include tax. He makes no inter-state sales.
Option 1: Regular scheme
| Item | ₹ |
|---|---|
| Customer receipts (tax included) | 1,40,00,000 |
| Taxable value (1.40 crore ÷ 1.18) | 1,18,64,407 |
| Output GST at 18% | 21,35,593 |
| Less: ITC on purchases | 18,00,000 |
| GST paid in cash | 3,35,593 |
| Profit (taxable value − purchases ₹1 crore) | 18,64,407 |
Option 2: Composition (1% for traders)
| Item | ₹ |
|---|---|
| Customer receipts | 1,40,00,000 |
| Composition tax at 1% of turnover (paid from own pocket) | 1,40,000 |
| Purchases including GST (no ITC) | 1,18,00,000 |
| Profit | 20,60,000 |
Result
For Ravi, composition gives about ₹1.96 lakh more profit a year and much simpler compliance: CMP-08 every quarter and GSTR-4 once a year, instead of monthly GSTR-1 and GSTR-3B.
When composition would be the wrong choice
- If many customers are businesses that want to claim ITC: a composition dealer cannot charge GST, so they cannot claim ITC and may stop buying.
- If he wants to sell inter-state or online across states.
- If his margin is very low, or he buys mostly from unregistered suppliers (then he loses little ITC under the regular scheme anyway).
- If turnover will cross ₹1.5 crore (₹75 lakh in special category states).
Steps to opt in
File CMP-02 before the start of the financial year (31 March). Reverse ITC on stock in hand on the day before opting in (ITC-03), and show "composition taxable person, not eligible to collect tax on supplies" on every bill of supply.