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 ?27,904 (CGST ?13,952 + SGST ?13,952); and

• Penalty under Section 125 amounting to ?50,000 (CGST ?25,000 + SGST ?25,000) for non-filing of Form ITC-03.

What should be the proper defense or reply in such cases

AI Summary

Composition taxpayer argues failure to file ITC-03 doesn't revoke composition unless ITC was availed; seek Section 74 limits A composition taxpayer who failed to file ITC-03 may argue that loss of composition benefit arises only if input tax credit was actually availed and not reversed; if no ITC was claimed or reversal (and tax payment on stock) was made subsequently, composition eligibility remains. Defenses include: demonstrating no/zero ITC availed, proving adjustment/payment of tax on closing stock or filing ITC-03 belatedly, reliance on bona fide error or inadvertence, challenging invocation of Section 74 absent fraud/gross negligence, and contesting penalties as disproportionate. Seek computation limited to actual unpaid tax, interest per Section 50, remission/waiver of penal provisions, and allow time for rectification.