Voilation of provisions of section 10 composition scheme

[Varun Kumar Gonuguntla]

I have been registered uder composition. I have unknowingly made Inter State Supply in FY 2019-20 & FY 2020-21. I have received a notice u/s 74 regarding the same, directing me to pay tax @18? on total turnover from those 2 financial years.

Is there any way to reduce my liability? 

Can I adjust the liabilty with ITC on purchases made in those two financial years?

Are there any case laws regarding the same? 

[Sadanand Bulbule]

You were under Composition Scheme (Section 10 of CGST Act) in FY 2019-20 and 2020-21. You unknowingly made inter-State supply, which is not permitted under the composition scheme under Section 10[2A][b]. Department has issued a notice u/s 74 of CGST Act (for tax not paid/short paid due to fraud/suppression), directing you to pay 18% GST on total turnover for those years.

Key Points: 1. Violation of Section 10[2A][b]: Once you made inter-State supplies, you became ineligible for composition. Legally, you should have shifted to regular scheme and paid tax at normal rates.

2. Liability: Department can demand GST at applicable rates (say 18%) on turnover of those years. They may also demand interest (u/s 50) and penalty.

3. Input Tax Credit (ITC): ITC benefit can be claimed only if you had switched to regular scheme at that time and filed returns accordingly. Since you continued under composition, practically you did not avail ITC then. Courts have allowed such set-off of ITC in genuine cases (to avoid double taxation).

4. Reduction of liability / defense : You can file a reply to the notice u/s 74 and argue: There was no intention to evade; it was a genuine mistake. Therefore proceedings should be under Section 73 (no fraud), not 74. Request waiver/reduction of penalty. Seek adjustment of eligible ITC on inputs, capital goods, and services used in those periods.

5. Case Laws:

Allahabad High Court in Bharat Mint & Allid Chemicals Vs. State of UP - 2025 (6) TMI 1243 - ALLAHABAD HIGH COURThas held that a SCN under Section 74 cannot be sustained if there is no allegation of fraud, wilful mistatement, or suppression of facts.

In the light of this judgement, you could argue that liability should instead be under Section 73. Interestingly for the FY 2019-20 and 2020-21 the jurisdiction for adjudication under Section 73 is hit by limitation. If this arguments clicks in your favour, you are on the safer side. Take a chance.

[Sadanand Bulbule]

The Honble Gujarat High Court in  the case of Zodiac Energy Ltd. Versus Assistant Commissioner Of State Tax, Unit-5 - 2025 (9) TMI 858 - GUJARAT HIGH COURT held that the revenue authority cannot invoke Section 74 and the extended limitation period of five years without establishing fraud, wilful misstatement, or suppression of facts, and where the normal limitation period under Section 73 has expired, proceedings under Section 74 are impermissible in the absence of such mens rea.

[Sadanand Bulbule]

Refer:  Bharat Mint & Allied Chemicals Versus State of U.P. and another - 2025 (6) TMI 1243 - ALLAHABAD HIGH COURT the Honble Allahabad High Court quashed an SCN under Section 74 where the same officer had earlier processed issues under Section 73 without any allegation of fraud, suppression, or willful misstatement, holding such action was without jurisdiction

AI Summary

Composition scheme ineligibility from inter state supply can trigger regular GST liability and challenge to fraud invocation. Inter State supplies made while under the Composition Scheme render the taxpayer ineligible for composition and expose turnover to tax under the regular regime with potential interest and penalties. The taxpayer may contest invocation of the extended limitation fraud provision by denying fraud, seeking adjudication under the ordinary limitation provision, pursuing adjustment of eligible Input Tax Credit where applicable, and requesting waiver or reduction of penalties; recent high court authorities support quashing extended limitation notices absent allegations of mens rea.