Composition Scheme — Operations, CMP-08 & GSTR-4

Learning Objectives

• Understand who can opt for Composition and from when
• File CMP-02 to opt in and CMP-04 to opt out
• Compute the quarterly tax liability and file CMP-08
• File GSTR-4 annual return — know the deadline and content
• Handle the negative liability adjustment without losing your client's cash
• Advise on mid-year switches between regular and Composition

Composition Scheme — Quick Refresher

The Composition Scheme is a simplified GST regime for small taxpayers. The deal:

• You pay a low flat rate on turnover (1%, 5%, or 6%)
• You cannot claim Input Tax Credit
• You cannot make interstate outward supplies
• You cannot issue a tax invoice (you issue a Bill of Supply)
• You file quarterly tax (CMP-08) and one annual return (GSTR-4)

The Lifecycle in One Picture

            ┌─────────────────────────────────────────────────────┐
            │                                                       │
            │     CMP-02 (opt-in)        ┌───────────────┐         │
            │  ───────────────────────►  │   COMPOSITION  │         │
            │                            │      DEALER    │         │
            │                            │                │         │
            │                            │  CMP-08 every  │         │
            │                            │    quarter     │         │
            │                            │  (18th of next │         │
            │                            │     month)     │         │
            │                            │                │         │
            │                            │  GSTR-4 once   │         │
            │                            │      a year    │         │
            │                            │   (30 April)   │         │
            │                            │                │         │
            │                            └───────┬────────┘         │
            │                                    │                  │
            │     CMP-04 (opt-out)               │                  │
            │  ◄─────────────────────────────────┘                  │
            │     OR auto-exit on                                   │
            │     crossing ₹1.5 Cr / interstate sale / ineligible   │
            │                                                       │
            └───────────────────────────────────────────────────────┘

Opt-In — Filing CMP-02

To opt for Composition, file Form CMP-02 on the GST portal.

Two windows to file CMP-02:

1. At the start of a new financial year — file CMP-02 between 1 February and 31 March of the previous FY. Composition then applies from 1 April.
2. At the time of new registration — tick "Composition" in the registration application (Form REG-01). Composition applies from the date of registration.

You cannot opt in mid-year for an existing regular taxpayer. If a regular taxpayer wants to switch to Composition, they must wait until the next 1 February — 31 March window.

Form CMP-02 captures:

• GSTIN
• Date from which Composition is to be effective
• Declaration that the taxpayer satisfies all conditions (turnover, no interstate, no e-commerce, etc.)

Once CMP-02 is filed, the taxpayer must also file Form GST ITC-03 within 60 days — to reverse any ITC available on stock as on the cut-off date. (Composition dealers cannot carry ITC forward.)

Quarterly Tax — Filing CMP-08

CMP-08 is the self-assessed quarterly tax payment statement. Pay first, file later.

What CMP-08 contains:

Form CMP-08 — Statement for Self-Assessed Tax

Sl  Description                          Value (₹)
1.  Outward supplies (incl. exempt)      45,00,000
2.  Inward supplies attracting RCM        2,00,000

Tax Payable
3.  CGST                                    23,500   (0.5% of 45L + 0.5% of nil + RCM at applicable rate)
4.  SGST                                    23,500
5.  IGST (only on RCM)                       3,600   (RCM on inter-state import, etc.)
6.  Cess                                         0
                                          ─────────
Total tax payable                           50,600

Payment from Electronic Cash Ledger:
- CGST: ₹23,500
- SGST: ₹23,500
- IGST: ₹3,600

Three rules:

1. Cash only — Composition dealers cannot pay tax from ITC ledger (they have no ITC).
2. No late fee on CMP-08 itself — but interest @ 18% p.a. on delayed payment runs from the day after due date.
3. Tax includes RCM — if the Composition dealer pays freight to a GTA or legal fees to an advocate, RCM applies at the standard rate (not the Composition rate) and is added to CMP-08.

Annual Return — GSTR-4

GSTR-4 is the annual return for Composition taxpayers.

GSTR-4 captures:

• Aggregate outward supplies (intrastate, exempt, nil-rated)
• Aggregate inward supplies (B2B + RCM)
• Tax already paid through CMP-08 (auto-populated)
• Any additional liability — paid via cash ledger
• TDS/TCS credit if any

Important nuance: GSTR-4 was overhauled from FY 19-20 onwards — it is now a true annual return. (Previously it was a quarterly return that has been replaced by CMP-08.) Many CAs still confuse the old quarterly GSTR-4 with the current annual GSTR-4.

Negative Liability Adjustment — The Trap

This is the single most common operational headache in Composition. Here is what happens:

The Composition dealer pays quarterly tax via CMP-08 to the Electronic Cash Ledger. At year-end, GSTR-4 is filed showing the actual annual liability. If quarterly payments exceed annual liability → the excess remains in the cash ledger and creates a negative liability balance.

The catch: This negative balance does NOT automatically refund. It also doesn't auto-adjust against the next year's CMP-08. You must follow a specific process.

The 2021 Bug — Why CAs Hate Negative Liability

In FY 19-20 and FY 20-21, the GST portal had a quirk: after GSTR-4 filing, the system automatically created a negative balance entry in the negative-liability register. This entry then auto-debited the dealer's next CMP-08 payment, eating up their cash before they realised it.

Many small dealers found they could not pay their Q1 of next FY tax — the cash they had deposited had been "absorbed" by the negative liability adjustment. The CBIC issued circulars in 2021 to fix this and refunds were eventually processed.

Current Process (FY 25-26)

1. File GSTR-4 by 30 April. Any excess in cash ledger remains parked.
2. Apply for refund via Form GST RFD-01 — category: "Excess balance in Electronic Cash Ledger."
3. OR carry forward — leave it in the cash ledger to use against the next year's CMP-08.

Practical advice: Don't park large amounts in cash ledger. Compute the quarterly liability accurately to avoid over-payment.

Opt-Out — Filing CMP-04

The Composition dealer must file Form CMP-04 to switch to regular registration. Three triggers:

1. Voluntary switch — dealer simply decides regular is better (often because customers want tax invoices for ITC)
2. Auto-trigger by turnover — aggregate turnover crosses ₹1.5 Cr in any FY
3. Auto-trigger by ineligibility — single interstate sale, becoming an e-commerce seller, supplying goods not allowed under Composition

Filing CMP-04 within 7 days of the trigger event is mandatory.

Day-of-switch obligations:

• File Form GST ITC-01 within 30 days to claim ITC on stock held as on the switch date (you couldn't claim ITC before; now you can on whatever you have)
• Start issuing tax invoices instead of bills of supply from the switch date
• Charge regular GST (5%/12%/18% etc.) on outward supplies from the switch date
• Begin filing GSTR-1 and GSTR-3B from the month of switch

Case Study — A Hyderabad Textile Trader on Composition

💼 Veni Vastralayam (fictitious case study — not Sunrise Retail)

Sunrise Retail can't be Composition because it sells interstate. Let's switch to a textile trader to demonstrate.

Business: Veni Vastralayam — retail seller of sarees, suits, dress materials Location: Charminar, Hyderabad PAN: AABCV2345Q GSTIN: 36AABCV2345Q1Z3 FY 25-26 projected turnover: ₹78 Lakh — all intrastate Owner: Smt. Lakshmi Devi

Year-Start Compliance

Lakshmi Devi is already on Composition (filed CMP-02 in March 2024 for FY 24-25). For FY 25-26 she stays on Composition automatically — no fresh filing needed unless she wants to opt out.

Q1 FY 25-26 (Apr–Jun 2025) — CMP-08 Computation

Filed CMP-08 on 18 July 2025 — paid ₹21,700 from cash ledger.

Full-Year Pattern

Year-End GSTR-4 (Due 30 April 2026)

Veni Vastralayam files GSTR-4 by 30 April 2026, declaring full-year turnover of ₹78,00,000 and tax already paid of ₹79,000.

Verification: Annual tax on ₹78,00,000 @ 1% = ₹78,000 + RCM ₹1,000 = ₹79,000 — matches CMP-08 total. No additional liability. No negative balance.

Mid-Year Switches — The Operational Reality

Regular → Composition

Cannot happen mid-year. Wait for 1 Feb — 31 Mar window of previous FY.

Composition → Regular (Voluntary)

Can happen mid-year. Common because:

• B2B customers demand tax invoices for ITC
• Dealer wants to start interstate sales
• Dealer wants to claim ITC on big-ticket purchase (vehicle, machinery)

Process: File CMP-04 → start regular compliance from the date of opt-out (not retroactively).

Composition → Regular (Forced by Turnover Crossing ₹1.5 Cr)

Happens to growing businesses. On the day turnover crosses ₹1.5 Cr:

• File CMP-04 within 7 days
• Switch to regular compliance prospectively
• ITC on stock held: claim within 30 days via ITC-01
• All sales from that day onwards: tax invoice, full GST rate

Note: Sales BEFORE the crossing are NOT recomputed at regular rates — they remain at 1% Composition. Only sales after the crossing get regular treatment.

Common Mistakes to Avoid

Practice Exercise

Exercise 1: Lakshmi Devi's Q3 (Oct–Dec 2025) turnover spike pushes her cumulative FY 25-26 turnover to ₹1,58,00,000 by 15 January 2026. What happens, and what are the immediate action items?

Exercise 2: A small restaurant in Begumpet on the Composition Scheme (5% rate). Total Q1 FY 25-26 sales: ₹14,80,000. They also paid ₹12,000 to a registered GTA for kitchen equipment delivery. Compute CMP-08 tax payable.

Key Terms

Checklist — what you should now be able to do:

• Advise a new client whether Composition is the right fit (turnover, customer mix, ITC needs)
• File CMP-02 in the February–March window for FY change-over
• Compute and file CMP-08 each quarter including RCM components
• File GSTR-4 by 30 April and reconcile against the four CMP-08s
• Execute the mid-year switch from Composition to Regular without losing ITC