The Second Proviso: 10% of Turnover or ₹5 Lakh of Services

Second Proviso explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Before 1 February 2019 a goods composition dealer who let a customer pay for a delivery lost the scheme. The second proviso replaced that cliff with a measured tolerance — and the measurement has three moving parts that are easy to get wrong.

The second proviso to s.10(1) permits a person paying tax under clause (a), (b) or (c) to supply services other than those in clause (b) of paragraph 6 of Schedule II, of value not exceeding ten per cent of turnover in a State or Union territory in the preceding financial year, or five lakh rupees, whichever is higher. The Explanation, notified from 01.01.2020, keeps exempt supply of services by way of extending deposits, loans or advances where the consideration is interest or discount out of the turnover used for that computation.

What the proviso was fixing

The agenda for the 28th GST Council meeting stated the problem in its own words: registered persons supplying services other than restaurant services were not eligible for the scheme, so "manufacturers and traders supplying services are unable to opt for the scheme even if its percentage is very small as compared to the supplies of goods".

That is the design intent, and it explains the shape of the limit. The proviso is not a licence to run a service business inside a goods scheme; it is a tolerance for the services a goods business cannot avoid — freight recovered from a customer, an installation charge, a repair done for a buyer, commission on a stray transaction.

The three moving parts

One — the base is "turnover in a State or Union territory", not aggregate turnover. So a dealer with registrations in three States computes a separate allowance for each. The eligibility gate is PAN-wide; this allowance is per registration.

Two — the base is the preceding financial year. The proviso says "in the preceding financial year". The allowance for the current year is therefore a fixed rupee number, known on 1 April, not a figure that grows as the year's turnover grows.

Three — the test is "whichever is higher". Below ₹50 lakh of preceding-year State turnover, ₹5 lakh is the higher figure and it governs. Above ₹50 lakh, the 10% figure takes over.

And the exclusion in the proviso itself. Services referred to in clause (b) of paragraph 6 of Schedule II — food and drink supplied as part of a service — do not count against the allowance, because a person supplying those pays under clause (b) of s.10(1) and the whole of that activity is the scheme, not an exception to it.

The Explanation, and why interest income is the usual trap

Explanation to the second proviso, inserted by section 93 of the Finance (No. 2) Act, 2019 and notified through Notification No. 1/2020-CT with effect from 01.01.2020:

"For the purposes of second proviso, the value of exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account for determining the value of turnover in a State or Union territory."

Interest is an exempt supply of service. Money left in a bank account, a fixed deposit, a loan to a partner or a group company — each produces interest, and each is a supply of service that is exempt rather than outside the charge.

Without the Explanation, every dealer with a bank balance would be supplying services, and a dealer with modest turnover could be knocked out by nothing more than deposit interest. The Explanation removes that.

Read the words carefully, though. The Explanation operates on "the value of turnover in a State or Union territory" — the base of the computation. ICAI's own worked examples in the Handbook apply it so that interest income neither swells the base nor counts as service value being tested. A worked example there takes a dealer with taxable turnover of ₹60 lakh, exempt services of ₹8 lakh and interest income of ₹2 lakh, and treats only the ₹8 lakh as service value against the allowance.

Two worked cases from the Handbook

Case A — exempt services of ₹8 lakh. Preceding-year aggregate turnover ₹55 lakh; taxable turnover of goods ₹60 lakh; exempt services other than interest ₹8 lakh; interest income ₹2 lakh. The ₹8 lakh of services exceeds the allowance, so from 1 February 2019 the person is ineligible.

Case B — taxable services of ₹3 lakh. Same figures but the services are taxable and total ₹3 lakh. The ₹3 lakh is within the ₹5 lakh floor, so from 1 February 2019 the person is eligible — where before that date, on the pre-substitution clause (a), the same person was ineligible for supplying any service at all.

The contrast is the point. Whether the service is taxable or exempt does not matter to the arithmetic; value does. An exempt service still counts against the allowance, because the proviso speaks of "services", not of "taxable services". Only interest and discount are carved out, and only by the Explanation.

What happens when the allowance is breached

The proviso is written into eligibility through clause (a) of s.10(2), which opens "save as provided in sub-section (1)". Cross the allowance and clause (a) is no longer satisfied.

Rule 6(1) and (2) then take over. The option remains valid only so long as every condition in the section and the Chapter is satisfied; from the day a condition fails, the person is liable to tax under s.9(1), must issue a tax invoice for every taxable supply made thereafter, and must file FORM GST CMP-04 within seven days of the event.

Note what the trigger is not. Breaching the service allowance is a failure of a condition, dealt with by Rule 6, not a lapse under s.10(3) — s.10(3) is reserved for crossing the turnover limit. The practical consequence is the same, but the paperwork and the date are driven by different provisions. Rule 6 and CMP-04 →

Key takeaways

• The allowance is the higher of 10% of preceding-year turnover in the State and ₹5 lakh — so ₹5 lakh governs below ₹50 lakh of turnover.
• The base is per State registration and is fixed on 1 April from last year's figure.
• Exempt services count against the allowance; only interest and discount on deposits, loans and advances are excluded, from 01.01.2020.
• Schedule II paragraph 6(b) food-and-drink supplies do not count — they are the scheme itself under clause (b).
• Breach is a Rule 6 condition failure, requiring CMP-04 within seven days, not an s.10(3) lapse.

Read next

• Section 10(1) Clause by Clause
• Section 10(2)(a) to (f): The Six Gates
• Section 10(2A): The 3% Scheme for Service Providers and Mixed Suppliers
• Rule 6: Lapse, Withdrawal and the CMP-04 to CMP-07 Chain

Disclaimer: Positions stated as on 5 September 2026, based on the second proviso and Explanation to section 10(1) of the CGST Act, 2017 as recorded in the ICAI Bare Law (12th edition, amended to 31 March 2026), and the worked examples and 28th GST Council agenda extract in the ICAI Handbook on Composition Scheme under GST (February 2026, 3rd edition).