What are the consequences of tax evasion under GST?

Tax evasion under the Goods and Services Tax (GST) is a serious offense that attracts a range of consequences, including penalties, interest, imprisonment, and other punitive actions. GST laws aim to ensure compliance and discourage fraudulent activities through stringent provisions under the Central Goods and Services Tax (CGST) Act, 2017, and related rules.

1. Consequences of Tax Evasion under GST

A. Monetary Penalties

1. General Penalties (Section 122, CGST Act)
   • For tax evasion, incorrect invoicing, or wrongful Input Tax Credit (ITC) claims, a penalty of:
     • 10% of the tax amount due (minimum ₹10,000) for non-fraudulent cases.
     • 100% of the tax amount due (minimum ₹10,000) for fraudulent cases.
2. Late Payment or Non-Payment of Tax
   • Interest at 18% per annum on unpaid taxes under Section 50.
3. Confiscation of Goods or Conveyances (Section 130)
   • Authorities can confiscate goods and impose fines in addition to recovery of tax.
4. Offense-Specific Penalties
   • Using fake invoices: Severe fines and other punitive actions.
   • Non-issuance of invoices: Penalty equivalent to the tax amount.

B. Imprisonment and Criminal Penalties

1. Imprisonment under Section 132
   • Fraudulent evasion exceeding specified limits can lead to imprisonment:
     • Evasion above ₹5 crore: Up to 5 years.
     • Evasion between ₹2 crore and ₹5 crore: Up to 3 years.
     • Evasion between ₹1 crore and ₹2 crore: Up to 1 year.
2. Cognizable Offenses
   • Offenses involving evasion exceeding ₹5 crore are cognizable and non-bailable.
3. Falsification of Records
   • Knowingly submitting false records or suppressing information is punishable with imprisonment and fines.

C. Denial of Input Tax Credit (ITC)

1. Reversal of Wrongful ITC
   • Taxpayers must repay wrongly claimed ITC along with interest.
2. Restriction on Future Claims
   • Taxpayers engaging in fraudulent activities may face restrictions on claiming ITC.

D. Cancellation of GST Registration

1. Provisions for Cancellation
   • Authorities can cancel the registration of taxpayers engaging in tax evasion or fraud under Section 29.
2. Impact
   • Suspension of GST registration can disrupt business operations.

E. Prosecution and Blacklisting

1. Prosecution
   • Offenders can be prosecuted under criminal law provisions of the CGST Act.
2. Blacklisting
   • Taxpayers involved in repeated evasion may be blacklisted, restricting their ability to do business with compliant entities.

F. Social and Reputational Damage

1. Public Notice
   • Authorities may publish details of taxpayers engaged in significant tax evasion.
2. Loss of Business
   • Loss of trust among suppliers, customers, and financial institutions.

2. Provisions in the CGST Act, 2017

1. Section 73 and 74: Recovery of Taxes
   • Deals with recovery of taxes for non-fraudulent and fraudulent cases.
   • Fraudulent cases attract higher penalties and interest.
2. Section 122: Penalties for Specific Offenses
   • Lists offenses and corresponding penalties.
3. Section 132: Criminal Penalties
   • Prescribes imprisonment and fines for serious offenses.
4. Section 67: Inspection, Search, and Seizure
   • Empowers authorities to inspect premises and seize goods or documents in cases of evasion.
5. Section 130: Confiscation of Goods
   • Authorizes confiscation of goods and conveyances involved in tax evasion.

3. Constitutional Framework

1. Article 265:
   • Ensures that “no tax shall be levied or collected except by authority of law.”
   • GST laws are designed to prevent evasion and ensure compliance.
2. Article 246A:
   • Grants the Union and States concurrent powers to legislate on GST, including anti-evasion provisions.
3. Article 14:
   • Guarantees equality before the law, ensuring fair treatment in enforcement and penalties.
4. Article 19(1)(g):
   • Protects the right to trade, subject to reasonable restrictions like compliance with GST laws.

4. Landmark Cases on GST Evasion

A. Union of India vs. Aap and Co. (2019)

• Issue: Claiming ITC without actual receipt of goods.
• Outcome: The court upheld penalties and ruled that ITC cannot be claimed on fake invoices.

B. Bharti Airtel Ltd. vs. Union of India (2021)

• Issue: Rectification of GSTR-3B to correct ITC claims.
• Outcome: The Supreme Court emphasized the importance of accurate returns to prevent evasion.

C. Ratan Industries vs. Commissioner of GST (2020)

• Issue: Use of shell companies to evade GST.
• Outcome: The court supported stringent penalties and prosecution for creating fictitious entities.

D. Siddharth Enterprises vs. Nodal Officer (2019)

• Issue: Denial of transitional ITC due to procedural errors.
• Outcome: The Gujarat High Court ruled that procedural lapses do not justify denying legitimate credits, emphasizing fairness.

E. State of Maharashtra vs. HDFC Bank Ltd. (2022)

• Issue: Misclassification of services for tax benefits.
• Outcome: The court held that deliberate misclassification constitutes evasion and warranted penalties.

5. Safeguards for Taxpayers

Taxpayers can disclose and rectify errors voluntarily to avoid harsh penalties.

Opportunity to Respond

Taxpayers are issued show-cause notices under Section 73 or 74 before penalties are imposed.

Appeals Process

Decisions can be challenged before appellate authorities under Section 107.

Voluntary Disclosure