Consequences of GST Non-compliance - Offenses and Penalties
The effective implementation of any tax law requires strict action against tax offenders. To encourage compliance with India's new GST tax regime, the government has come up with a three-pronged approach: interest, monetary penalties, and prosecution.
In this article, we will examine some of the monetary penalties and prosecution provided under the Central Goods & Services Tax Act, as of April 12, 2017.
Please note, some of the offenses prescribed below may also attract prosecution but that depends on the gravity of the offense.
The 21 offenses listed below are subject to a penalty of 10,000 rupees or the amount of tax involved, whichever is greater [Sec 122(1)]:
1. Supplying goods and/or services without issuing an invoice or issuing an incorrect or false invoice
2. Issuing an invoice without supplying goods and/or services
3. Collecting tax but failing to remit it to the government within three months of the due date
4. Collecting tax in contravention of law but failing to remit it to the government within three months of the due date
5. Failing to deduct tax or deposit the tax with the government
6. Failing to collect tax or collecting too little tax from the supplier at the time of payment, or failing to pay the tax to the government — applies to eCommerce operators*
7. Taking full or partial input tax credit without actual receipt of goods and/or services
8. Obtaining a refund of tax by fraud
9. Distributing an input tax credit other than in the manner prescribed
10. Falsifying or substituting financial records, producing fake accounts and/or documents, or furnishing a false return
11. Failing to obtain registration (if registration is required)
12. Furnishing false information during registration
13. Obstructing an officer from the discharge of duties
14. Transporting taxable goods without documents
15. Suppressing turnover leading to evasion of tax
16. Failing to maintain books of accounts and documents
17. Failing to furnish information to CGST/SGST officers or furnishing false information
18. Supplying and/or storing goods which one has reason to believe are liable for confiscation
19. Issuing an invoice or document by using the identification number of another person
20. Tampering with material evidence
21. Tampering with any goods that have been detained, seized, or attached
* In addition to any action that may be taken under Sec. 122, failure of an electronic commerce operator to furnish all required information could lead to penalties of up to 25,000 rupees.
The Central Goods and Services Tax Act allows for a reduction in penalties when a person fails to pay or underpays the tax owed erroneously, rather than deliberately by fraud, wilful misstatement, or the suppression of facts. In such cases, penalties could be reduced to 10 percent of the tax owed, subject to a minimum of 10,000 rupees. A similar abatement of penalties could be available when input tax credits are wrongly availed or utilized, or when the tax is erroneously refunded on the supply of goods or services. [Sec 122(2a)]
Additionally, if there is an element of fraud or wilful misstatement or suppression of facts, then the penalty will be the tax owed, subject to a minimum of 10,000 rupees. [Sec 122(2b)]
A penalty is also prescribed for offenses where the person is not directly involved in any
evasion but may be a party to evasion or fails to attend summons or produce
necessary documents. In such cases, the penalty would be up to 25,000 rupees. [Sec 122(3)]
Certain people are required to furnish information return and if they fail to do so, a penalty of 100 rupees per day applies, subject to a maximum of 5,000 rupees. [Sec 123]
If a person fails to furnish statistics or willfully furnishes false statistics, the following penalties apply:
- First-time offense – 10,000 rupees
- Continuing offense – 10,000 rupees plus 100 rupees per day (from the second day), subject to maximum of 25,000 rupees [Sec 124]
A penalty of up to 25,000 rupees applies to any offense of the GST law that lacks a specifically prescribed penalty [Sec 125].
Compared to earlier tax laws (i.e., Excise Duty, Service Tax, VAT), the GST tax regime contains a substantial increase in the maximum penalty levied. This indicates the seriousness of the government's intent to ensure GST compliance. However, the government also reserves the right to either fully or partially waive penalties.
The CGST law also sets guidelines for the judicious levy of penalties. Some of the principles of natural justice are codified in the law itself So that no unjust penalties are imposed for trivial offenses. These general principles are enlisted below -
(a) A substantial penalty shall not be levied in instances where the tax involved is less than 5,000 rupees (minor breach) and documentation errors are easily rectifiable.
(b) There are safety nets so that the degree and severity of a breach can be determined before a penalty is imposed.
(c) No penalty will be imposed without issuing a show cause notice or giving the assessee a personal hearing.
(d) Voluntary disclosure by a person to a tax authority (not merely in his own books and
records) about the circumstances of the breach may be considered as a mitigating
factor for levy of penalty.
These guidelines are for cases involving substantive penalties; cases involving fixed sum or percentage of penalty are excluded.
Moreover, GST law has not yet specified the penalty for breaching the anti-profiteering measure. Finance Minister Arun Jaitley has said that there would be no witch hunt, but no further clarity has been provided.
Confiscation of goods or conveyance
Certain offenses will lead to both a penalty and the confiscation of goods and/or conveyances. The penalty will be 10,000 rupees or an amount equal to the tax evaded. These offenses are:
- Failing to account for the goods on which a person is liable to pay tax
- Supplying or receiving goods in breach of any provisions or rules, with the intent to evade payment of tax
- Supplying any goods liable to tax without registering
- Using a conveyance to deliver taxable goods in breach of any provisions or rules
The Confederation of All India Traders (CAIT) states that high penalties will ensure that taxes collected by the merchant will not be used for working capital or the financial benefit of companies. This should lead to more stable tax collection and administration.
The prosecution provisions are harsher as compared to mere pecuniary penalties. They are intended to be a deterrent not only to the assessee but also to all other assessees.
Period of imprisonment
The period of imprisonment of a prosecuted person will depend on the amount of tax evaded:
|Type of Offence
||Amount of tax evaded/ ITC wrongly availed/utilized/refund wrongly taken
||Period of maximum imprisonment & fine
|Certain offenses specified in the Act
||Exceeding Rs 500 lakhs
||5 yrs* and fine (Non-bailable)|
|Certain offenses specified in the Act
||Exceeding Rs 200 lakhs up to Rs 500 lakhs
||3 yrs* and fine
|Any other offense
||Exceeding Rs 100 lakhs up to Rs 200 lakhs
||1 yr* and fine|
|Commits/ assists in the commission of certain specified offenses
||6 months and/or fine
|Repetition of offense
(i.e. second & every subsequent offense)
|5 yrs* and fine
*Without any specific or special reason as recorded in the order by the court, the term of imprisonment should not be less than 6 months.The CGST Act also proposes the levy of late fees to facilitate better GST compliance:
|A person fails to furnish details of outward or inward supplies, monthly return or final return by the due date [Sec 47].
||Rs 100 per day while the failure continues, subject to a maximum of Rs 5,000 rupees.
|A person fails to furnish the annual return by the due date [Sec 47]
||Rs 100 per day while the failure continues, subject to a maximum of quarter percent of the person’s turnover in the state where he/she is registered
|Deductor fails to furnish TDS certificate to Deductee within 5 days of credit to govt. [Sec 51]
||Rs 100 per day, subject to max of Rs 5,000
Various trade organizations argue that the government should tackle noncompliance with soft hands initially, rather than with imprisonment, since non-compliance could be erroneous rather than intentional. Navneet Agarwal, State General Secretary of Akhil Bharatiya Udyog Vyapar Mandal, Madhya Pradesh has expressed that, “the government should set a three-year period for transition from the current system to GST, and shouldn’t impose a penalty or punishment on those who commit mistakes in this period. This duration should be treated as a learning period”.
“Prevention is always better than cure.” Therefore, to avoid penalties or prosecution under India's new Goods and Services Tax, businesses should look for the most suitable HST automation services available.
Avalara India provides a fully automated GST compliance software in the cloud for your returns preparation and filing needs. We are a seasoned Application Service Provider (ASP) partners with several licensed GST Suvidha Providers (GSPs). To know more about Avalara's TrustFile GST offering, please visit http://avalara.com/in/products/gst-returns-filing/
This whitepaper is authored by CA Priya Madrecha. Priya is a CA, CS by profession and Partner at Madrecha & Co. in Mumbai. She is a moderator at gstindia.net, a forum on Goods and Services Tax. An ex-consultant at KPMG, she specializes in indirect taxation.