AI Summary

CMP-05 is a show cause notice issued to composition scheme taxpayers when GST officers believe you were ineligible or violated scheme conditions. You must reply using Form CMP-06 within 15 days. An adverse CMP-07 order can impose retroactive tax demands at standard GST rates for your entire composition period.

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GST Notice CMP-05: What It Is, Why You Got It, and How to Reply

A CMP-05 is a show cause notice (SCN) issued by the Proper Officer to a GST composition scheme taxpayer. It means the officer has reason to believe you were either ineligible for the composition scheme from the start, or that you violated its conditions after opting in. Of India’s 1.51 crore registered GST taxpayers (CBIC, April 2025), a significant subset operates under the composition scheme with turnover caps of Rs. 1.5 crore for goods dealers and Rs. 50 lakh for service providers. When any of the scheme’s strict conditions are breached, a CMP-05 follows. You have 15 days to respond using Form CMP-06, and the stakes are high: an adverse CMP-07 order can impose a retroactive tax demand covering your entire composition period, plus 18% interest and penalties.

Key Takeaways

  • CMP-05 is a show cause notice under Rule 6(4) of CGST Rules 2017, not a tax demand. It gives you a chance to explain yourself before any order is passed.
  • Reply using Form CMP-06 within 15 days of receiving the notice. There is no statutory extension.
  • The officer then has 30 days to pass an order in Form CMP-07, either accepting your reply or cancelling composition scheme benefit.
  • An adverse CMP-07 can make you liable as a regular taxpayer retroactively, for the full composition period, at standard GST rates.
  • After CMP-07, you must file Form ITC-01 within 30 days to claim ITC on stock in hand on the date of withdrawal.
  • You can appeal an adverse CMP-07 order to the GST Appellate Authority under Section 107 of the CGST Act.

What Is a CMP-05 GST Notice?

A CMP-05 is a formal show cause notice issued by a GST officer to a composition scheme taxpayer, asking them to explain why their composition scheme benefit should not be cancelled. It is governed by Rule 6(4) of the CGST Rules 2017, which reads: “Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or provisions of this Chapter, he may issue a notice to such person in FORM GST CMP-05 to show cause within fifteen days of the receipt of such notice as to why the option to pay tax under section 10 shall not be denied.” The notice is issued electronically through the GST portal and appears under Services > User Services > View Notices and Orders.

Three points are critical to understand from the start. First, CMP-05 is not a tax demand; it is a pre-decisional notice that gives you a hearing. Second, the officer does not need to wait for you to admit a violation; the threshold is merely “reasons to believe,” which includes data mismatches from third-party sources like AIS, e-way bill analytics, or GSTR-2B reconciliation. Third, the notice applies to all GSTINs under the same PAN: if you have two businesses under composition and one is found ineligible, the CMP-05 and its consequences affect every GSTIN linked to that PAN.

Who Receives a CMP-05 Notice and Why?

Any GST composition scheme taxpayer can receive a CMP-05 if the department has data suggesting a violation of Section 10 of the CGST Act 2017, which defines the composition levy. The composition scheme is available to goods dealers with aggregate turnover up to Rs. 1.5 crore (Rs. 75 lakh for Northeastern states and Himachal Pradesh) and service or mixed-supply businesses up to Rs. 50 lakh under Section 10(2A). Manufacturers pay composition tax at 1% of taxable turnover; goods traders at 1%; restaurants (not serving alcohol) at 5%; and mixed-supply or service providers at 6%. Staying within these parameters is the taxpayer’s responsibility.

The GST department increasingly uses AI-based risk profiling to detect composition scheme violations before issuing a CMP-05. Cross-referencing your annual income tax return, AIS data, e-way bills, and suppliers’ GSTR-1 data against your own CMP-08 declarations can reveal turnover suppression, interstate transactions, or ITC claims that composition dealers are prohibited from making. A CMP-05 is typically not the first signal: you will usually see an advisory message or compliance query on the portal before the formal notice is issued.

What Are the Most Common Triggers for a CMP-05 Notice?

The most common triggers are violations of Section 10(2) CGST Act, which sets the eligibility conditions. Breaching any single condition makes the taxpayer ineligible for the entire period of violation, not just the month or quarter it occurred.

Trigger Legal Basis How the Department Detects It
Aggregate turnover exceeds the scheme limit (Rs. 1.5 crore / Rs. 75 lakh / Rs. 50 lakh) Section 10(3) CGST Act IT-GST data matching, AIS, bank transaction data
Making inter-state outward supplies Section 10(2)(b) CGST Act E-way bills with delivery addresses in other states; GSTR-2A of out-of-state buyers
Claiming Input Tax Credit (ITC) Section 10(5) CGST Act ITC appearing in GSTR-2B / CMP-08 mismatch; system-generated flag
Issuing a tax invoice instead of a Bill of Supply Section 10(5) read with Rule 49 Invoice type mismatch detected in GSTR-1 data of buyers
Supplying services through an e-commerce operator (Section 52 TCS) Section 10(2)(d) CGST Act TCS certificates filed by e-commerce operators; GSTR-8 data matching
Manufacturing notified goods (ice cream, pan masala, tobacco) Section 10(2)(e) CGST Act Business activity classification; DGGI intelligence
Services component exceeding 10% of turnover or Rs. 5 lakh Rule 5 CGST Rules Cross-verification of supply type in CMP-08 vs third-party data
CA Insight: The E-Commerce Amendment Most Composition Dealers MissFrom October 2023, composition scheme taxpayers supplying goods through e-commerce operators arepermitted, following the GST Council’s recommendation. However, supply of services through e-commerce operators (other than restaurant services) remains prohibited under Section 10(2)(d). If you registered your business on Amazon or Flipkart after October 2023 for goods sales, you are not in violation. If you supply delivery-based services or software services through a platform that deducts TCS under Section 52, that is still a CMP-05 trigger. This distinction is missing from every competitor article on CMP-05.

What Is the Time Limit to Reply to CMP-05?

Rule 6(4) of the CGST Rules 2017 mandates a reply within 15 days of receipt of the CMP-05 notice. This window is non-negotiable in the statute: unlike some GST provisions that allow the officer discretion to extend timelines, Rule 6(4) uses the mandatory word “shall show cause within fifteen days.” There is no built-in application for extension. If you need more time in a genuine emergency, approach the jurisdictional officer directly and document any response, but do not assume an extension is available as a right.

The 15-day clock starts from the date of receipt on the portal, not from the date you open or acknowledge the notice. Log in immediately after receiving an SMS or email alert about a new notice. If the 15-day window expires with no CMP-06 filed, the Proper Officer can pass the CMP-07 order ex parte, based only on the department’s version of events, within 30 days from the expiry of the reply deadline.

Do Not Miss the 15-Day WindowAn ex parte CMP-07 order is almost always adverse: the officer has only the department’s data and no explanation from you. Once CMP-07 is passed, you face a retroactive tax demand at regular GST rates for the entire composition period. You can still appeal under Section 107, but the appellate process is slower, requires a 10% pre-deposit of disputed tax, and adds months of uncertainty. The cost of filing CMP-06, even with a partial explanation, is always lower than the cost of an ex parte order.

How Do You File Form CMP-06 in Reply to CMP-05?

Form CMP-06 is your formal response to the CMP-05 notice. Filing it correctly is the difference between scheme continuation and a retroactive demand. The reply must be filed on the GST portal electronically and authenticated with DSC or EVC. There is no offline or physical filing option.

  1. Log in to gst.gov.in and go to Services > User Services > View Notices and Orders. Open the CMP-05 notice, note the exact allegation, and identify the period to which it relates.
  2. Assess your position honestly: Determine whether the allegation is factually correct. Two reply strategies exist, and the wrong one makes things worse. If the violation occurred, admit it and proceed to compute your liability. If it did not occur, gather documentary evidence to rebut the allegation.
  3. Navigate to Form CMP-06: Go to Services > Registration > Application for Withdrawal from Composition Levy or search for Form CMP-06 under the Notices section. Select the relevant CMP-05 reference number.
  4. Draft the reply body: State clearly whether you admit or deny the allegation. If denying, explain the factual position and reference the documents you are attaching (ledgers, invoices, bank statements, purchase records). If admitting, state the nature of the violation and the period involved.
  5. Attach supporting documents: Upload ledgers, sales registers, state-wise turnover breakdowns, e-way bill data, or any other evidence that supports your position. Keep file sizes within the portal’s limits (PDF format, typically 5 MB per file).
  6. Submit and authenticate: Submit using DSC or EVC. Save the acknowledgement reference number. The officer’s 30-day clock for passing CMP-07 begins from this submission date.
CA Insight: Admitted Violation Reply vs. Denied Violation ReplyThe two paths in CMP-06 carry very different consequences. If youadmit the violation, your CMP-06 should include a voluntary computation of the tax differential you owe (regular GST minus composition tax already paid), and ideally a payment challan showing you have already deposited the shortfall before filing the reply. Demonstrating proactive payment usually results in a less severe CMP-07, sometimes limited to cancellation of the scheme going forward without retroactive demand. If youdeny the violation, your evidence must be watertight: invoices, bank statements, and state-wise turnover analyses that directly contradict the officer’s data. A weak denial with no documents is worse than an admission: the officer passes an adverse CMP-07 and may treat the denial as a sign of wilful non-cooperation, which moves the demand from Section 73 (no fraud) territory to Section 74 / 74A (fraud or suppression) territory, increasing the penalty exposure significantly.

What Happens After You Receive a CMP-07 Order?

The officer issues Form CMP-07 within 30 days of receiving your CMP-06 reply (or within 30 days of the expiry of the 15-day reply window if no CMP-06 was filed). CMP-07 either accepts your reply and closes the matter, or denies your composition scheme benefit from a specified date. If denied, the following consequences apply immediately.

Retroactive Tax Demand: A Worked Example

Illustrative Case: Interstate Supply Violation

A goods trader in Maharashtra is under the composition scheme. Annual turnover: Rs. 60 lakh. Composition tax paid at 1%: Rs. 60,000 per year. The officer discovers via e-way bill data that the trader made interstate supplies worth Rs. 8 lakh to Gujarat buyers over one full financial year, which is prohibited under Section 10(2)(b).

The CMP-07 order backdates the scheme cancellation to the start of that financial year. The trader is now treated as a regular taxpayer for the entire year at, say, 12% GST on all Rs. 60 lakh of turnover:

  • Regular GST due: Rs. 60 lakh × 12% =Rs. 7,20,000
  • Composition tax already paid: Rs. 60,000
  • Tax shortfall:Rs. 6,60,000
  • Interest at 18% p.a. for 12 months:Rs. 1,18,800
  • Penalty under Section 73 (no fraud): 10% of shortfall =Rs. 66,000
  • Total additional liability: Rs. 8,44,800

Note: The trader also loses the simplified quarterly CMP-08 filing and must switch to GSTR-1 and GSTR-3B monthly filings going forward.

Compliance Steps After an Adverse CMP-07

  • File Form GST ITC-01 within 30 days of the CMP-07 order. Declare all stock in hand, WIP, and capital goods as on the date of withdrawal. This lets you claim ITC that was denied during the composition period, a significant cash flow relief that most taxpayers miss.
  • Shift to regular GSTR-1 and GSTR-3B filings from the month following the withdrawal date specified in CMP-07.
  • Pay the retroactive demand (tax shortfall + interest) to stop interest from accruing. Pay penalty separately under the relevant Section 73 / 74 / 74A challan.

Section 74A: The Changed Penalty Landscape from FY 2024-25

For demands relating to FY 2024-25 onwards, the Finance Act 2024 replaced the dual Section 73 / Section 74 framework with a unified Section 74A. This removes the distinction between “fraud” and “non-fraud” cases for penalty determination at the demand stage, though it introduces a fresh set of graduated penalty slabs. If your CMP-05 relates to FY 2024-25 or later, your CA should analyse the applicable penalty under Section 74A before you respond.

Appealing an Adverse CMP-07 Order

If the CMP-07 order is wrong on facts or law, you can appeal to the GST Appellate Authority under Section 107 of the CGST Act within 3 months of receiving the order. The appeal requires a pre-deposit of 10% of the disputed tax amount. The appellate authority must dispose the appeal within one year. This option is available but slow. If you have strong documentary evidence, a well-drafted CMP-06 is always preferable to relying on Section 107: it resolves the matter at source and avoids the pre-deposit requirement. For guidance on composition versus regular registration trade-offs, see our business structure compliance comparison.

Old Notices from FY 2017-20: GST Council Relief

If your CMP-05 relates to a period covered by the 53rd GST Council’s recommendations (June 2024), interest and penalties on Section 73 demand notices for FY 2017-18, 2018-19, and 2019-20 were waived, provided the full tax was paid by 31 March 2025. If you have an older pending demand notice in this category and paid the tax before the deadline, file an application with your jurisdictional officer citing the Council’s recommendation and CBIC Notification 21/2024-CT. The penalty and interest waiver does not apply automatically for composition scheme-specific cancellation orders, but it can reduce the financial impact on the underlying tax demand that follows from CMP-07.

For other GST compliance situations, our guide on GSTR-3A non-filing notices covers what happens when regular taxpayers miss return deadlines.

Frequently Asked Questions on CMP-05 GST Notice

Is a CMP-05 the same as a tax demand notice?

No. CMP-05 is a show cause notice under Rule 6(4) of CGST Rules 2017, not a tax demand. It gives you 15 days to explain why your composition scheme benefit should not be denied. Only the CMP-07 order that follows (if the officer rejects your reply) creates the formal basis for a retroactive tax demand. Receiving a CMP-05 does not mean a demand has been raised yet.

Can I continue using the composition scheme while a CMP-05 is pending?

Yes. CMP-05 is a show cause notice, and no adverse order has been passed yet. You can continue to file CMP-08 and operate under the composition scheme during the 15-day reply period and while the officer deliberates on CMP-07. However, if the CMP-07 order is ultimately adverse, the cancellation is retroactive to the date specified in the order, and all supplies made during that period will be reassessed at regular GST rates.

What happens to all my GSTINs if one receives an adverse CMP-07?

The composition scheme operates at the PAN level under Section 10(2) of the CGST Act. If you have two or more GSTINs under the same PAN (for example, businesses in two different states), and one GSTIN is found ineligible, the composition scheme benefit for all GSTINs under that PAN is cancelled. This PAN-level impact is one of the most overlooked consequences of CMP-05 for multi-state business owners.

Can I re-enter the composition scheme after receiving an adverse CMP-07?

Yes, but only from the beginning of the next financial year, provided you meet all eligibility conditions at that time. The process is to file Form GST CMP-02 (intimation of composition intent) before the start of the financial year you wish to opt in. There is no bar on re-entry per se, but if the CMP-07 found you ineligible ab initio (from the date you first opted), the department may scrutinise your re-entry application more carefully.

What is Form ITC-01 and why does it matter after CMP-07?

Form ITC-01 is a declaration of the Input Tax Credit available on stock, work-in-progress, and capital goods in hand on the date a taxpayer exits the composition scheme. Composition scheme dealers cannot claim ITC during the scheme period, but Section 18(1)(b) of the CGST Act allows them to claim ITC on existing stock when they exit. You must file ITC-01 within 30 days of the CMP-07 order. Missing this deadline means losing potentially significant ITC that would otherwise offset your regular GST liability going forward.

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