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Offences and Penalties under the Central Goods and Services Tax Act, 2017 (CGST Act)
Introduction
The Central Goods and Services Tax Act, 2017 represents a landmark reform in India’s indirect taxation system, introducing a unified tax structure replacing multiple central and state-level taxes. However, with this transformative change came the necessity for robust enforcement mechanisms to ensure compliance and prevent revenue leakage. Chapter XIX of the CGST Act, encompassing sections 122 to 138, establishes an elaborate framework of offences and corresponding penalties designed to deter tax evasion, promote voluntary compliance, and maintain the integrity of the GST regime. These penal provisions strike a balance between penalizing deliberate misconduct and providing relief for genuine errors, thereby creating a fair and effective compliance ecosystem.
Understanding these provisions is critical for taxpayers, professionals, and enforcement authorities alike, as they navigate the complexities of GST compliance. The framework distinguishes between civil penalties and criminal prosecution, with varying degrees of severity based on the nature and gravity of the offence. This article examines the regulatory structure governing offences under the CGST Act, exploring the legal provisions, penalties, enforcement mechanisms, and judicial interpretations that shape compliance obligations in India’s GST landscape.
Classification of Offences under CGST Act
The CGST Act categorizes offences into distinct classes based on their severity and nature. The primary categorization differentiates between offences attracting civil penalties and those warranting criminal prosecution. Civil penalties are primarily governed by sections 122 to 125 of the CGST Act, while criminal offences inviting prosecution and imprisonment are detailed under section 132 of CGST Act. This dual approach recognizes that not all violations are equally severe and that the punishment must be commensurate with the gravity of the misconduct.
Section 122 of the CGST Act constitutes the cornerstone of the penalty framework, enumerating twenty-one specific offences liable for monetary penalties [1]. These offences encompass a wide range of violations, including supply of goods or services without proper invoicing, issuance of fake invoices without actual supply, wrongful availment of input tax credit, failure to obtain registration despite liability, failure to deduct or collect tax at source, and various other compliance failures. The section applies to taxable persons, which includes not only registered persons but also those liable to be registered under sections 22 or 24 of the Act.
The penalties under section 122 are structured in subsections that differentiate between various categories of offenders. Subsection 122(1) applies to any taxable person and prescribes penalties for twenty-one enumerated offences. Subsection 122(1A), inserted with effect from January 1, 2021, targets beneficiaries who retain advantages from fraudulent transactions covered under specific clauses of subsection 122(1). Subsection 122(2) specifically addresses registered persons who supply goods or services on which tax has not been paid or has been short-paid, distinguishing between cases involving fraud and those without fraudulent intent. Subsection 122(3) covers aiding, abetting, or dealing with goods liable to confiscation, imposing penalties up to twenty-five thousand rupees.
Penalty Structure and Quantum Under the CGST Act
The penalty framework under the CGST Act is designed to encourage voluntary compliance while deterring intentional violations. The quantum of penalties varies significantly based on the presence or absence of fraudulent intent and the stage at which the taxpayer rectifies the default.
Under section 122(2) for registered persons, where tax has not been paid or has been short-paid for reasons other than fraud, wilful misstatement, or suppression of facts, the penalty is the higher of ten thousand rupees or ten percent of the tax due. However, where such non-payment or short payment arises from fraud or wilful misstatement or suppression of facts to evade tax, the penalty escalates to the higher of ten thousand rupees or the entire amount of tax due [2]. This graduated approach ensures that honest mistakes receive more lenient treatment compared to deliberate evasion.
Section 122(1A) imposes a particularly severe penalty on beneficiaries of fraudulent transactions. Any person who retains the benefit of transactions involving supply without invoice, fake invoicing, or wrongful input tax credit availment, and at whose instance such transaction is conducted, faces a penalty equivalent to the entire amount of tax evaded or input tax credit wrongly availed or passed on. This provision was specifically introduced to target the ultimate beneficiaries of tax fraud, recognizing that masterminds often operate behind the scenes while using others as fronts.
Section 125 provides for a general penalty applicable to offences for which no specific penalty is prescribed elsewhere in the Act. In such cases, the violator faces a penalty extending up to twenty-five thousand rupees. This provision serves as a catch-all mechanism ensuring that no violation goes unpunished merely because it was not explicitly enumerated in other penalty provisions.
An important limitation on penalty imposition is provided under section 126, which mandates that no penalty shall be imposed for minor breaches of tax regulations or procedural requirements. Specifically, any omission or mistake in documentation that is easily rectifiable and made without fraudulent intent shall not attract penalties. The provision defines a minor breach as one where the tax involved is less than five thousand rupees, providing a reasonable threshold for de minimis violations.
Demand and Recovery Provisions
The CGST Act establishes two parallel mechanisms for demanding and recovering unpaid or short-paid taxes through sections 73 and 74, each addressing different circumstances and carrying different implications for taxpayers.
Section 73 applies to cases where tax has not been paid or has been short-paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized, for any reason other than fraud, wilful misstatement, or suppression of facts to evade tax [3]. This section is designed to address genuine errors, inadvertent omissions, or misinterpretations of law that result in tax shortfall. The proper officer must issue a show cause notice at least three months before the time limit for issuance of order, requiring the person to explain why the demanded amount should not be paid along with interest under section 50 and applicable penalties.
The penalty structure under section 73 encourages early compliance. If the taxpayer pays the tax along with interest within thirty days of the show cause notice, no penalty is imposed at all. If payment is made after thirty days but before the final order, the penalty is limited to the higher of ten thousand rupees or ten percent of the tax due. This graduated penalty system incentivizes voluntary compliance and early rectification of errors.
Section 74 deals with more serious cases involving fraud, wilful misstatement, or suppression of facts to evade tax [4]. The proper officer must issue notice at least six months before the time limit for issuance of order, and the penalty provisions are significantly more stringent. If the taxpayer comes forward and pays fifteen percent of the tax involved along with interest before issuance of notice, proceedings may be dropped. If payment of tax, interest, and a penalty equivalent to twenty-five percent of tax is made within thirty days of notice, proceedings are concluded. However, if payment is made only after the final order, the penalty equals fifty percent of the tax amount.
Both sections 73 and 74 prescribe strict time limits for issuance of notices and orders, ensuring that proceedings are not indefinitely prolonged. These provisions apply to demands up to the financial year 2023-24, with section 74A governing demands from financial year 2024-25 onwards, introducing modified timelines and procedures based on recommendations of the 53rd GST Council Meeting.
Criminal Offences and Prosecution
While civil penalties address most compliance failures, the CGST Act reserves criminal prosecution for the most serious violations. Section 132 of CGST Act delineates offences that attract not merely monetary penalties but imprisonment, reflecting the legislature’s intent to treat grave tax evasion as a criminal matter deserving stringent punishment.
Section 132(1) enumerates twelve categories of offences warranting prosecution, including supply of goods or services without invoice with intent to evade tax, issuance of invoices without actual supply leading to wrongful input tax credit availment, fraudulent availment of input tax credit, collection of tax but failure to deposit it with the government beyond three months, tax evasion not covered under specific clauses, falsification of financial records, obstruction of GST officers, dealing with goods liable to confiscation, dealing with services in contravention of the Act, destruction of material evidence, failure to supply information returns, and aiding or abetting commission of specified offences [5].
The punishment for these offences is graduated based on the quantum of tax evaded or input tax credit wrongly availed. Where the amount exceeds five crore rupees, the offence is cognizable and non-bailable, with imprisonment extending up to five years and a fine. For amounts between two crore and five crore rupees, the offence is non-cognizable and bailable, with imprisonment up to three years and fine. For amounts between one crore and two crore rupees, the punishment is imprisonment up to one year and fine. For offences involving falsification of records, obstruction of officers, or dealing with goods liable to confiscation, imprisonment extends to six months or fine or both.
Section 132(2) provides for enhanced punishment for repeat offenders. Any person previously convicted under section 132 who is convicted again faces imprisonment extending to five years along with a fine, regardless of the amount involved. This provision recognizes that recidivism indicates a pattern of deliberate criminality requiring more severe deterrence.
Section 132(5) explicitly classifies offences where the tax evaded exceeds five crore rupees as cognizable and non-bailable, allowing authorities to arrest without warrant and refuse bail. This classification reflects the gravity with which the law views large-scale tax evasion. However, section 132(6) provides an important safeguard by requiring that no prosecution shall be initiated except with the previous sanction of the Commissioner, preventing arbitrary or malicious prosecutions.
Arrest Provisions and Procedural Safeguards
Section 69 of the CGST Act empowers the Commissioner to authorize arrest of persons suspected of committing offences under section 132(1)(a) to (d) and punishable under section 132(1)(i) or (ii) or section 132(2) [6]. The power of arrest is exercisable only when the Commissioner has reason to believe that the person has committed specified offences, and the arrest must follow the procedure laid down in the Code of Criminal Procedure, 1973.
The arrested person must be informed of the grounds of arrest and presented before a Magistrate within twenty-four hours. The distinction between cognizable and non-cognizable offences becomes critical at this stage. For cognizable offences (tax evasion exceeding five crore rupees), the accused cannot claim anticipatory bail under section 438 of the Criminal Procedure Code and must approach the Magistrate for regular bail. For non-cognizable offences, the Assistant or Deputy Commissioner can grant bail, being vested with powers equivalent to the officer-in-charge of a police station.
The Central Board of Indirect Taxes and Customs has issued detailed instructions through Instruction No. 2/2022-23 dated August 17, 2022, providing guidelines for arrest and bail in GST offences. These instructions emphasize that all legal formalities must be fulfilled before arrest, reasons for arrest must be recorded in writing, the arrested person must be treated with dignity, and a prosecution complaint must be filed preferably within sixty days of arrest where bail has not been granted. These safeguards balance the need for effective enforcement with protection of individual rights.
Compounding of Offences
Section 138 of the CGST Act provides a mechanism for compounding of offences, allowing persons to avoid prosecution by paying a compounding amount [7]. This provision recognizes that court proceedings are time-consuming and expensive, and that allowing settlement through payment serves both the interests of revenue collection and judicial efficiency.
The Commissioner may permit compounding of offences either before or after institution of prosecution. The compounding amount ranges from a minimum of the higher of ten thousand rupees or fifty percent of the tax involved, to a maximum of the higher of thirty thousand rupees or one hundred fifty percent of the tax involved. The specific amount is prescribed based on the nature and severity of the offence.
However, compounding is not available in all cases. Persons who have previously compounded offences under section 132(1)(a) to (f) and (l) cannot compound the same offence again. Similarly, persons who have been allowed to compound once under section 132(1)(g) or (j) or (k) cannot avail compounding again for any offence. Persons already convicted by a court for offences under section 132 are also barred from compounding. These restrictions ensure that compounding remains a one-time relief mechanism and not a license for repeated violations.
Importantly, section 138(5) clarifies that compounding does not affect prosecution or punishment of persons other than the applicant, nor does it affect the recovery of unpaid tax or interest. The applicant must withdraw any pending appeal or proceeding relating to the offence as a condition for compounding. Upon compounding, no further proceedings shall be initiated for the same offence, and any criminal proceeding already instituted stands abated.
Distinction Between Civil and Criminal Liability
A critical jurisprudential question that has emerged in GST litigation is whether penalties under section 122 constitute civil or criminal liability. This distinction has profound implications for the standard of proof required, the adjudicating authority competent to impose penalties, and the availability of certain legal protections.
The Allahabad High Court in a recent judgment examined this question and held that penalty imposed under section 122 is civil in nature [8]. The court reasoned that section 74 is a charging and machinery provision for recovery of tax and imposition of penalty, while section 122 is a penal provision aimed at curbing tax evasion, and both must be interpreted strictly. The court distinguished between criminal law where mens rea (guilty intent) is essential and civil taxation matters where it is irrelevant for imposing civil liability.
This judgment has significant practical implications. Since section 122 penalties are civil in nature, they can be imposed by the proper officer through adjudication without requiring trial by a criminal court. The standard of proof is the civil standard of preponderance of probabilities rather than the criminal standard of beyond reasonable doubt. The procedural protections available in criminal trials, such as the presumption of innocence until proven guilty and protection against self-incrimination, do not automatically apply.
However, the court also clarified that proceedings under sections 73 and 74 (tax demand) and proceedings under section 122 (penalty) are independent of each other. Dropping of proceedings under section 74 does not automatically result in dropping of proceedings under section 122, as they address contraventions of different provisions. This independence ensures that even if a tax demand cannot be sustained due to lack of evidence, penalties for procedural violations or obstruction of proceedings may still be imposed.
Judicial Interpretation and Landmark Cases
Courts across India have played a crucial role in interpreting the penal provisions of the CGST Act, providing clarity on their scope and application.
The Supreme Court in Mukesh Kumar Garg v. Union of India examined the applicability of section 122(1A) and held that this provision does not apply to non-taxable persons and cannot be applied retrospectively to periods before January 1, 2021 [9]. The Court granted leave to examine substantial questions of law regarding whether section 122(1) applies to non-taxable persons and whether section 122(1A), which came into force from January 1, 2021, can be retrospectively applied to assessment years 2017-2020. This judgment stayed recovery of penalty subject to deposit of twenty-five percent of the demand, providing interim relief while preserving the revenue’s interests.
The Bombay High Court in Amit Manilal Haria v. Joint Commissioner of CGST & CE held that section 122(1A) cannot be imposed prior to January 1, 2021, as it was brought into force only from that date. The court restrained the department from taking coercive actions against petitioners who were directors of a company, holding that imposing penalty for periods prior to the provision coming into force violated principles of natural justice and prospective application of penal statutes.
The Madras High Court in Greenstar Fertilizers Ltd. examined penalty imposition for wrongful input tax credit availment and held that where there is no evidence of fraud or misstatement and the credit was reversed promptly, imposition of higher penalty under section 74 is inappropriate. Instead, a nominal penalty of ten thousand rupees under section 122 was deemed sufficient. This judgment reinforces the principle that penalties must be proportionate to the gravity of the violation.
The Allahabad High Court in M/s Metenere Ltd. v. Union of India dealt with penalties for failure to maintain proper records and held that the maximum penalty imposable was twenty-five thousand rupees under section 122(3), not the disproportionate amount imposed by authorities. The court emphasized that where no exercise for quantification of tax evaded has been undertaken, heavy penalties cannot be justified merely on the ground of record-keeping failures.
Regulatory Framework and Recent Developments
The regulatory framework governing offences and penalties under the CGST Act continues to evolve through amendments, circulars, and notifications issued by the Central Board of Indirect Taxes and Customs. Several significant developments have shaped the current landscape.
The Finance Act, 2020 introduced substantial amendments to section 122, including insertion of subsection (1A) targeting beneficiaries of fraudulent transactions and modifications to subsection (3) regarding aiding and abetting. These amendments reflected the government’s intent to strengthen enforcement against organized tax fraud networks where masterminds operate behind shell entities.
The Finance Act, 2023 further amended various provisions, including omission of certain clauses and substitution of language to clarify the scope of offences. These amendments were made effective from October 1, 2023, through Notification No. 28/2023-CT dated July 31, 2023.
The 53rd GST Council Meeting recommended introduction of section 128A providing for conditional waiver of interest and penalty for demands pertaining to financial years 2017-18, 2018-19, and 2019-20, where full tax liability is paid before a notified date. This amnesty scheme recognizes the initial teething troubles in GST implementation and provides taxpayers an opportunity to regularize their position without bearing the burden of accumulated interest and penalties.
Circular No. 171/03/2022-GST dated July 6, 2022 clarified tax and penal implications for transactions involving fake invoices, providing detailed guidance on applicability of sections 73, 74, and 122 in such cases. The circular emphasized that while the main perpetrator faces penalties under all applicable provisions, recipients of fake invoices who have reversed wrongly availed credit and paid interest may face reduced penalties.
Section 75(13) provides an important safeguard against double jeopardy by stipulating that where any penalty is imposed under section 73 or 74 or 74A, no penalty for the same act or omission shall be imposed under any other provision of the Act. This ensures that taxpayers are not subjected to multiple penalties for a single violation.
Conclusion
The offences and penal provisions under the Central Goods and Services Tax Act, 2017 constitute a comprehensive enforcement framework designed to ensure compliance with India’s indirect tax regime. The framework balances deterrence against intentional violations with leniency toward genuine errors, providing graded penalties based on the nature and severity of offences. Civil penalties under sections 122 to 125 of CGST Act address most compliance failures, while criminal prosecution under section 132 CGST Act is reserved for grave violations involving substantial tax evasion or deliberate fraud.
The distinction between sections 73 and 74 ensures that honest mistakes receive different treatment from willful evasion, with significantly lower penalties for non-fraudulent defaults. The availability of compounding under section 138 provides an exit mechanism for offenders willing to pay prescribed amounts, reducing litigation burden while securing revenue. Procedural safeguards in arrest provisions and time limits for adjudication protect taxpayer rights while enabling effective enforcement.
Judicial interpretation has played a vital role in clarifying the scope and application of these provisions, establishing principles such as the civil nature of section 122 penalties, prospective application of penal provisions, proportionality of penalties, and independence of penalty proceedings from tax demand proceedings. Recent amendments and policy initiatives, including the conditional waiver scheme under section 128A, demonstrate the government’s commitment to balancing revenue collection with taxpayer facilitation.
For taxpayers and professionals, understanding these provisions is essential not merely for compliance but for strategic tax planning and risk management. Maintaining proper documentation, ensuring timely filing and payment, conducting regular self-audits, and promptly rectifying errors can significantly reduce exposure to penalties and prosecution. Where violations have occurred, voluntary disclosure and payment before issuance of notice can minimize penalties, while understanding the grounds for defense can help in effectively contesting unjustified demands.
The penal provisions of the CGST Act will continue to evolve through legislative amendments, regulatory guidance, and judicial interpretation. Staying abreast of these developments and adopting a proactive compliance approach remains the best strategy for navigating this complex regulatory landscape.
References
[1] Central Board of Indirect Taxes and Customs. (n.d.). Section 122 of CGST Act 2017. https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter19/section122_v1.00.html
[2] ClearTax. (2025). Section 122 of the CGST Act: Penalties and Offences. https://cleartax.in/s/section-122-of-cgst-act-penalties-offences
[3] Central Board of Indirect Taxes and Customs. (n.d.). Section 73 of CGST Act 2017. https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter15/section73_v1.00.html
[4] Central Board of Indirect Taxes and Customs. (n.d.). Section 74 of CGST Act 2017. https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter15/section74_v1.00.html
[5] Central Board of Indirect Taxes and Customs. (n.d.). Section 132 of CGST Act 2017. https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter19/section132_v1.00.html
[6] Metalegal. (n.d.). Arrest and bail in GST law. https://www.metalegal.in/articles/arrest-and-bail-in-gst-law
[7] Numen Law Offices. (n.d.). Offences under Central Goods and Services Tax Act, 2017. https://numenlaw.com/offences-under-central-goods-and-services-tax-act-2017.php
[8] EY India. (2025). HC holds penalty imposed under Section 122 is a civil liability. https://www.ey.com/en_in/technical/alerts-hub/2025/06/hc-holds-penalty-imposed-under-section-122-is-a-civil-liability
[9] A2Z Taxcorp. (2025). Supreme Court stays retrospective GST penalty under Section 122(1A). https://a2ztaxcorp.net/supreme-court-stays-retrospective-gst-penalty-under-section-1221a-and-to-examine-its-applicability-to-non-taxable-persons
