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Show Cause — Response Required Within 15 Days
The department wants to remove you from the composition scheme. Not responding means automatic removal, back-dated tax liability, and potential penalties.
Show Cause Notice for Composition Scheme Violation
Have your actual CMP-05 notice?
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If you're on the GST composition scheme and just got a CMP-05, here's what's happening: the GST department believes you've violated one or more conditions of the composition scheme, and they're giving you a chance to explain before removing you from it.
CMP-05 is a show cause notice — it's not an order. The officer is saying, "We think you've broken the rules. Tell us why we shouldn't kick you out of composition." You get 15 days to respond using Form CMP-06.
The composition scheme is a simplified GST system for small businesses — you pay a flat 1% or 6% tax rate instead of the full GST rates, file quarterly returns instead of monthly, and deal with much less paperwork. But it comes with strict conditions: turnover limits, no inter-state sales, no e-commerce, and restrictions on certain goods. Violate any of these, and CMP-05 follows.
If you don't respond — or if the officer isn't convinced by your reply — they'll issueCMP-07 (order for removal). Once removed, you switch to regular GST filing and potentially owe back taxes at full rates for the period of violation.
The composition scheme has clear eligibility rules. Here are the violations that typically trigger CMP-05:
Turnover Exceeded the Limit
Your aggregate turnover crossed ₹1.5 crore for goods (₹75 lakh in special category states) or ₹50 lakh for services. Note: "aggregate turnover" includes all supplies under the same PAN across all states — not just one GSTIN.
Inter-State Supply Detected
Composition dealers cannot make inter-state outward supplies. If the department finds evidence of sales to buyers in another state — through e-way bills, buyer's GSTR-2A, or bank transactions — they'll issue CMP-05. Even a single inter-state invoice triggers this.
Supply Through E-Commerce
Selling goods through e-commerce platforms (Amazon, Flipkart, Meesho, etc.) is not allowed under composition scheme. If the platform reports TCS (Tax Collected at Source) on your supplies, the department will know.
Dealing in Ineligible Goods
Certain goods are excluded from composition: ice cream, pan masala, tobacco products, and aerated drinks. If you start selling any of these while on composition, CMP-05 follows.
Non-Filing of Returns
Composition dealers must file CMP-08 (quarterly statement) and GSTR-4 (annual return). Persistent non-filing — typically 3 or more consecutive quarters — can trigger removal.
Issuing Tax Invoices
Composition dealers must issue "Bill of Supply" — not tax invoices. If you issued invoices with GST breakup (showing CGST, SGST separately), it suggests you're collecting full GST from customers while paying only composition rate. This is a serious violation.
Being removed from the composition scheme is not just about switching filing systems — it has real financial consequences:
| Impact Area | What Changes |
|---|---|
| Tax Rate | From flat 1%/6% to full GST rates (5%, 12%, 18%, 28%) — typically 3x to 6x higher |
| Filing Frequency | From quarterly CMP-08 to monthly GSTR-1 + GSTR-3B (or quarterly under QRMP) |
| Invoicing | Must issue proper tax invoices with GST breakup instead of Bill of Supply |
| ITC Eligibility | Now eligible to claim Input Tax Credit — small consolation since you're paying higher tax |
| Back Tax | You may owe differential tax (full rate minus composition rate) for the violation period |
| Interest | 18% per annum interest on any differential tax from the date it was due |
| Penalty | Up to 10% of tax amount or ₹10,000 (whichever is higher) for the violation |
Here's a real-world example: say you're a goods retailer paying 1% composition rate on ₹1.2 crore turnover = ₹1.2 lakh tax per year. If removed and switched to regular 18% rate, your tax jumps to ₹21.6 lakh — offset by ITC, let's say net ₹8-10 lakh. That's a 7x to 8x increase in tax outflow. Plus you need accounting software, proper invoicing, and a CA to handle monthly filings.
Identify the Specific Violation
CMP-05 mentions the exact reason for proposed removal. Is it turnover breach? Inter-state supply? E-commerce? Understand the specific allegation before reacting.
Verify If the Allegation Is Correct
Cross-check the department's claim against your records. If they say your turnover exceeded ₹1.5 crore, calculate your actual aggregate turnover. If they say you made inter-state supply, check if the e-way bill or invoice they cited is actually yours. Errors happen.
Prepare Your Defence / Explanation
If the allegation is wrong — prepare evidence proving it. If the turnover calculation includes exempt supplies that shouldn't be counted, show the breakdown. If the inter-state supply was a stock transfer that was later cancelled, show the credit note. If the allegation is correct — consider voluntary withdrawal and settling the differential tax.
File Form CMP-06 on GST Portal
Login to gst.gov.in → Services → User Services → View Additional Notices → Find CMP-05 → Reply with Form CMP-06 → Attach supporting documents → Submit within 15 days.
Pay Differential Tax If Applicable
If the violation is genuine, paying the differential tax (full GST rate minus composition rate paid) plus 18% interest before the order shows good faith. Use DRC-03 to make voluntary payment. This significantly reduces penalty risk.
Before responding to CMP-05, make sure you understand all the composition scheme conditions. You must meet every single one of these:
Violating any of these conditions makes you ineligible from the date of violation. The department can issue CMP-05 at any time after discovering the breach — even months later.
Yes — but not immediately. Here's how the re-entry process works:
Wait until next financial year
You can only opt into composition at the start of a new financial year. If you're removed in July 2025, the earliest you can rejoin is April 1, 2026.
File CMP-02 before March 31st
Submit Form CMP-02 on the GST portal before March 31 of the current year to opt in from April 1 of the next year.
Meet all eligibility conditions
Your previous financial year turnover must be under the limit, and you must not have any ongoing inter-state supplies, e-commerce sales, or ineligible goods in stock.
Reverse any ITC claimed
If you claimed ITC during the regular period, you must reverse it in your last GSTR-3B before switching back to composition. ITC on closing stock and capital goods needs to be reversed.
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Disclaimer: This guide is for educational and informational purposes only. Composition scheme rules can vary based on your state and business type. Always consult a qualified Chartered Accountant before responding to CMP-05 or making any transition between composition and regular scheme.
Last updated: March 2026 | Based on CGST Act 2017 and Composition Levy Rules