Rule 5 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 5 is where the composition scheme stops being a tax computation and becomes a set of running obligations. Seven conditions, two of which are about words printed on paper and on a board outside your shop — and clause (d) quietly restates the most consequential feature of the whole scheme.
Rule 5(1) requires a composition dealer to be neither a casual nor a non-resident taxable person; to hold stock not purchased inter-State or imported at the appointed day; to hold stock not bought from unregistered suppliers without paying s.9(4) tax; to pay tax under s.9(3) and s.9(4) on inward supplies; not to have manufactured notified goods in the preceding year; to print "composition taxable person, not eligible to collect tax on supplies" at the top of every bill of supply; and to display "composition taxable person" on every notice or signboard at every place of business. Rule 5(2) confirms no annual re-intimation is needed.
Clause (a): neither casual nor non-resident
"he is neither a casual taxable person nor a non-resident taxable person"
This condition now lives in two places. It was in Rule 5(1)(a) from 2017; the Finance (No. 2) Act, 2019 then inserted it into the statute as s.10(2)(f), notified through Notification No. 1/2020-CT with effect from 01.01.2020. The rule was not deleted, so it is both a statutory eligibility condition and a rule-level continuing condition.
The rationale is the advance tax mechanism. A casual taxable person under s.2(20) and a non-resident taxable person under s.2(77) register for a period not exceeding ninety days and deposit advance tax under s.27(2). A turnover-based composition sum settled quarterly cannot coexist with that.
Clauses (b) and (c): the appointed-day stock conditions
Clause (b) — the goods held in stock on the appointed day were not purchased in the course of inter-State trade or commerce, not imported, and not received from a branch, agent or principal outside the State, "where the option is exercised under sub-rule (1) of rule 3".
By its own words this condition attaches only to the CMP-01 transitional route, and the appointed day was 1 July 2017. It is spent for anyone entering today.
Clause (c) — the goods held in stock were not purchased from an unregistered supplier, and where purchased, the person pays tax under s.9(4).
Its live period was narrow. The ICAI Handbook records that clause (c) was relevant from 1 July 2017 to 12 October 2017; from 13 October 2017 to 31 January 2019 the general s.9(4) reverse charge stood suspended, and s.9(4) was then amended to apply only to notified classes of registered recipients. So clause (c) now operates only where the recipient falls in such a notified class.
Clause (d): the condition that catches people out
"he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both"
This is not a new obligation — it is a restatement. Section 10(1) is already expressed to be "subject to the provisions of sub-sections (3) and (4) of section 9". Rule 5(1)(d) turns that into a condition of the option, which changes the consequence of getting it wrong.
Breach a condition and Rule 6(1) removes the option. So a composition dealer who fails to pay reverse charge on, say, a goods transport agency service or a legal service does not merely owe that tax with interest — the failure is capable of costing the scheme itself.
And the reverse charge is paid at the ordinary rate, in cash, with no credit. Section 10(4) forbids any credit of input tax, so reverse charge tax paid by a composition dealer is a pure cost. Reverse charge and the composition dealer →
Clause (e): no notified manufacture last year
"he was not engaged in the manufacture of goods as notified under clause (e) of sub-section (2) of section 10, during the preceding financial year"
Note the tense. The section bars a person who is a manufacturer of notified goods; the rule bars a person who was, during the preceding financial year. Both must be satisfied, so a manufacturer who stopped in March cannot be in the scheme in April. The manufacturer bar →
Clauses (f) and (g): the two legends
Clause (f) — on the bill of supply. "he shall mention the words 'composition taxable person, not eligible to collect tax on supplies' at the top of the bill of supply issued by him".
Two requirements in one clause. The exact words, and their position — at the top. A composition dealer issues a bill of supply, not a tax invoice, under s.31(3)(c) read with Rule 49, because s.10(4) forbids collecting tax from the recipient. Bill of supply format →
Clause (g) — on the signboard. "he shall mention the words 'composition taxable person' on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business".
Every place of business, not just the principal one. A godown or a second outlet declared as an additional place of business carries the same obligation.
Both legends do the same job. A composition dealer's customer gets no input tax credit, and the buyer has no invoice showing tax to tell them so. The legends are the statutory substitute for that disclosure — which is why they are conditions of the scheme rather than mere formalities, and why a s.125 general penalty exposure follows a breach.
Rule 5(2): the option runs on
"The registered person paying tax under section 10 may not file a fresh intimation every year and he may continue to pay tax under the said section subject to the provisions of the Act and these rules."
Two halves. No annual renewal — one CMP-02 lasts until the person exits. And the continuation is expressly "subject to the provisions of the Act and these rules", which is Rule 6(1) restated: the option survives only while every condition holds.
So there is no such thing as a dormant breach. Eligibility is tested continuously, not annually, and failure operates from the day the condition fails, not from the year end. Rule 6 and the CMP-04 chain →
Key takeaways
- Clause (a) duplicates s.10(2)(f) since 01.01.2020 — both remain in force.
- Clauses (b) and (c) are largely spent, tied to the appointed day and the pre-2019 s.9(4).
- Clause (d) makes reverse charge payment a condition, so failure can cost the scheme, not just the tax.
- Clause (e) looks at the preceding financial year, where the section looks at the present.
- Clause (f) requires exact words at the top of the bill of supply; clause (g) requires a legend at every place of business.
- Rule 5(2) means no annual re-intimation, but continuation is conditional at all times.
Read next
- Rule 3 and Rule 4: Which CMP Form, and When the Option Starts
- Rule 6: Lapse, Withdrawal and the CMP-04 to CMP-07 Chain
- Reverse Charge and the Composition Dealer
- The Manufacturer Bar: Which Goods Knock You Out of Composition
Disclaimer: Positions stated as on 5 September 2026, based on Rule 5 of the CGST Rules, 2017 and sections 10, 31(3)(c) and 49 of the CGST Act, 2017 as recorded in the ICAI Bare Law (12th edition, amended to 31 March 2026), and the commentary in the ICAI Handbook on Composition Scheme under GST (February 2026, 3rd edition).