The Madras High Court recently dealt with an important dispute involving a taxpayer registered under the GST composition scheme. The tax department alleged short payment of tax and proceeded to assess turnover by adding a notional gross profit, ultimately demanding tax at the regular rate of 18%.
The Court held that where the assessee is covered under Section 10 composition levy, tax liability is limited to the prescribed composition rate, and the matter required reconsideration.
Case Citation
10 Feb 2026
[2026] 182 taxmann.com 887 (Madras High Court)
Decision Date: 12-12-2025
Key Legal Provision
Section 10(1)(c) of CGST Act, 2017
This provision allows eligible taxpayers to pay GST at a concessional rate (generally 1%) instead of normal rates, subject to turnover limits and conditions.
Facts of the Case
- The assessee was registered under the composition scheme.
- Reported turnover was only ₹80,000.
- However, purchases recorded were about ₹7.38 lakh.
- The department alleged that turnover was suppressed.
Department’s Approach
- The assessing authority assumed that the assessee earned 20% gross profit on purchases.
- Based on this, turnover was artificially enhanced.
- GST was demanded at the regular rate of 18%, instead of composition rate.
Issue Before the Court
Whether a composition taxpayer, liable to pay tax at 1%, can be assessed at the regular GST rate of 18% by estimating turnover through gross profit addition.
High Court’s Observations
The Madras High Court noted:
- Composition levy is a special scheme under Section 10.
- Tax liability under composition is fixed at the prescribed percentage of turnover.
- The department cannot simply apply the normal GST rate of 18% on estimated turnover without proper justification.
Appeal and Limitation Issue
- The assessee’s appeal was found to be time-barred.
- However, considering the nature of dispute, the Court exercised its writ jurisdiction.
Final Ruling
The High Court:
✅ Remanded the matter back to the authorities for a fresh assessment order
✅ Directed the assessee to make a 10% pre-deposit as a condition
✅ Held that the demand at 18% required reconsideration in light of composition provisions
Key Takeaway
This judgment reinforces that:
- Composition taxpayers are governed strictly by Section 10 composition rates.
- Authorities cannot mechanically impose normal GST rates by making GP-based turnover estimations.
- Even when appeals are delayed, High Courts may grant relief where assessment is prima facie inconsistent with law.
Practical Significance
This case is important for small businesses under composition because:
- Purchase mismatch alone cannot justify taxing at full rate
- Estimation methods must align with composition scheme structure
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Proper opportunity and lawful computation are mandatory