GST recovery cannot be prevented merely exercising option under composite scheme: Andhra Pradesh High Court

Composition Scheme was introduced under the GST regime to provide benefits to small businesses. Thus, an option has been provided where they can opt to pay a fixed percentage of turnover in lieu of tax. Person opting for composition scheme will be relieved from detailed compliances required under GST law. Further, the Government vide Notification No. 02/2019 has provided an option of 6% tax rate on first supplies of goods or services or both upto an aggregate turnover of fifty Iakh rupees made on or after the 1st day of April in any financial year. Question is if an applicant being supplier of both goods and services being 2 distinct business can avail both benefits of composition scheme as well as the scheme provided under the notification by separating the goods under composition scheme and the services under 6% of in accordance with the notification.

Features of the Composition Scheme are as follows:-

Businesses with annual turnover up to Rs 1.5 crore in the preceding financial year can opt for composition scheme.
Service providers with aggregate turnover not exceeding Rs 50 lakh in the preceding financial year can opt for composition scheme.
Turnover of all businesses with same PAN has to be added up to calculate turnover for the purpose of composition scheme.
Only manufacturers of goods, dealers, and restaurants (not serving alcohol) can opt for composition scheme.
The Composition Scheme person is required to file GST CMP 08 quarterly on the GST website and GSTR 4 annual return on 30^th April after end of every Financial Year

Fact and Issue of the case

The petitioner firm, represented by its proprietrix, was doing business in furniture after obtaining permission and licence from the concerned Departments, including erstwhile Sales Tax Department. When GST Act came into force, the petitioner, along with other dealers, got registered and obtained GST registration number vide registration No.37AABPA9728J1ZJ from the Department, which was with effect from 1.7.2017. The petitioner claims to have opted for paying tax under composite scheme as per the procedure contemplated under Section 10(1) of GST Act and got it registered through GST portal. The petitioner has been filing GST returns and Form GSTR-IV from the quarter ending September, 2017 and the taxes were paid as per the said scheme, which postulates payment of 1% of GST on the turn over. According to the petitioner, the Department accepted the taxes paid/returns filed, till the date of issuance of show cause notice by the 3rd respondent on 14.2.2018, wherein the action of the petitioner claiming payment of tax under the composite scheme was rejected on the ground that the turnover of petitioner for the “previous year” under the VAT regime was Rs.2.09 crores. The petitioner is said to have given an explanation to the show cause notice, but the same was rejected on 26.7.2018 in Form-GSTCMP07. Consequently, the petitioner was issued with a show cause notice on 27.7.2018, in terms of Section 74 and Section 10(5) of the State GST Act, stating that she is liable to pay S.GST @ 14% and C.GST @ 14% from the date of initial registration i.e., from 1.7.2017. Though an explanation was given stating that she is not liable to pay an amount of Rs.15,93,708/-, as demanded in the show cause notice, the same was rejected by the 3rd respondent on 19.9.2018 confirming the demand along with interest and penalty. Challenging the order of the 3rd respondent, the petitioner preferred an appeal before the 2nd respondent, but the same was rejected on 12.2.2020. Aggrieved by the said order, the present writ petition came to be filed in the month of June, 2020.

Observation of the court

In the instant case, the dispute in so far as interpretation of the word ‘previous financial year’ arose only for the financial year 2017-2018, as the GST regime commenced from 1.7.2017. If the intention of the legislature was that the turn over of the financial year under GST regime is only to be taken into consideration, then there would have been a clarification of the word ‘preceding financial year’. Section 10 (1) of the Act would not carry any meaning if such an interpretation, as sought by the petitioner, is given, namely, the turn over in the VAT regime has to be excluded while computing the tax liability. If such a narrow interpretation to Section 10(1) is given, as observed earlier, many of the businessmen would not only escape payment of GST for the year 2017-2018, though the self-declaration made is incorrect or false, but also end up paying minimum GST though their turn over is on a higher side. It is to be noted here that word ‘preceding financial year’ is appearing at more than one place in Section 10 itself, hence, it cannot be said that there was any error in usage of the word “preceding” in Section 10. The legislature was conscious enough, when the word ‘preceding’ was used before the word ‘financial year’ in Section 10(1) and also in the second proviso to Section 10(1)(c), while extending benefits under a scheme. The legislature in its wisdom observed that such a benefit can be extended to those whose turn over in the previous financial year does not exceed Rs.50 lakhs. Therefore, the word ‘preceding’ appearing before the word ‘financial year’ cannot be ignored and if done, one would doing mockery of the words ‘financial year does not exceed Rs.50 lakhs’. Therefore, to fix a parameter for extending the benefits under the scheme and for payment of less tax in case of manufacturers and for those engaged in making supplies, the legislature thought it fit to take into account the turn over of the previous financial year. In so far as the financial year 2017-2018 under GST regime is concerned, the preceding financial year would be 2016-2017 under the VAT regime. The collection of tax under the GST Act, 2017 is not in addition to the provisions of VAT, but this is being introduced as a substitute to VAT Act to deal with both goods and services, so as to maintain uniformity across the length and breadth of the country. This has been introduced to meet the requirements under the recommendations of the GST council, in which all the States and Union territories are the stakeholders.

Hence, courts find no illegality in taking into consideration the previous year’s turn over (under VAT regime) for the purpose of extending benefits under the composite scheme or for collecting taxes and penalty.