What are the penalties for non-compliance under GST?

Non-compliance with the Goods and Services Tax (GST) laws in India attracts strict penalties under the Central Goods and Services Tax (CGST) Act, 2017 and related statutes. These penalties are designed to ensure compliance, deter evasion, and maintain the integrity of the GST system. Below is an overview of penalties, relevant constitutional provisions, and landmark cases concerning GST non-compliance.

1. Penalties for Non-Compliance under GST

A. Categories of Non-Compliance

Failure to Register Under GST
- Penalty: ₹10,000 or the amount of tax evaded, whichever is higher (Section 122 of the CGST Act, 2017).
Failure to Issue a Tax Invoice
- Penalty: ₹10,000 or the amount of tax evaded, whichever is higher.
Incorrect or False Returns
- Penalty: ₹10,000 or the tax short-paid, whichever is higher.
Non-Payment or Short Payment of Tax
- Penalty: Equal to the tax amount evaded (100%).
Fraudulent Tax Evasion
- Penalty: 100% of the tax amount involved in fraud, with possible prosecution.
Failure to File Returns
- Late Fee:
  - ₹50 per day (₹25 CGST + ₹25 SGST), up to a maximum of ₹5,000.
  - For Nil returns: ₹20 per day (₹10 CGST + ₹10 SGST).
Wrongful Availment or Utilization of Input Tax Credit (ITC)
- Penalty: 100% of the tax amount.
Failure to Generate E-Way Bill
- Penalty: ₹10,000 or the tax sought to be evaded (whichever is higher).
Obstruction of Officers During Audit/Inspection
- Penalty: ₹25,000.

B. Types of Penalties

Monetary Penalty:
- Imposed in cases like delayed filing, non-registration, or incorrect reporting.
Prosecution:
- Applicable in severe cases like fraudulent tax evasion exceeding ₹5 crore.
- Punishments range from imprisonment (up to 5 years) and fines.
Interest on Late Payment of Tax (Section 50):
- Interest at 18% per annum on the outstanding tax amount.
Compounding Offenses (Section 138):
- Offenders may opt to pay a compounding fee instead of facing prosecution.

2. Relevant Provisions in the CGST Act, 2017

Key Sections on Penalties:

Section 122: Specifies offenses and penalties for various types of non-compliance.
Section 123: Penalty for failing to furnish information or documents.
Section 124: Penalty for furnishing incorrect information.
Section 125: General penalty for non-specific offenses (up to ₹25,000).
Section 126: Guidelines for imposing penalties, ensuring they are proportional to the offense.
Section 127: Provides for penalty imposition without a show-cause notice for minor breaches.
Section 132: Prescribes punishments for fraudulent activities, including imprisonment.

Key Features of the Penalty Framework:

Intent-Based Penalties: Higher penalties for intentional fraud compared to unintentional mistakes.
Show-Cause Notices (Section 73 and 74): Notices must be issued before imposing penalties to ensure fair hearings.
Voluntary Disclosure: Taxpayers may rectify errors and avoid penalties by voluntarily disclosing discrepancies.

3. Constitutional Provisions

The constitutional framework underpins GST’s penalty provisions:

Article 265: Ensures that “no tax shall be levied or collected except by authority of law.” Penalty provisions align with this article to ensure legal compliance.
Article 246A: Empowers both the Union and States to legislate on GST, providing the legal foundation for penalties.
Article 14 (Right to Equality): Penalties must be applied fairly and equitably, respecting the principle of non-arbitrariness.

4. Landmark Cases on GST Penalties

A. Rattan Industries vs. Union of India (2020)

Issue: Imposition of a penalty for delayed GST payment due to technical glitches on the GST portal.
Outcome: The Punjab and Haryana High Court ruled that penalties cannot be imposed for delays caused by technical issues beyond the taxpayer’s control.

B. Siddharth Enterprises vs. Nodal Officer (2019)

Issue: Denial of transitional input tax credit (ITC) and imposition of penalties.
Outcome: The Gujarat High Court ruled that technical lapses should not result in the denial of ITC or harsh penalties, emphasizing fairness in GST implementation.

C. Mohit Minerals Pvt. Ltd. vs. Union of India (2022)

Issue: Penalties for tax evasion in the context of “Ocean Freight.”
Outcome: The Supreme Court invalidated GST on certain ocean freight transactions, stressing that penalties should only apply to lawful impositions.

D. Bajaj Allianz General Insurance vs. Commissioner of CGST (2021)

Issue: Penalty imposed for alleged wrongful classification of services.
Outcome: The court held that minor classification errors, if not fraudulent, should not attract heavy penalties.

E. Union of India vs. Dharampal Premchand Ltd. (2020)

Issue: Excessive penalties for minor technical non-compliance.
Outcome: The Supreme Court emphasized proportionality in penalties and directed the authorities to avoid arbitrary actions.

5. Key Takeaways for Taxpayers

A. Avoiding Penalties

Timely Compliance: Ensure timely registration, filing of returns, and payment of taxes.
Accurate Reporting: Maintain accurate records and report transactions correctly.
Voluntary Disclosures: Rectify errors promptly through the GST portal to avoid penalties.

B. Defenses Against Penalties

Prove Bona Fide Errors: Courts have often waived penalties for unintentional mistakes.
Technical Issues: Document evidence of portal glitches to defend against penalties.
Proportionality Argument: Advocate for reduced penalties by citing proportionality principles.

C. Role of Legal Precedents

Landmark cases provide guidance on defending against arbitrary penalties and ensuring fair treatment under the GST framework.

6. Conclusion

Penalties under GST are stringent to deter non-compliance but are also guided by principles of fairness and proportionality, as emphasized in judicial rulings. Businesses must ensure meticulous compliance with GST laws to avoid penalties and leverage available remedies in case of disputes. If you require further insights into any specific aspect, let me know!