GSTAT Clears Cum-Tax Relief for Dealers Losing GST Composition Scheme Due to Turnover Breach
Tribunal orders tax recalculation on ‘inclusive-of-tax’ values, offers key clarity for composition dealers crossing threshold
Understanding the GST Composition Scheme and Thresholds
The GST composition scheme under Section 10 of the CGST/TSGST Acts offers eligible small businesses a simpler compliance regime: they pay tax at a reduced flat rate (for bricks manufacturers, 1% in Telangana) without much of the detailed record-keeping or compliance required under the normal GST scheme. However, this scheme is subject to a strict annual turnover limit, which for Telangana stands at ₹1.5 crore. Crossing this threshold immediately revokes composition scheme benefits—taxpayers must then shift to regular GST, pay at standard rates, and comply with full GST requirements. Crucially, composition dealers are barred from collecting tax from customers (Section 10(4)).
The Parameshwara Bricks Case: What Happened?
M/s. Parameshwara Bricks availed the GST composition scheme at 1% for supplying red clay bricks. During 2020–21, a departmental audit detected that the business’s actual turnover (₹1,95,53,800, as reflected in e-way bills) exceeded the ₹1.5 crore threshold, making them ineligible for the composition scheme from the date of breach. The declared turnover in the mandatory quarterly GST CMP-08 forms was lower, prompting further scrutiny.
Authorities initiated proceedings under Section 73 (relating to underpayment/short payment of GST), demanding:
- Differential tax at the standard rate of 5% (previously 28%) on post-threshold supplies
- Interest under Section 50(1)
- Penalty at 10% of the tax amount
The dealer argued that all invoices after threshold breach were issued on a tax-inclusive basis, since they could not legally collect GST as composition taxpayers.
The Legal Issue: How Should Tax Be Computed on Post-Breach Supplies?
When a dealer loses composition scheme eligibility mid-year, a practical dilemma arises: Should they be assessed GST on the full invoice value (as if declared exclusive of tax, inflating liability), or on the value after deducting imputed GST (the so-called 'cum-tax' method), since they couldn’t charge tax separately?
Under Rule 35 of the CGST/TSGST Rules, when the price is tax-inclusive (i.e., dealer couldn’t (or didn’t) add tax), the amount received is considered to include GST, and tax must be calculated accordingly. This principle prevents authorities from demanding more than the actual tax embedded in the amount paid by customers.
What Did the GST Appellate Tribunal (GSTAT) Decide?
The Hyderabad GSTAT (Parameshwara Bricks Vs. State Tax Officer) confirmed:
- The composition scheme lapses from the day the turnover threshold is crossed per Section 10(3), requiring payment of normal GST for subsequent supplies.
- However, as invoices post-breach were tax-inclusive (because the composition supplier cannot legally collect GST), tax must be recalculated on a cum-tax basis under Rule 35.
- The Tribunal directed authorities to recompute tax, interest, and penalty using this method, which results in a lower taxable value (see table below).
- The GSTAT called upon the Supreme Court’s principle from the Unichem Laboratories case: only lawful tax may be collected—no excess.
Worked Example: Cum-Tax Computation (5% GST Rate)
| Invoice Value (Inclusive of GST) | GST Rate | Taxable Value (Exclusive of GST) | GST Payable (5%) |
|---|---|---|---|
| ₹1,05,000 | 5% | ₹1,00,000 | ₹5,000 |
Formula: Tax payable = Invoice Value × [GST Rate / (100 + GST Rate)]
Other Key Points from the Ruling
- Interest and penalty (10% of the actual tax under Section 73) are to be redetermined after recalculation.
- Input tax credit (ITC) post-composition was left open; eligible claims can be made per law.
- Department has two weeks to issue revised demands.
Whom Does This Affect?
- Composition dealers who inadvertently exceed the turnover threshold mid-year
- GST consultants and accountants managing compliance for such businesses
- Bricks manufacturers and other sectoral composition taxpayers
Why This Matters
This order streamlines compliance and prevents punitive over-taxation for composition dealers caught in mid-year breaches, especially where tax was not collected from customers.
Key Practical Takeaways
- Monitor turnover in real time: Once breached, move to regular GST immediately.
- Use cum-tax computation for post-breach invoices where GST could not be collected separately.
- Maintain clear documentation (e-way bills, CMP-08 filings) for departmental scrutiny.
Frequently asked questions
What happens when a GST composition dealer crosses the turnover threshold during the year?
The composition scheme lapses from the date the threshold is breached, and the dealer becomes subject to normal GST, including standard rates and compliance requirements.
What is 'cum-tax' valuation and why does it matter in this case?
Cum-tax valuation means calculating the GST embedded in a tax-inclusive invoice (where GST was not collected separately), resulting in a lower taxable amount and lower GST liability.
Does this GSTAT decision apply only to Parameshwara Bricks or to all composition dealers?
While the order is specific to this case, the principle—cum-tax calculation post-threshold breach—applies to all similarly placed composition dealers under GST law.
Can input tax credit (ITC) be claimed after losing composition dealer status?
ITC eligibility post-composition is left open; claims can be made if conditions under Section 16 and related GST rules are satisfied.
What documentation is important for dealers crossing the turnover limit?
Dealers should maintain accurate e-way bills, CMP-08 filings, and invoice copies, as these are crucial for proving compliance and supporting their case during departmental audits.