Composition Scheme, GST on Invoices and Three TDS Questions
Sunrise Traders is a proprietorship in Pune trading in hardware. Turnover for FY 2024-25 was ₹1.42 crore and all sales were within Maharashtra. The owner opted for the composition scheme with effect from 1 April 2024. During the year the firm:
- issued tax invoices charging 18% GST, telling customers that 'we are registered, so GST is payable';
- purchased goods on GST invoices totalling ₹68 lakh and claimed input tax credit of ₹4.10 lakh;
- paid a consultant ₹45,000 for a system study;
- paid shop rent of ₹2,20,000 for the year;
- paid a contractor ₹85,000 as a single labour-only job; the contractor is an individual;
- sold goods to a buyer in Gujarat in February 2025 for ₹6 lakh.
The owner believes that registration entitles him to collect GST and claim input tax credit. The accountant must file the annual return and correct the position.
1. Is the collection of GST and the claim of input tax credit valid? What must the firm do to regularise, and what is the fate of the invoice issued to the Gujarat buyer?
Read the worked answer
A composition taxable person under the GST law cannot collect tax from customers and cannot claim input tax credit. Registration does not create that right; the scheme withdraws it. Therefore:
- The 18% charged on invoices is not tax payable by law. It is an amount collected without authority; it must be deposited with the government and cannot be retained, and the invoices must be replaced by a bill of supply carrying the prescribed declaration that the supplier is a composition taxable person and is not eligible to collect tax.
- The ₹4.10 lakh input tax credit is inadmissible and must be reversed with interest for the period it was wrongly availed, along with any penalty exposure for the contravention.
- Inter-state outward supply is prohibited for a composition dealer. The ₹6 lakh sale to Gujarat is a contravention. The option becomes invalid from that date: file the prescribed withdrawal form (CMP-04) within the specified days, charge and pay tax at the normal rate on that supply, and continue as a regular taxpayer thereafter, when input credit on stock becomes available subject to conditions.
The core lesson: composition registration is a licence to pay a flat rate, not a licence to pass on tax.
2. Determine TDS applicability on the three payments, with amounts.
Read the worked answer
Test each payment on its own facts and threshold:
| Payment | Relevant provision | Threshold test | TDS |
|---|---|---|---|
| Consultant ₹45,000 | 194J, professional fees, 10% | Exceeds ₹30,000 for the payee in the year | ₹4,500 |
| Rent ₹2,20,000 | 194-I, 10% | Below ₹2,40,000 a year | Nil |
| Contractor ₹85,000, individual, single job | 194C, 1% | Single payment exceeds ₹30,000 | ₹850 |
The two common traps are here. Rent is not taxable merely because each month is paid; the annual threshold of ₹2,40,000 is tested on the aggregate, and ₹2,20,000 falls short, so no deduction - but the moment another ₹20,000 is paid to the same landlord, the whole amount becomes taxable. Conversely, the contractor payment attracts TDS even though the annual aggregate is under ₹1 lakh, because a single payment above ₹30,000 triggers it independently. Deposit the tax by the statutory due date and file the quarterly statements, or interest and disallowance follow.
3. The proprietor asks whether he can simply continue in composition and treat the Gujarat sale as an isolated error. Advise him, comparing the two options.
Read the worked answer
No. The law does not treat an inter-state outward supply as a curable slip; it makes the composition option invalid. So the realistic choices are to withdraw formally and become a regular taxpayer, or to face the supply being taxed at the normal rate anyway, with penalties and interest added and the option cancelled with retrospective effect. Withdrawal is the cleaner route.
Compare the economics rather than the compliance paperwork. Under composition, the tax outgo is a small flat percentage of turnover and paperwork is light, but he cannot claim input credit on ₹68 lakh of purchases and cannot sell outside the state or through online channels that require it. As a regular taxpayer he may recover output tax from customers and set off input credit, which is valuable for a hardware trader with high input purchases and B2B customers who demand tax invoices.
Given the Gujarat order and the input-heavy purchase pattern, regular registration is likely cheaper overall. Document the withdrawal date, reprice the affected contracts and inform customers in writing.