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A mid-market manufacturer runs the monthly GSTR-2B reconciliation on the fifteenth. Rs 3,44,000 in ITC ties cleanly from the purchase register to the portal. One vendor's Rs 36,000 in monthly invoices — Rs 2,00,000 in packaging materials at what the reconciler assumed was 18 per cent GST — sits in the gap month after month. The vendor's GSTIN is valid and active on the portal search. The vendor's AR desk insists every invoice has been filed. The finance manager wants an explanation before signing off the ITC line in GSTR-3B Table 4(A) on the twentieth, and the controller is asking why the gap on this one vendor has been recurring for six consecutive months. The vendor's invoice, on closer inspection, is headed 'Bill of Supply' rather than 'Tax Invoice' and carries no GST break-up — the vendor is registered under the Section 10 composition scheme, and the entire premise of the reconciliation for that vendor line is wrong.
A composition-scheme vendor under Section 10 of the CGST Act 2017 does not file GSTR-1 and does not push any per-invoice detail to any buyer's GSTR-2B. They file CMP-08 quarterly and GSTR-4 annually under Rule 62 — self-assessed tax deposit statements that report their turnover and composition tax to the Government but do not populate the recipient side. The invoice they issue under Section 31(3)(c) read with Rule 49 is a bill of supply, not a tax invoice — no CGST, SGST, or IGST columns; a mandatory 'Composition Taxable Person, not eligible to collect tax on supplies' declaration on the face. Under Section 10, they are prohibited from collecting GST from buyers and prohibited from passing ITC. The consequence for the buyer is a hard zero ITC on the supply — the Rs 36,000 that would have been claimable at 18 per cent from a regular vendor is unavailable, and the full Rs 2,00,000 invoice value is a P&L expense. The reconciliation gap closes not by chasing the vendor to file GSTR-1 (they cannot) but by reclassifying the vendor line in the purchase register as non-ITC-eligible and excluding it from the eligible-ITC subtotal that feeds the GSTR-2B match.
A 'Composition Vendor' flag column on the vendor master, populated at onboarding by a GST portal search for every new GSTIN. A monthly refresh of the flag against the GST portal for the top vendors by value (composition status can change mid-year if the taxpayer opts out via CMP-04 or crosses the Rs 1.5 crore threshold). A chart-of-accounts separation between ITC-eligible purchases (routed to inbound-GST-inclusive vendor accounts) and non-ITC-eligible purchases (routed to a composition-vendor expense sub-account with no ITC receivable line). A pre-reconciliation filter on the purchase register that excludes composition-vendor rows from the eligible-ITC subtotal before the GSTR-2B match runs. A vendor onboarding checklist that captures the bill-of-supply-versus-tax-invoice distinction at the first invoice, so the classification is set from day one rather than surfacing as a recurring gap six months in.
Every composition-vendor invoice is booked at gross value with a non-ITC-eligible tag. The GSTR-2B reconciliation excludes composition-vendor rows up front. The eligible-ITC subtotal that feeds GSTR-3B Table 4(A) matches the GSTR-2B ceiling without a phantom gap on the composition vendor. The Rs 36,000 illustrative example no longer surfaces as an unexplained shortfall — it is correctly recognised as zero ITC by design, and the reconciler's chase queue is not clogged with a vendor who cannot file GSTR-1. The vendor master carries a durable status field that survives across monthly closes, and any transition (composition to regular or vice versa) is caught in the monthly refresh rather than months after the change.
You pulled the GSTR-2B on the fifteenth. You ran it against the purchase register. Rs 3,44,000 in ITC reconciles cleanly to the portal. One vendor’s Rs 36,000 in monthly invoices sits in the gap — same GSTIN, same vendor, month after month — and every time you chase the vendor’s AR desk they insist the invoices have been filed. You checked the GSTIN on the GST portal search page. It is valid, active, and registered in Karnataka.
Then you notice something on the invoice you had missed. It does not carry a GST break-up. The document is headed “Bill of Supply,” not “Tax Invoice.” A small declaration at the bottom reads “Composition Taxable Person, not eligible to collect tax on supplies.” The vendor is on the GST composition scheme, and that changes everything about how their invoices should sit in your books.
The quick answer
The vendor is registered under Section 10 of the CGST Act 2017 — the composition scheme. Composition dealers pay a fixed low rate of GST (1 per cent for goods traders, 5 per cent for restaurants, 6 per cent for other services) on their outward turnover directly to the Government, and in exchange they cannot collect GST from their buyers and cannot pass any ITC to any buyer. They file CMP-08 quarterly and GSTR-4 annually — they do not file GSTR-1. Their invoices are structurally excluded from your GSTR-2B by design, not by defect.
The consequence for you as the buyer is a hard Rs 0 in ITC on that vendor’s supply. The Rs 36,000 sitting in the gap is not a recoverable working-capital timing item and it is not a Section 16(4) at-risk write-off — it is a cost you expense in full to the P&L. The reconciliation gap closes not by chasing the vendor to file GSTR-1 (they cannot) but by reclassifying the invoice in your books as a non-ITC-eligible purchase.
What Section 10 actually says — the composition scheme
The composition scheme under Section 10 of the CGST Act 2017 is an optional simplified compliance regime for small taxpayers. Two turnover ceilings define eligibility. Section 10(1) covers a registered person supplying goods (with limited services) whose aggregate turnover in the preceding financial year did not exceed Rs 1.5 crore (Rs 75 lakh for the special-category states). Section 10(2A) covers a registered person supplying services with aggregate turnover up to Rs 50 lakh in the preceding financial year.
The composition rate is a fixed percentage of turnover, not of GST charged on individual invoices. Rule 5 of the CGST Rules 2017 prescribes the rates — 1 per cent for a manufacturer or trader of goods (0.5 per cent CGST plus 0.5 per cent SGST); 5 per cent for a supplier of restaurant services under paragraph 6(b) of Schedule II (2.5 per cent CGST plus 2.5 per cent SGST); and 6 per cent for any other supplier eligible under Section 10(2A) (3 per cent CGST plus 3 per cent SGST).
Section 10(2) carries hard restrictions on the scheme. A composition dealer cannot make an inter-state outward supply of goods or services, cannot supply through an e-commerce operator required to collect TCS under Section 52, cannot supply goods or services not leviable to GST, and cannot be a manufacturer of certain notified goods (ice cream, pan masala, tobacco, aerated water, bricks). Any breach of these conditions causes automatic loss of composition status from the date of the breach and reversion to regular taxpayer registration.
What a composition dealer’s invoice actually looks like
Under Section 31(3)(c) of the CGST Act 2017 read with Rule 49 of the CGST Rules 2017, a composition dealer must issue a “bill of supply” for every outward supply — not a tax invoice. The two documents differ in structural detail that matters for your books.
The bill of supply carries no GST break-up. There is no CGST column, no SGST column, no IGST column. The document shows the vendor’s GSTIN, the buyer’s name (GSTIN mandatory if the buyer is registered), the HSN or SAC code, the description of goods or services, the total value, and — mandatorily — the declaration “Composition Taxable Person, not eligible to collect tax on supplies” on the face of the document.
If a vendor’s invoice carries a GST break-up despite the composition status, the invoice is defective — a composition dealer is prohibited from collecting GST from buyers under Section 10. The right response is to return the invoice and ask for a compliant bill of supply, not to book the erroneous GST charge as an ITC claim (which would fail the GSTR-2B match under Rule 36(4) and open a Section 74 exposure on the buyer side with three-year detection window, interest under Section 50(3), and 100 per cent penalty).
Why the invoice never appears in your GSTR-2B
Regular taxpayers file GSTR-1 monthly (or quarterly under QRMP), and every outward B2B invoice reported on GSTR-1 flows through to the recipient’s GSTR-2B under Rule 60 of the CGST Rules 2017. Composition dealers do not file GSTR-1. Under Rule 62 of the CGST Rules 2017, a composition dealer files CMP-08 quarterly by the eighteenth of the month following each quarter (a self-assessed tax deposit statement) and GSTR-4 annually by the thirtieth of April following the financial year (a consolidated return).
Neither CMP-08 nor GSTR-4 populates the recipient’s GSTR-2B. The two forms report the composition dealer’s turnover and self-assessed tax to the Government; they do not push any per-invoice detail to any buyer’s inbound ledger. Your GSTR-2B is fed exclusively by GSTR-1, GSTR-1A amendments, IFF filings under QRMP, and — from 1 October 2024 — the IMS action layer for regular taxpayers. The composition dealer’s invoice is not missing from any of these — it is not eligible to be there in the first place.
The Invoice Management System workflow does not surface a composition dealer’s invoice on the IMS dashboard either. There is no “Accept / Reject / Pending” action available on a bill of supply. The invoice sits entirely on the buyer’s side and never crosses over to the portal.
The ITC consequence — an illustrative Rs 2 lakh purchase
Take a mid-market manufacturer buying Rs 2,00,000 in packaging materials per month from a small local trader who has opted into the composition scheme.
If the trader were a regular taxpayer charging 18 per cent GST, the invoice would break out as Rs 2,00,000 taxable value plus Rs 36,000 GST for a Rs 2,36,000 total. The manufacturer would book the Rs 2,00,000 as a materials expense and the Rs 36,000 as an ITC receivable, and the ITC would flow to GSTR-3B Table 4(A) against the GSTR-2B entry.
If the same trader is on the composition scheme, the bill of supply reads Rs 2,00,000 flat with no GST break-up. The trader pays Rs 2,000 as composition tax to the Government (1 per cent on the Rs 2,00,000 turnover) directly under CMP-08 — a tax the buyer never sees on any invoice, portal record, or GSTR-2B line. The manufacturer books the entire Rs 2,00,000 as a materials expense, and no ITC receivable is created. The Rs 36,000 that would have been claimable is gone — not because the vendor failed to file, but because the vendor never charged it and the regime never intended it to be claimed.
Over twelve months, Rs 4,32,000 in ITC is unavailable that would have been available from a regular-scheme vendor at the same 18 per cent rate. This is the trade-off the composition scheme creates — the vendor’s compliance cost is lower and their price to buyers is typically lower to reflect the tax gap, but the buyer’s effective cost of purchase is the gross invoice value with no offset.
Verifying your vendor’s composition status — the buyer-side check
The GST portal’s search functionality lets any user look up a GSTIN and see the taxpayer type — Regular, Composition, TDS deductor, TCS collector, or Non-Resident. Enter the vendor’s GSTIN at the GST portal search page (services.gst.gov.in) and the result surfaces the taxpayer type alongside the registration status, legal name, trade name, jurisdiction, and effective date of registration.
If the taxpayer type shows “Composition” or the constitution of business shows a composition levy under Section 10, the vendor is on the composition scheme and every invoice from that vendor is a bill of supply with no ITC. If the taxpayer type shows “Regular” but the invoice you received carries no GST, one of two things has gone wrong — either the vendor has switched to composition mid-year and not communicated the change, or the vendor is a regular taxpayer wrongly issuing a bill of supply. Either case needs a supplier reconciliation call to align the invoice format with the underlying registration.
The GST reconciliation glossary covers the taxpayer-type field alongside every other GSTIN attribute the reconciler cross-references during the monthly close — jurisdiction, effective date of registration, filing frequency, IMS activation status, and the trade-name-versus-legal-name distinction that surfaces on cheque-vendor mismatches.
The one to escalate first — reclassifying the invoice in your books
The vendor is compliant. The invoice is compliant. The gap in your GSTR-2B is compliant. The only thing that needs to change is your book-side classification.
Add a “Composition Vendor” flag column to your vendor master. Tag every purchase from a composition-scheme vendor with a non-ITC-eligible marker in the purchase register. When you extract the eligible-ITC subtotal that feeds the GSTR-2B versus purchase register reconciliation, exclude the composition-vendor lines up front. The reconciliation gap closes cleanly on the first pass, and no analyst has to chase a composition vendor for a GSTR-1 filing that will never come.
If your ERP treats every AP invoice as ITC-eligible by default (Tally, Zoho Books, Busy, SAP FI, Oracle Fusion — most Indian ERP standard behaviour), the reclassification is a chart-of-accounts change: route composition-vendor invoices to a separate expense sub-account that carries no ITC receivable component. The why is ITC not showing when the vendor says they filed GSTR-1 walkthrough covers the more common regular-vendor case where the ITC should be there and is not — the composition case is the opposite end of the same reconciliation, where the ITC should not be there and the reconciler mistakenly expected it.
When the manual verification outgrows itself
For a mid-market finance team with under fifty active vendors, manually checking each vendor’s GSTIN on the GST portal once at onboarding and flagging composition status in the vendor master is a fifteen-minute onboarding task. Above roughly two hundred active vendors, or in an environment where new vendors are added weekly (retail chains, quick commerce operators, hospitality groups with rotating supplier lists), the manual GSTIN verification stops holding.
The composition-versus-regular classification also shifts over time. A vendor who was Regular at onboarding may opt into composition at the start of a new financial year via Form CMP-02, or a composition vendor may cross the Rs 1.5 crore threshold mid-year and revert to regular registration via Form CMP-04. The vendor master needs a monthly refresh against the GST portal, not a one-time flag.
At that scale, moving the vendor-status verification and the buyer-side ITC-eligibility classification onto continuously refreshed detection — where Terra Insight’s GST reconciliation software treats the composition-vendor flag and the blocked-ITC Section 17(5) classification as first-class outputs in the reconciliation working paper — is what keeps the ITC subtotal defensible against a going-back audit and stops the recurring gap from surfacing as an unexplained shortfall every month. Below that scale, the vendor-master flag column and the disciplined onboarding check are the right tools, and running the composition classification manually is what builds the reconciler’s judgement for when scale demands the shift.
Go deeper
- Why is my GSTR-2B less than my purchase register — the five-bucket walkthrough for the more general ITC-gap symptom
- Why ITC is not showing when the vendor says they filed GSTR-1 — the regular-vendor failure mode at the opposite end of the reconciliation
- Invoice Management System reconciliation — the IMS workflow in detail
- GST reconciliation glossary — the full field-by-field GSTIN attribute reference
- Blocked ITC under Section 17(5) — the sibling non-ITC-eligible category
- GST reconciliation software for India
Frequently Asked Questions
What is the composition scheme and why does it affect my ITC?
The composition scheme under Section 10 of the CGST Act 2017 is an optional simplified regime for small taxpayers — a manufacturer or trader of goods with turnover up to Rs 1.5 crore, a restaurant service supplier, or an other-service supplier with turnover up to Rs 50 lakh. A composition dealer pays a fixed low rate of GST (1 per cent, 5 per cent, or 6 per cent) on their outward turnover directly to the Government, and in exchange they cannot collect GST from buyers and cannot pass ITC to any buyer. The invoice they issue is a bill of supply, not a tax invoice — no CGST column, no SGST column, no IGST column, and a mandatory declaration reading “Composition Taxable Person, not eligible to collect tax on supplies” on the face of the document. The consequence for you as a buyer is a hard zero rupees in ITC on that vendor’s supply. The Rs 36,000 that would have been claimable at an 18 per cent rate from a regular vendor is not a working-capital timing item and it is not a Section 16(4) at-risk write-off — it is a cost you expense in full to the P&L.
If the composition vendor’s invoice does not appear in GSTR-2B, why do I still have to book it?
The purchase itself is real, the vendor supplied real goods or services, and the invoice — bill of supply — is a legally valid document that has to be recorded in your books at gross value for the AP ledger to reconcile against the vendor statement. What changes is only the ITC classification. The AP entry books the full invoice value (say Rs 2,00,000) as a materials or services expense with no ITC receivable component. The Rs 2,00,000 sits in the P&L as a fully expensed cost; the vendor gets paid Rs 2,00,000 in full; the GSTR-2B reconciliation excludes the invoice up front because it is not eligible to appear. The book-side classification is what closes the gap — the invoice is not a defect in GSTR-2B, it is a category the reconciliation working paper has to recognise separately.
Can a composition dealer switch to a regular tax invoice on request?
No — not while they remain on the composition scheme. A composition dealer is prohibited from collecting GST from buyers under Section 10 read with the CMP-02 declaration they filed to opt into the scheme. If they issue a document headed “Tax Invoice” with a GST break-up, the document is defective, the composition status is at risk of being revoked from the date of the breach, and any GST charged is not claimable by the buyer through GSTR-2B (the invoice never appears in the portal). A composition dealer who genuinely needs to charge GST to a specific buyer has to opt out of the composition scheme (Form CMP-04) and revert to regular taxpayer registration from the date the opt-out takes effect — after that, they file GSTR-1 monthly or under QRMP, and their invoices from that date onwards will appear in the recipient’s GSTR-2B.
How do I know if my vendor is on the composition scheme?
Three signals confirm composition status. First, the invoice itself — a composition dealer issues a bill of supply, not a tax invoice; there is no GST break-up on the document; the declaration “Composition Taxable Person, not eligible to collect tax on supplies” appears on the face. Second, the GST portal’s search functionality — enter the vendor’s GSTIN at services.gst.gov.in and the taxpayer type field surfaces as “Composition” rather than “Regular.” Third, the vendor’s filing history — a composition dealer files CMP-08 quarterly (by the eighteenth of the month following the quarter) and GSTR-4 annually (by the thirtieth of April) rather than GSTR-1. Any one of the three signals is definitive; two of the three together resolve any ambiguity where the vendor is transitioning between composition and regular status mid-year.
My composition vendor invoice does carry GST — should I claim ITC?
No — return the invoice and ask for a compliant bill of supply. A composition dealer is prohibited from collecting GST from buyers under Section 10, so any GST amount on the invoice has been charged in breach of the scheme conditions. The invoice will not appear in your GSTR-2B (composition dealers do not file GSTR-1), so no ITC is available through the portal in any case. Claiming the GST as ITC in GSTR-3B Table 4(A) without a matching GSTR-2B entry breaches Rule 36(4) — the ITC-to-2B ceiling — and opens a Section 74 exposure with three-year detection window, interest under Section 50(3), and 100 per cent penalty. The correct response is a supplier reconciliation call, a request for a corrected bill of supply, and — if the vendor insists they are entitled to charge GST — a verification of their GSTIN status on the GST portal to confirm whether they are actually still on composition or have transitioned to regular registration.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ Section 10, Central Goods and Services Tax Act 2017 — Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of Section 9, a registered person whose aggregate turnover in the preceding financial year did not exceed one crore fifty lakh rupees may opt to pay, in lieu of the tax payable by him under sub-section (1) of Section 9, an amount of tax calculated at the prescribed rate. The composition scheme is optional and opt-in; the taxpayer files Form CMP-02 to opt into the scheme at the start of a financial year (or Form CMP-01 for a fresh registration under composition). Section 10(2A) extends the scheme to service suppliers with aggregate turnover up to fifty lakh rupees in the preceding financial year. The registered person opting under Section 10 shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax — the two prohibitions together are the entire reason a composition vendor's invoice cannot carry a GST break-up and cannot push any ITC to the buyer's GSTR-2B.
- ▸ Rule 5, Central Goods and Services Tax Rules 2017 — The category of registered persons eligible for composition levy under Section 10, along with the rate of tax on the taxable turnover, is prescribed as follows — a manufacturer or a trader of goods pays one per cent (half per cent as CGST and half per cent as SGST or UTGST); a supplier of restaurant services under paragraph 6(b) of Schedule II pays five per cent (two-and-a-half per cent as CGST and two-and-a-half per cent as SGST or UTGST); any other supplier eligible under Section 10(2A) pays six per cent (three per cent as CGST and three per cent as SGST or UTGST). The rate is applied to the taxable turnover of the composition dealer directly, paid by the composition dealer to the Government from their own account, and is invisible to the buyer — no portion of it flows to the buyer's inbound GST ledger, GSTR-2B, or IMS dashboard.
- ▸ Section 31(3)(c), Central Goods and Services Tax Act 2017 read with Rule 49, Central Goods and Services Tax Rules 2017 — A registered person supplying exempted goods or services or paying tax under Section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed. Rule 49 specifies the mandatory content — the name, address, and GSTIN of the supplier; a consecutive serial number; the date of issue; the name, address, and GSTIN of the recipient (if registered); the HSN code of the goods or SAC of the services; the description of goods or services; the value of the supply after adjusting any discount or abatement; and the signature of the supplier or an authorised representative. Every bill of supply issued by a composition dealer must carry a declaration on the face of the document reading 'Composition Taxable Person, not eligible to collect tax on supplies' — the absence of this declaration on an invoice from a Section 10 taxpayer is a defect, and its presence is what signals to the buyer that no ITC is available on the supply.
- ▸ Rule 62, Central Goods and Services Tax Rules 2017 — Every registered person paying tax under Section 10 shall furnish a statement in Form GST CMP-08 for every quarter, or part thereof, electronically, on or before the eighteenth day of the month succeeding such quarter, and a return in Form GSTR-4 electronically on or before the thirtieth day of April following the end of a financial year. The CMP-08 statement carries the composition dealer's aggregate outward turnover and the self-assessed composition tax for the quarter; GSTR-4 consolidates the four CMP-08 filings for the year with the annual reconciliation. Neither form pushes per-invoice detail to any buyer's GSTR-2B — the composition dealer's outward supplies do not appear on the recipient's inbound ledger because they are not eligible to appear there. GSTR-2B is populated exclusively from GSTR-1 (monthly), GSTR-1A (amendments), IFF filings under QRMP, and the IMS action layer for regular taxpayers.
- ▸ Section 10(2), Central Goods and Services Tax Act 2017 — The registered person shall be eligible to opt under sub-section (1) only if he is not engaged in the supply of services (other than restaurant services under paragraph 6(b) of Schedule II), he is not engaged in making any supply of goods or services which are not leviable to tax under this Act, he is not engaged in making any inter-state outward supply of goods or services, he is not engaged in making any supply of goods or services through an electronic commerce operator who is required to collect tax at source under Section 52, and he is not a manufacturer of such goods as may be notified by the Government. The most operational of these restrictions is the inter-state outward supply prohibition — a composition dealer registered in Karnataka can supply goods and services within Karnataka but cannot invoice a buyer in Maharashtra under composition; any inter-state supply causes automatic loss of composition status from the date of the breach and reversion to regular taxpayer registration.