IGST Penalty under Section 73: 10% of IGST or 20%?

Penalty on an IGST Demand under Section 73 of CGST Act : Ten Per Cent of IGST or Twice the Penalty?

Abstract: Section 73(9) of the Central Goods and Services Tax Act, 2017 prescribes a penalty equivalent to ten per cent of the tax determined or ₹10,000, whichever is higher. In relation to integrated tax, the demand and penalty provisions of the CGST Act apply mutatis mutandis through section 20 of the Integrated Goods and Services Tax Act, 2017. The fourth proviso to section 20 further provides that, where penalty is leviable under the CGST Act and the SGST or UTGST Act, the penalty under the IGST Act shall be the sum total of the said penalties.

This article examines a critical area of dispute in Goods and Services Tax (GST) litigation: the determination of the quantum of penalty applicable to Integrated Goods and Services Tax (IGST) demands under non-fraud scenarios. Field formations often issue conflicting interpretations regarding whether the penalty under Section 20 of the IGST Act, 2017 read with Section 73 of the CGST Act, 2017 should be 10% of the IGST payable or double that amount (20%) by adding up the parallel components of CGST and SGST.

This language has led to differing practices. One view applies the ten per cent rate twice to the entire IGST amount, producing a penalty of twenty per cent. The preferable view, now explained in Kerala SGST Circular No. 12/2024 dated 13 August 2024, is that the corresponding CGST and SGST penalty amounts, rather than their rates, must be added. Consequently, the percentage-based penalty ordinarily remains ten per cent of IGST. Nevertheless, application of the statutory minimum to each component—and, according to the Circular, destination-wise—may produce an amount exceeding ten per cent of the aggregate IGST.

1. Introduction

The quantum of penalty applicable to an integrated goods and services tax demand under section 73 has been a matter of uncertainty among taxpayers as well as tax authorities. The question is whether the penalty should be:

1. ten per cent of the IGST determined;

2. twenty per cent of IGST, by applying ten per cent separately under the CGST and SGST enactments; or

3. twice the amount of IGST itself.

The third proposition—penalty equal to twice the IGST—finds no support in section 73. Section 73 covers demands not involving fraud, wilful misstatement or suppression of facts to evade tax. Sub-section (9) prescribes a penalty of ten per cent of tax or ₹10,000, whichever is higher. It does not authorise a penalty of one hundred per cent or two hundred per cent of tax.

The actual controversy is whether the fourth proviso to section 20 of the IGST Act doubles the ten per cent rate and thereby produces a penalty of twenty per cent of IGST. The controversy arises because section 20 requires the penalty under the IGST Act to be the “sum total” of penalties leviable under the CGST and SGST or UTGST enactments.

Kerala SGST Circular No. 12/2024 provides a detailed administrative interpretation of the provision. The Circular concludes that the penalty amounts must be added, not the penalty rates. Its illustrations also show that, although the percentage-based result is ten per cent of IGST, the ₹10,000 statutory minimum can produce a higher amount.

This article examines a critical area of dispute in Goods and Services Tax (GST) litigation: the determination of the quantum of penalty applicable to Integrated Goods and Services Tax (IGST) demands under non-fraud scenarios.

2. Statutory provisions

2.1 Penalty under section 73(9)

Section 73 deals with tax not paid or short paid, tax erroneously refunded, and input tax credit wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts to evade tax.

Under section 73(9), the proper officer, after considering the taxpayer’s representation, must determine the tax and interest and impose:

“a penalty equivalent to ten per cent of tax or ten thousand rupees, whichever is higher.”

The provision contains a percentage limb and a minimum-amount limb. If ten per cent of the relevant tax exceeds ₹10,000, the percentage amount applies. If it is below ₹10,000, the minimum applies.

The question is how these limbs operate when the tax determined is IGST rather than CGST or SGST.

2.2 Section 20 of the IGST Act

The IGST Act does not reproduce the entire machinery relating to assessment, adjudication, demand, recovery and penalties. Section 20 applies specified provisions of the CGST Act, including those relating to demands and recovery, offences and penalties, and imposition of interest and penalty, mutatis mutandis to integrated tax.

Accordingly, section 73(9) becomes applicable to an IGST demand through section 20.

The fourth proviso to section 20 states:

“Provided also that in cases where the penalty is leviable under the Central Goods and Services Tax Act and the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act, the penalty leviable under this Act shall be the sum total of the said penalties.”

The phrase “sum total of the said penalties” is crucial. Does it require the two penalty rates to be added, or only the penalty amounts calculated with reference to their corresponding tax components?

2.3 Kerala SGST Circular

Commissioner of SGST issued Circular No. 12/2024 on 13 August 2024 under section 168(1) of the Kerala SGST Act on the issue of computation and imposition of penalty under the fourth proviso of Section 20 of the Integrated Goods and Services Tax (IGST) Act, 2017 in cases where tax is being demanded under Section 73(1)/74(1) of the Act and clarified as under.

“9-In terms of 4th proviso to Section 20 of the IGST Act, the amount of penalty to be quantified/levied is the sum total of the amount of penalty “leviable” under the CGST Act plus the SGST Act. As such, there is no independent provision of its own under the IGST Act to quantify the amount of penalty; it arrives at such quantification through the provisions of the CGST and the SGST Acts.

10. In this scenario, what emerges is that the quantum of penalty under the IGST Act is entirely dependent upon the penalty “leviable” under the CGST and the SGST Acts.

11. As per 4th proviso of Section 20 of IGST Act, the penalty leviable under the IGST Act would be the sum total of the quantum of penalty to be levied under the CGST Act and the SGST Act”

According to the this Circular, destination-wise—may produce an amount exceeding ten per cent of the aggregate IGST and circular may be referred.

3. Analysis

Section 73(9) CGST Act state that the proper officer, after considering the taxpayer’s representation, must determine the tax and interest and impose a penalty equivalent to ten per cent of tax or ten thousand rupees, whichever is higher.

Section 20 of the IGST Act provide for application of provisions of CGST Act to the IGST Act. Accordingly, provisions of CGST Act relating to provisions in respect of imposition of interest and penalty shall, mutatis mutandis, apply, so far as may be, in relation to integrated tax as they apply in relation central tax as if they are enacted under the IGST Act.

The fourth proviso to section 20 of IGST Act provide that where the penalty is leviable under the Central Goods and Services Tax Act and the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act, the penalty leviable under this Act shall be the sum total of the said penalties.

Section 9 of the CGST Act provide that tax shall be levied on intra-state supplies, on the value determined u/s 15, at such notified rate, not exceeding twenty percent.

Section 5 of the IGST Act provide that tax shall be levied on inter-state supplies, on the value determined u/s 15 of CGST Act, at such notified rate, not exceeding forty percent.

The Kerala SGST Circular concludes that the penalty amounts must be added, not the penalty rates.

Co-joint reading of the aforesaid provisions indicate that rate of tax under IGST Act is consolidated amount of of CGST & SGST; and the quantum of penalty under the IGST Act is entirely dependent upon the penalty “leviable” under the CGST and the SGST Acts and it would be the sum total of the quantum of penalty to be levied under the CGST Act and the SGST Act. It also makes clear that quantum penalty under IGST Act would be ten percent of IGST levied as IGST is already double of CGST or SGST.

4. Contraversy on quantum of penalty under IGST

Two competing methods

Assume that taxable supplies of ₹1,00,00,000 attract IGST at eighteen per cent. The IGST demand is ₹18,00,000.

Method I: Adding the penalty rates

Under this method, ten per cent is applied to the entire IGST amount as if it were a CGST penalty, and another ten per cent is applied to the same amount as if it were an SGST penalty:

• CGST-linked penalty: 10% of ₹18,00,000 = ₹1,80,000;
• SGST-linked penalty: 10% of ₹18,00,000 = ₹1,80,000;
• total: ₹3,60,000.

This produces a penalty equal to twenty per cent of IGST.

Method II: Adding the corresponding penalty amounts

An eighteen per cent IGST rate represents the combined incidence corresponding to nine per cent CGST and nine per cent SGST. The computation is therefore:

• CGST component: ₹1,00,00,000 × 9% = ₹9,00,000;
• penalty on CGST component: 10% = ₹90,000;
• SGST component: ₹1,00,00,000 × 9% = ₹9,00,000;
• penalty on SGST component: 10% = ₹90,000;
• aggregate penalty: ₹1,80,000.

The aggregate is ten per cent of IGST of ₹18,00,000.

The second method adds the two penalty amounts. The first method adds the rates and applies them to the same IGST base twice. The statutory expression supports the second method.

5. Kerala Circular No. 12/2024

Kerala SGST Circular No. 12/2024 was issued on 13 August 2024 under section 168(1) of the Kerala SGST Act to ensure uniformity in calculating penalties under sections 73 and 74 read with section 20 of the IGST Act.

The Circular makes three important propositions:

1. The IGST Act has no independent provision quantifying the penalty in such cases; quantification is derived from the CGST and SGST enactments.

2. The penalty under the IGST Act is the aggregate of the amounts leviable under the CGST and SGST enactments.

3. It is the penalty amounts that must be added; the penalty rates should not be added.

The three examples in the Circular illustrate not only this general principle but also the effect of the minimum penalty. Two example is discussed hereunder.

6. Example 1: Mixed IGST, CGST and SGST demands

The first example concerns non-payment of tax on the following supplies:

Penalty on CGST and SGST demands

The total taxable value of the intra-State supplies is ₹25,00,000. At nine per cent, the CGST and SGST liabilities are ₹2,25,000 each.

Ten per cent of each tax component is ₹22,500. Since this exceeds ₹10,000:

• CGST penalty: ₹22,500;
• SGST penalty: ₹22,500.

Penalty on the IGST demand

The inter-State taxable value is ₹2,00,000 and the IGST is ₹36,000. For penalty computation, the corresponding components are:

• central component: ₹2,00,000 × 9% = ₹18,000;
• State component: ₹2,00,000 × 9% = ₹18,000.

Ten per cent of each component is only ₹1,800. Section 73(9), however, prescribes ₹10,000 as the minimum. The calculation is therefore:

• CGST-linked minimum: ₹10,000;
• SGST-linked minimum: ₹10,000;
• aggregate IGST penalty: ₹20,000.

Ten per cent of ₹36,000 would be only ₹3,600. Nevertheless, the Circular arrives at ₹20,000 because the ₹10,000 minimum is applied to each corresponding component.

This example establishes an important qualification: the penalty rate is not twenty per cent of IGST, but the actual penalty may exceed ten per cent where the minimum amounts operate.

7. Example 2: Entire demand under the IGST head

The second example concerns ineligible IGST input tax credit utilised by a taxable person:

Although there is no separate CGST or SGST demand, the Circular does not treat the penalty as nil. Section 20 requires the corresponding central and State penalty amounts to be calculated.

The computation is:

• ₹1,72,00,000 × 9% × 10% = ₹1,54,800;
• ₹1,72,00,000 × 9% × 10% = ₹1,54,800;
• total IGST penalty = ₹3,09,600.

The ₹10,000 minima do not affect the result because each percentage amount is higher than ₹10,000.

The penalty of ₹3,09,600 is exactly ten per cent of IGST of ₹30,96,000. Thus, the absence of a CGST or SGST demand does not mean that the fourth proviso is inapplicable. At the same time, the complete IGST amount is not used twice as the penalty base.

If ten per cent had been applied twice to ₹30,96,000, the penalty would have been ₹6,19,200. The Circular expressly rejects such an approach.

9. Why twenty per cent of IGST is not justified

The Circular’s view is supported by the following interpretative considerations.

First, section 20 requires addition of the “said penalties,” not addition of the statutory rates. A penalty amount can be added only after identifying its corresponding tax component.

Second, IGST represents the combined central and destination-State tax incidence. Treating the complete IGST as central tax and again as State tax duplicates the same tax base.

Third, section 73(9), as adapted to integrated tax, expressly refers to ten per cent of tax. A penal burden cannot ordinarily be increased to twenty per cent without clear language.

Fourth, the twenty per cent interpretation creates an anomalous distinction. An intra-State default would attract ten per cent of CGST plus ten per cent of SGST, equalling ten per cent of the combined tax. The same default involving an inter-State supply would attract twenty per cent merely because IGST applies.

Finally, the words mutatis mutandis permit the adjustment necessary to apply the CGST machinery to integrated tax. They do not authorise duplication of the integrated-tax amount.

10. Status and limitations of the Circular

The Kerala Circular is binding on officers functioning under the administrative control of the Kerala State Tax Department, subject to the statute and decisions of competent courts. It is not a circular issued by the Central Board of Indirect Taxes and Customs and does not automatically bind central tax authorities or authorities in other States.

It also does not constitute a judgment declaring the law for the entire country. Nevertheless, it is a reasoned administrative interpretation of a common statutory provision and may possess persuasive value in adjudication and appellate proceedings outside Kerala.

Taxpayers relying on the Circular should therefore use it as supporting authority while grounding their principal argument in the language and scheme of sections 20 and 73.

10. Conclusion

The fourth proviso to section 20 does not authorise a penalty equal to twice the IGST or a percentage-based penalty of twenty per cent. It requires addition of the penalty amounts corresponding to the central and State components.

Accordingly:

• where the percentage calculation governs, the penalty is ordinarily ten per cent of IGST;
• the ten per cent rate is not to be applied twice to the entire IGST amount;
• the statutory minimum may operate as ₹10,000 for each corresponding component, producing a minimum IGST penalty of ₹20,000 in a single-destination case; and
• under the Kerala Circular’s destination-wise approach, separate application of the minimum may produce a total exceeding both ₹20,000 and ten per cent of aggregate IGST.

Section 20 requires the addition of corresponding penalty amounts and not the addition of penalty rates. The percentage-based penalty under section 73 remains ten per cent of IGST.

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