Denial of composition option by tax authorities and effective date thereof

Circular No.: 77/51/2018-GST
Date of Circular: 31st December 2018
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 10: Composition levy
  • Section 9: Levy of tax for regular taxpayers
  • Section 73 & 74: Determination of tax, interest, and penalty
  • Section 18(1)(c): Credit on stock and capital goods after opting out of composition
• CGST Rules, 2017:
  • Rule 6: Conditions and procedures for composition scheme
    • Sub-rules (2), (3), (4), (5): Withdrawal/denial procedure
  • Forms: CMP-04, CMP-05, CMP-06, CMP-07

Summary of Circular:

This circular clarifies the effective date for withdrawal or denial of composition levy option under Rule 6 of CGST Rules and provides guidance for follow-up action in case of retrospective denial by tax authorities.

1. Effective Date for Voluntary Withdrawal (FORM CMP-04):

• If a taxpayer voluntarily files for withdrawal from the composition scheme:
  • Effective date is the one indicated in FORM GST CMP-04, but it cannot be earlier than the start of the financial year in which the application is filed.
  • Taxpayer is liable to pay tax as a regular taxpayer from that date.

2. Effective Date for Denial by Authorities (FORM CMP-07):

• If tax authorities deny composition levy after issuing show cause notice (CMP-05) and receiving reply (CMP-06):
  • Officer issues order in FORM CMP-07.
  • Denial effective from date of contravention, not before it.
  • Taxpayer becomes liable to pay tax under Section 9 from the date of CMP-07 order.
  • Recovery proceedings under Section 73 or 74 may be initiated for the period between contravention date and CMP-07 order date.

3. Input Tax Credit Upon Exit from Composition:

• As per Section 18(1)(c), taxpayers opting out or being denied composition can claim ITC on inputs, semi-finished/finished goods, and capital goods held in stock as on the day before CMP-07 order.

Source: Circular No.: 77/51/2018-GST