Composition Scheme – Retrospective Cancellation

Retrospective cancellation of GST registration is frequently invoked by tax authorities in cases involving non-filing of returns by composition taxpayers. Courts have consistently clarified that procedural lapses cannot retrospectively alter tax liability, particularly where the taxpayer operated under an active GST registration and remained eligible for the Composition Scheme.

This article explains the settled legal position emerging from statutory provisions and consistent judicial rulings.

Registration under the Composition Scheme (Section 10)

When a taxpayer is validly registered and enrolled under the Composition Scheme, the applicable tax liability is governed exclusively by Section 10 of the CGST Act read with Rule 7 of the CGST Rules. The composition levy is a special statutory mechanism and continues to apply so long as the registration remains valid.

In this context, courts have clarified that the composition levy continues until one of the following events occurs:

• the taxpayer breaches the eligibility conditions,
• the taxpayer opts out of the scheme voluntarily, or
• the department formally declares the taxpayer ineligible.

Importantly, non-filing or delayed filing of CMP-08 does not result in automatic cancellation of registration. Where the GSTIN remained active and business transactions were carried out, the taxpayer cannot be treated as unregistered for that period.

An active GST registration carries full legal recognition for the relevant tax period.

Non-Filing of Returns Is Not Fraud

Courts have repeatedly held that non-filing of returns is a procedural default and does not, by itself, amount to fraud, suppression, or wilful misstatement. Procedural non-compliance must be distinguished from substantive tax evasion.

Established legal principles:

• Delay or failure to file CMP-08 does not attract Section 74
• Retrospective cancellation under Section 29(2) requires clear findings of fraud, bogus registration, or non-existent business
• Mechanical backdating of cancellation without fraud is legally invalid

Accordingly, procedural non-compliance alone cannot justify retrospective action.

Normal GST Rates Cannot Apply to Past Composition Periods

Where the GSTIN was active and the taxpayer continued under the Composition Scheme, the applicable tax structure cannot be altered retrospectively. The law does not permit reassessment of past composition periods at standard GST rates.

In such cases:

• Normal GST rates (5%, 12%, 18%, 28%) cannot be applied retrospectively
• Section 10(4) read with Rule 7 prohibits reassessment at standard rates
• Supplies made during the validity of registration cannot later be treated as unregistered supplies

Retrospective cancellation cannot rewrite the tax structure applicable at the time of supply.

Judicial Position Across High Courts

High Courts across India have adopted a consistent and uniform approach in protecting bona fide composition taxpayers from retrospective reassessment.

Important rulings include:

• M/s G.R. Palle Electricals v. Assistant Commissioner – Madras High Court (2023)
  Retrospective cancellation for non-filing alone is impermissible; composition supplies under active GSTIN remain valid.

• JSD Traders LLP v. Additional Commissioner CGST – Delhi High Court (2023)
  Retrospective effect must be explicitly proposed in the SCN; orders beyond the SCN violate natural justice.

• R.B. Traders v. State of U.P. – Allahabad High Court (2022)
  Registered supplies cannot be reclassified as unregistered through backdated cancellation.

• M/s Tejjan Aarhus v. State of Uttar Pradesh – Allahabad High Court (2024)
  Non-filing alone cannot justify retrospective cancellation; composition tax continues for active GSTIN periods.

• Tvl. N.P. Agency v. Assistant Commissioner – Madras High Court (2024)
  Backdated cancellation violates taxpayer rights and Section 10(4).

• Shree Govind Alloys v. State of Rajasthan – Rajasthan High Court (2023)
  In the absence of fraud, cancellation must operate prospectively.

• NK Pipes & Fittings v. State of Gujarat – Gujarat High Court (2023)
  Tax rate applicable at the time of supply is final and cannot be altered retrospectively.

Legal Effect of These Rulings

The combined effect of statutory provisions and judicial rulings establishes that:

• Retrospective cancellation solely for non-filing is invalid
• Supplies made during active registration remain composition supplies
• Tax demands at normal GST rates for such periods are without jurisdiction
• Voluntary payment through DRC-03 requires closure under Section 73(8) without penalty