GST Composition Scheme Lapse Is Automatic Under Section 10(3), But Differential Tax Must Be Recomputed on Cum-Tax Basis Under Rule 35: GSTAT Hyderabad

Overview of the Decision

The GST Appellate Tribunal, Hyderabad Bench, rendered a significant ruling in Parameshwara Bricks Vs State Tax Officer (Appeal No. APL/126/HYD/2026, decided on 20/08/2026) addressing two foundational questions in composition scheme jurisprudence: first, whether exceeding the prescribed turnover ceiling triggers an automatic lapse of composition eligibility regardless of the assessee's intent; and second, whether the differential tax demand must be worked out on a cum-tax basis under Rule 35 of the CGST Rules even when the assessee never raised such a claim. The Tribunal answered both questions decisively — affirming the statutory lapse while simultaneously directing recomputation of tax, interest, and penalty in accordance with the cum-tax formula.

Background and Facts of the Case

M/s. Sri Parameshwara Bricks, a manufacturer and supplier of red clay bricks operating in Telangana, was registered under Section 10(1) of the Telangana Goods and Services Tax Act, 2017 read with the Central Goods and Services Tax Act, 2017. The assessee discharged its GST liability under the composition scheme at the concessional rate of 1% on its turnover.

The permissible aggregate turnover ceiling for composition scheme eligibility stood at ₹1.50 crore. During a routine audit, jurisdictional Audit Officers observed a material variance between the turnover figures appearing in the e-way bills generated by the assessee and those declared in its FORM GST CMP-08 statements:

  • FY 2020-21: E-way bill turnover — ₹1,95,53,800/- | Declared turnover — ₹1,44,86,100/-
  • The differential excess over ₹1.50 crore — ₹50,67,700/- — was found to have escaped assessment at the standard rate

Invoking Section 10(3) of the TGST Act, the audit authorities concluded that the assessee had breached the threshold in FY 2020-21 and consequently forfeited composition eligibility for both FY 2020-21 and FY 2021-22. Show Cause Notices were issued initially proposing tax recovery at 28% (comprising 14% CGST and 14% SGST), which was subsequently corrected to the applicable rate of 5% at the adjudication stage.

Adjudication Outcome

The Adjudicating Authority, proceeding under Section 73 of the TGST Act, confined the tax confirmation to the 5% rate after excluding turnover attributable to typographical errors in certain e-way bills. The confirmed demands were:

  • FY 2020-21: Differential tax of ₹1,27,250/-
  • FY 2021-22: Differential tax of ₹6,43,856/-

Interest was levied under Section 50(1) and penalty was imposed at 10% of the tax under Section 73. The First Appellate Authority sustained these findings in their entirety. The assessee then preferred appeals before the GSTAT, Hyderabad Bench.

Arguments Before the Tribunal

Assessee's Contentions

The assessee's counsel urged that:

  • The turnover breach was entirely inadvertent and lacked any deliberate or conscious intent
  • Business operations had been severely disrupted by the COVID-19 pandemic, impairing the assessee's ability to monitor turnover and comply with associated obligations
  • The assessee operated under a bona fide and reasonable belief that its composition eligibility remained intact
  • There was no suppression of material facts or mala fide conduct on its part
  • The demands towards tax, interest, and penalty deserved to be annulled, composition benefit restored, and the pre-deposit amount refunded

Revenue's Contentions

The Departmental Representative, relying on cross-objections filed in both appeals, submitted that:

  • Voluntary payments made by the assessee were computed at the composition rate and fell well short of the tax payable at the regular rate
  • Upon crossing the turnover threshold, the assessee became liable at the applicable regular rate
  • The demand had been computed after duly accounting for and excluding errors in e-way bill data
  • The appeals deserved to be dismissed and the confirmed demands upheld

Issues Framed by the Tribunal

  1. Whether the composition scheme option lapses automatically under Section 10(3) upon aggregate turnover crossing ₹1.50 crore, rendering the assessee liable at the regular rate notwithstanding its plea of inadvertence and bona fide belief?

  2. Whether the differential tax on post-lapse supplies must be computed on the full invoice value or on a cum-tax basis by applying Rule 35 of the CGST Rules — particularly when the assessee had not raised this claim before any forum?

Tribunal's Ruling

The GSTAT, Hyderabad Bench disposed of the appeals through Common Order Nos. 001/HYD/2026 & 002/HYD/2026, holding as follows:

On the Automatic Lapse of Composition Eligibility

The Tribunal held that it was not in dispute that the assessee had exceeded the aggregate turnover threshold in both the relevant financial years. A plain reading of Section 10(3) leaves no room for doubt:

"(3) The option availed of by a registered person under sub-section (1) [or sub-section (2A), as the case may be] shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1) [or sub-section (2A), as the case may be]."