The Hyderabad Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) has held that a taxpayer registered under the GST composition scheme automatically ceases to be eligible for the concessional scheme once its aggregate turnover crosses the prescribed threshold of ₹1.50 crore.

The bench of  A.P. Ravi (Judicial Member) and Duvvuri Krishna Srinivas, Member (Technical) simultaneously granted the taxpayer the benefit of cum-tax valuation under Rule 35 of the TSGST/CGST Rules, 2017, directing the department to recompute the differential tax liability only on supplies made after the date on which the composition option lapsed.

The appellant/assessee was engaged in the manufacture and supply of red clay bricks and had opted for the composition scheme under Section 10(1) of the Telangana GST Act, 2017, read with the CGST Act. Under the applicable composition scheme, the appellant was required to discharge tax at the prescribed composition rate of 1% in respect of the relevant supplies.

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The dispute arose during departmental audit when the authorities compared the turnover reflected in the appellant’s e-way bills with the turnover declared in its FORM GST CMP-08 statements.

For financial year 2020–21, the e-way bill records reflected aggregate turnover of ₹1,95,53,800, whereas the turnover declared in the CMP-08 statements was ₹1,44,86,100. The difference amounted to ₹50,67,700. The department consequently took the view that the appellant had crossed the statutory composition threshold of ₹1.50 crore.

According to the department, once the aggregate turnover crossed ₹1.50 crore, the appellant ceased to qualify for the composition scheme and became liable to pay GST under the regular scheme on the supplies made after such cessation.

Following the audit objections, show-cause notices were issued proposing recovery of differential tax for the relevant financial years. The initial computation in the notices adopted a GST rate of 28%, comprising 14% CGST and 14% SGST, although the applicable rate was subsequently restricted to 5% during adjudication.

The proper officer passed orders under Section 73 of the TSGST Act confirming the differential tax liability along with applicable interest and a penalty equivalent to 10% of the tax.

The taxpayer challenged the orders before the First Appellate Authority, but the appeals were dismissed. The taxpayer thereafter approached the Hyderabad Bench of GSTAT seeking restoration of the composition scheme, setting aside of the tax, interest and penalty demands, and consequential relief including refund of pre-deposit.

The principal question before the Tribunal was whether the taxpayer had exceeded the prescribed ₹1.50 crore aggregate turnover threshold during the relevant financial years and, consequently, whether it automatically ceased to be eligible for the composition scheme.

A connected issue was whether the differential tax could be computed on the entire value of supplies or whether the taxpayer was entitled to the cum-tax benefit under Rule 35, considering that composition taxpayers are prohibited from separately collecting GST from their customers.

GSTAT found that the taxpayer had, in fact, exceeded the prescribed turnover threshold. It relied upon Section 10(3), which provides that the composition option lapses from the day on which the aggregate turnover of a registered person exceeds the statutory limit.

The Tribunal observed that the consequence under Section 10(3) is automatic and operates by force of statute. Once the threshold is crossed, the taxpayer ceases to remain eligible for the composition scheme and becomes liable to pay tax under the regular scheme from the date of such cessation.

The Tribunal further referred to Rule 6(2) of the CGST/TSGST Rules, which provides that a person who ceases to satisfy the conditions of the composition scheme becomes liable to pay tax under Section 9(1), issue tax invoices for taxable supplies thereafter and intimate withdrawal from the composition scheme in FORM GST CMP-04.

Accordingly, the Tribunal rejected the proposition that the composition benefit could continue merely because the excess turnover was inadvertent or occurred without a deliberate intention to evade tax.

The appellant argued that the excess turnover occurred inadvertently and without any deliberate or conscious intention. It was submitted that the business had been adversely affected by the COVID-19 pandemic, which made it difficult to properly monitor business affairs, turnover and tax compliance.

The appellant also claimed that it had acted under a bona fide and reasonable belief that it continued to remain eligible for the composition scheme and had neither suppressed material particulars nor acted with mala fide intent.

However, GSTAT made it clear that the statutory consequence attached to crossing the threshold does not depend upon the taxpayer’s intention. Once the aggregate turnover exceeds the prescribed limit, the composition option lapses from that point in accordance with Section 10(3).

The Tribunal also considered the taxpayer’s contention regarding errors in certain e-way bills.

The department had already taken the alleged typographical or other errors into account while determining the demand. GSTAT noted that the excess turnover attributable to such errors had been excluded by the department.

Consequently, the Tribunal found no sufficient basis to interfere with the turnover figures ultimately determined by the lower authorities.

While upholding the fundamental finding that the composition scheme had lapsed, the Tribunal granted an important statutory benefit to the taxpayer.

GSTAT examined Section 10(4), which prohibits a composition taxpayer from collecting tax separately from recipients and also prevents the taxpayer from claiming input tax credit during the period of composition.

The Tribunal reasoned that because a composition taxpayer cannot separately collect GST from customers or show a separate GST component in its invoices, the consideration received from customers must be treated as the total consideration inclusive of tax for the supplies made after the composition scheme ceased to apply.

The Tribunal therefore invoked Rule 35, which prescribes the mechanism for determining tax where the value of supply is inclusive of tax. Under the rule, the tax component is calculated using the prescribed cum-tax formula rather than by simply applying the tax rate to the entire amount.

GSTAT specifically held that the present case fell within the scope of Rule 35 because the taxpayer was not permitted to collect tax separately and the department had not alleged that the taxpayer had actually recovered any amount over and above the invoice value.

A significant aspect of the ruling was the Tribunal’s finding that the taxpayer’s failure to specifically claim the Rule 35 benefit before the authorities did not disentitle it from receiving the statutory benefit.

The Tribunal observed that the relevant facts were already available on record and that the authorities were required to determine the legally correct tax liability.

According to GSTAT, the department cannot collect tax in excess of what is legally payable merely because a taxpayer did not specifically invoke a statutory benefit.

The Tribunal relied upon the principle laid down by the Supreme Court in M/s. Unichem Laboratories Limited v. Collector of Central Excise, Bombay, emphasizing that revenue authorities must levy and collect the amount legally due—neither less nor more—and must act reasonably and fairly.

Having extended the benefit of Rule 35, GSTAT directed the proper officer to recompute the differential tax liability only in respect of supplies made on and after the date on which the composition option actually lapsed.

The declared value was to be treated as cum-tax, with the tax component determined according to the formula prescribed under Rule 35.

The Tribunal directed that the revised computation be completed and communicated to the taxpayer within two weeks from the date of the order. Any consequential liability towards interest and penalty was also directed to be recalculated on the basis of the revised tax liability.

The Tribunal also considered the issue of input tax credit following cessation of the composition scheme.

It noted that a person under the composition scheme is not entitled to avail ITC during the period in which the scheme remains applicable. However, once the composition scheme ceases due to crossing of the turnover threshold, the taxpayer may become eligible for ITC, subject to fulfillment of the statutory requirements under Section 16 and the relevant rules.

Since the appellant had not specifically advanced a claim for ITC in the proceedings, GSTAT declined to adjudicate the issue and expressly left the question of ITC entitlement open.

The Tribunal therefore did not completely quash the demand against the taxpayer.

Instead, it upheld the First Appellate Authority’s order subject to a limited modification, namely that the taxpayer would receive the benefit of cum-tax valuation under Rule 35.

The tax liability is consequently required to be recomputed in accordance with the Tribunal’s directions, and the corresponding interest and penalty must also be recalculated on the basis of the revised tax figure.

The GSTAT record reflects a differential demand of ₹1,27,250 for FY 2020–21, comprising ₹63,625 each towards CGST and TSGST. For FY 2021–22, the departmental representative stated that the additional liability worked out to ₹6,43,856, comprising ₹3,21,928 each towards CGST and TSGST.

The final liability, however, cannot be understood simply from these figures because GSTAT has specifically directed the proper officer to undertake a fresh computation after applying the Rule 35 cum-tax mechanism.

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