Hardware Trader Facing GST, Rent and Blocked Credits
M/s Sailaja Traders is a proprietorship registered under GST at Bhubaneswar, dealing in hardware and sanitaryware. Its aggregate turnover was ₹1.20 crore in FY 2023-24 and ₹1.55 crore in FY 2024-25, almost entirely intra-State supplies to consumers and small builders. The proprietor, Mr. Sailaja Prasad, pays shop rent of ₹45,000 per month, excluding GST, to an individual landlord who is not registered under GST but whose PAN is available. In September 2024 he purchased a car for ₹12,00,000 plus 18% GST for his family's use, and in November 2024 he paid ₹8,00,000 plus 18% GST to a contractor for tiling and false ceiling of the shop under a works contract. His GSTR-3B for October 2024, showing a tax liability of ₹1,20,000, was filed on 27 November 2024 instead of 20 November 2024. He asks whether he can now move to the composition scheme, how he must handle the rent, and what happens to the input tax credit on the car and the renovation.
1. Is he eligible for the composition scheme for FY 2025-26? What would change if he were?
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Eligibility test: Composition for a trader of goods requires aggregate turnover in the preceding financial year not to exceed ₹1.5 crore (₹75 lakh in special category States; Odisha is not one). His FY 2024-25 turnover is ₹1.55 crore, which is above the limit, so he cannot opt for composition for FY 2025-26 and must continue as a regular taxable person.
Had he been eligible, the trade-offs would be:
- Tax at a flat 1% of taxable turnover for goods, paid from his own pocket, with no tax shown on the invoice.
- No input tax credit at all, so the ₹2,16,000 GST on the car and ₹1,44,000 on the renovation, and any credit on purchases, would be a permanent cost.
- No inter-State outward supplies and no supplies through an e-commerce operator.
- Quarterly statement in Form CMP-08 and annual return in Form GSTR-4.
- If a composition dealer crosses ₹1.5 crore, he must exit within seven days of crossing the limit by filing Form GST CMP-04 and thereafter file regular returns from the date of crossing.
Ask him to compare his likely input credit on purchases with the 1% composition tax before assuming composition is cheaper; a hardware trader buying tax-paid stock is usually better off as a regular dealer.
2. Explain his obligations on the shop rent under GST and under income tax, with amounts.
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GST – reverse charge: Renting of a commercial immovable property by an unregistered landlord to a registered recipient is under reverse charge at 18% (section 9(3) read with the relevant notification). The supplier is unregistered, so Mr. Prasad cannot expect a tax invoice; he must self-invoice or record the liability and pay ₹8,100 per month (₹45,000 × 18%), about ₹97,200 for the year, in cash through GSTR-3B. He may take input tax credit of this tax if the premises are used for business, since the credit is not blocked under section 17(5). RCM tax cannot be paid using credit.
Income tax – TDS under section 194I: Annual rent is ₹5,40,000, above the ₹2,40,000 threshold, so tax must be deducted at 10%, i.e., ₹4,500 per month or ₹54,000 for the year.
- Deduct on the rent excluding the GST component, since GST is shown separately.
- Deposit by the 7th of the following month and file Form 26Q quarterly; issue Form 16A.
- If the landlord's PAN is not furnished, section 206AA raises the rate to 20%.
Trap to flag: The two obligations are independent. Paying GST under reverse charge does not satisfy TDS, and deducting TDS does not pay the GST liability; non-payment of either attracts separate interest and penalties.
3. What is the fate of the credit on the car and the renovation, and what does the late return cost?
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Car: Section 17(5)(a) blocks credit on motor vehicles for transporting persons with seating capacity up to 13 (including the driver), unless the vehicle is used for further supply of vehicles, passenger transport or driving training. A car bought for the proprietor's family use is blocked, so the GST of ₹2,16,000 (₹12,00,000 × 18%) is a cost; credit on its insurance, repairs and maintenance is also blocked. Even if it were entered in the books as a business asset, the block would apply.
Renovation: Section 17(5)(c) and (d) block works contract services and goods or services used for construction of an immovable property, even if the property is used for business. Tiling and false ceiling of the shop are not plant and machinery, so the ₹1,44,000 credit (₹8,00,000 × 18%) is unavailable and the amount must be capitalised or expensed with no credit.
Late GSTR-3B for October 2024: Filed 7 days late.
- Late fee ₹50 per day (₹25 CGST + ₹25 SGST) = ₹350.
- Interest at 18% per annum on ₹1,20,000 for 7 days = about ₹414.
- Only invoices appearing in GSTR-2B for the period can be used for credit, and payment of the liability is a condition for the credit, so he should clear the cash liability first.
Advise him to set a compliance calendar; repeated late filing also risks suspension of registration.