Non filing of ITC-03 by composition dealer

[MAHTAB KHAN]

The party had opted for the Composition Scheme under Section 10 of the CGST Act, 2017 by filing Form GST CMP-02 for FY 2019-20 and 2020-21 but failed to file Form GST ITC-03. Subsequently, the applicant shifted to the regular scheme from FY 2021-22. During the composition period, the applicant discharged tax liability at the rate of 1% on outward supplies.

A Show Cause Notice (SCN) has been issued by the CGST authorities alleging that Form GST ITC-03 was not filed and, therefore, ITC reversal as per Section 18(4) read with Rule 44(4) was not done, rendering the applicant ineligible for the Composition Scheme.

The SCN further states that during FY 2019-20 and 2020-21, due to violation of Section 18(4) read with Rule 44(4), the applicant was not entitled to composition benefits. However, the applicant continued to pay tax at 1% under the Composition Scheme, thereby contravening the provisions of Section 10(4) read with Rule 3(4) of the CGST Rules, 2017.

Accordingly, the SCN proposes:

• Recovery of short-paid tax @ 17% under Section 74(1) with interest under Section 50(1), as the applicant paid only 1% under the Composition Scheme;
• Penalty under Section 122(2)(b) amounting to Rs. 27,904 (CGST Rs. 13,952 + SGST Rs. 13,952); and
• Penalty under Section 125 amounting to Rs. 50,000 (CGST Rs. 25,000 + SGST Rs. 25,000) for non-filing of Form ITC-03.

What should be the proper defense or reply in such cases

[Shilpi Jain]

You should reverse the applicable tax that was supposed to be done in ITC-03 now. If this form is available well and good. Do that payment with interest.

If this form in not available then do it by DRC-03. Once this is done, composition scheme should not be disentitled.

AI Summary

Composition dealer non-filing of ITC-03 leads to alleged ITC reversal failure; remedy is reversal/payment via ITC-03 or DRC-03 with interest. Failure to file Form ITC-03 during the composition period led to alleged non-reversal of ineligible input tax credit and a challenge to composition eligibility, prompting proposals for recovery of differential tax, interest, and penalties. The operative remedy set out is to reverse and pay the applicable tax-by filing Form ITC-03 if available or by making payment through DRC-03 where ITC-03 cannot be filed-together with interest, to address the compliance shortfall.