Composition rate and stock difference

If your client's annual sales are less than Rs 1.5 crore, they can opt for the composition scheme and pay 1% tax on their turnover ¹.

However, if their sales exceed Rs 1.5 crore, they will have to pay the regular tax rate applicable to their business category 

 Since the stock difference found is Rs 400000, the tax payable would be 1% of this amount, which is Rs 4000 ¹

. However, please note that the composition scheme is not applicable for businesses that make inter-state supplies.

Stock shortage in a composition dealer's inspection:

• A stock shortage found during inspection is usually treated as unaccounted (suppressed) supplies. The department demands tax on its value. For a composition taxpayer, the dispute is whether to tax at the composition rate (1%) or at normal rates.

• Since the suppression may be treated as a contravention, officers often invoke Sec 74 (fraud), with penalty, and may cancel the composition option (Sec 10(5) and Rule 6: tax at normal rates and penalty if the person wasn't eligible or contravened provisions).

• Defences: reconcile the difference (unrecorded sales vs wastage, theft, or counting errors), produce records, and argue for tax at the composition rate on any genuine unrecorded sale.

• Pay via DRC-03 before an SCN if the difference is genuine, to reduce penalty.