Analysis of Penalty Provisions Under GST Act 2017

Introduction

Chapter XIX of The Central Goods and Service Tax Act 2017 deals with topic related to offences and penalties. In this article penalty provisions under section 122,123,125, 10(5), 52(14) 73 and 74 have been discussed.

Meaning of term penalty.

Penalty normally provided for contravention of provisions of law and it act as deterrent and promote the persons for voluntary compliance of law. The word “penalty” has not been defined in the CGST/SGST Act but judicial pronouncements and principles of jurisprudence have laid down the nature of penalty as :

temporary punishment or sum of money imposed by statute, to be paid as punishment for commission of certain offence;

a punishment imposed by the law or contract for doing or failing to do something that was the duty of party to do.

Power to impose penalty in certain cases.

Penalty is in addition to tax and is liability under the act. Penalty is statutory liability and without clear, unambiguous and express enactment, it cannot be imposed. Thus, penalty cannot be imposed without authority of law and in absence of specific provisions. Section 127 of the state that, where the proper officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings under section 62 or section 63 or section 64 or section 73 or section 74 or section 129 or section 130, he may issue an order levying such penalty after giving a reasonable opportunity of being heard to such person. Section 10, 52, 122, 123, 125, 127, 129 and 130 empower proper officer to impose penalty where specified offence is committed. While imposing penalty proper assumption of jurisdiction has great significance. Orders passed without jurisdiction are always subject to challenge and not sustainable in the eyes of law. Therefore, the taxable person is required to examine whether penalties has been imposed under appropriate sections and proper officer has proper jurisdiction to impose such penalties. Similarly, Proper officer is required to assume proper jurisdiction by initiating penalty proceeding by invoking appropriate section of the act.

In the case of Vegetable Product Ltd 88ITR 192 Supreme Court has observed that penalty provisions should be interpreted as they stand and in case of doubt it should be in a manner favourable to taxpayer. If the language of taxing provision ambiguous or capable of having more than one meaning one has to adopt interpretation favourable to assessee.

Offences prescribed u/s 122.

Section 122 of the act prescribes the following offences for levy of penalty.

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply ;

(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;

(iii) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

(iv) collects any tax in contravention of the provisions of this Act but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

(v) fails to deduct the tax in accordance with the provisions of sub-section (1) of section 51, or deducts an amount which is less than the amount required to be deducted under the said sub-section, or where he fails to pay to the Government under sub-section (2) thereof, the amount deducted as tax;

(vi) fails to collect tax in accordance with the provisions of sub-section (1) of section 52, or collects an amount which is less than the amount required to be collected under the said sub-section or where he fails to pay to the Government the amount collected as tax under sub-section (3) of section 52 ;

(vii) takes or utilizes input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;

(viii) fraudulently obtains refund of tax under this Act;

(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;

(x) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information or return with an intention to evade payment of tax due under this Act ;

(xi) is liable to be registered under this Act but fails to obtain registration;

(xii) furnishes any false information with regard to registration particulars, either at the time of applying for registration, or subsequently;

(xiii) obstructs or prevents any officer in discharge of his duties under this Act;

(xiv) transports any taxable goods without the cover of documents as may be specified in this behalf;

(xv) suppresses his turnover leading to evasion of tax under this Act;

(xvi) fails to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made thereunder;

(xvii) fails to furnish information or documents called for by an officer in accordance with the provisions of this Act or the rules made thereunder or furnishes false information or documents during any proceedings under this Act;

(xviii) supplies, transports or stores any goods which he has reasons to believe are liable to confiscation under this Act;

(xix) issues any invoice or document by using the registration number of another registered person;

(xx) tampers with, or destroys any material evidence or documents;

(xxi) disposes off or tampers with any goods that have been detained, seized, or attached under this Act,

Meaning and scope of penalty under section 122.

This section provides to impose penalty for the specified offences. As stated in earlier para offences liable for penalty have been prescribed. Section 122(1) deals with penalty applicable to the taxable persons and prescribe fixed percentage of penalty which linked to the amount involved in relevant offence. This is mandatory penalty and authority has no discretion in not levy penalty or in quantum of penalty.

Penalty under section 122(2) will attract to registered persons who supplies goods or services and there is short payment of tax, erroneous grant of refund or wrong availment or utilisation of ITC due to reason of fraud suppression or any other reasons. This penalty is also mandatory and quantum penalty has been prescribed which has direct nexus with the amount tax due. The ingredients of offences contained in section 122(2) (a) and 122(2)(b) has been inserted in section 73 and 74 of the act respectively, which enable to avail concession in amount of penalty by making early payment and impose penalty during said proceeding where necessary.

This penalty under section 122(1A) is applicable to the persons, who has retained benefit of transactions covered under following clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction conducted. Said person shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed. Such persons who are not covered under definition of taxable person or registered person are now liable for mandatory penalty under this subsection.

Penalty under Section 122(3) will be applicable to the other persons who are not taxable persons but who aid or abet the specified offences and involved in other specified activities. This penalty is discretionary and may be extended up to Rs 25,000/.

Thus this section provides to impose penalty on taxable persons, registered persons and other persons subject to committing specified offences .

Penalty u/s 122(1) of the act .

Section 122(1) deals with penalty for certain offences. The said sub section provides for imposing penalty on taxable person who has committed specified offence. Accordingly, a taxable person who has committed specified offence, shall be liable to pay a penalty of ten thousand or an amount equivalent to the tax evaded or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected u/s 52 or short collected or collected but not paid to the government or input tax credit availed of or passed on or distributed irregularly, or refund claimed fraudulently, whichever is higher. This penalty is applicable to taxable person, and in view of section 2(107) registered person and person liable for registered are known as taxable persons. Thus, scope of section 122(1) is very wide. Once the taxable person commit any default prescribed u/s 122(1), he shall be liable to penalty and proper officer has power to impose penalty after giving opportunity of hearing. This is mandatory penalty and proper officer has no discretion regarding not to levy of or in quantum of penalty.

In the case of Mahavir Enterprises High Court of Gujarat 22-06-2020 the applicant has challenged legality and validity of show cause notice issued u/s 122(1). It was submitted that Rule 142(1)(a) of the CGST Rules contemplates for issuance of summary notice electronically along with the notice issued under Section 52 or Section 73 or Section 74 or Section 76 or Section 122 or Section 123 or Section 124 or Section 125 or Section 127 or Section 129 or Section 130 of the GST Act, 2017. It was further submitted that as Section 122 of the Act, 2017 does not contemplate issue of any show cause notice, the Rule 142(1)(a) travels beyond the provisions of the Act and in such circumstances, Rule 142(1)(a) deserves to be declared as ultra vires being in excessive delegation of the powers.

High court of Gujarat has held that show cause notice is valid. Further it is held that rule 142(1) (a) is valid and is no manner conflict with the provisions of the GST act 2017

Penalty u/s 122(1A) of the act

Penalty under this subsection is applicable to persons other than taxable persons who are not covered within ambit and scope of 122(1), (2) and (3) of the act. This subsection (1A) has been inserted by Finance act 2020 and made effective from 1-1- 2021 by notification no 92/2020 CT dt 22-12-2020. This penalty is applicable to the persons, who has retained benefit of transactions covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transactions conducted. Such persons shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed. It is pertinent to note that above referred persons are not covered under definition of taxable person and therefore specific provision has been made to impose penalty on such person to protect the interest of revenue and curb evasion. Section 127 of the act gives powers to the proper officer to impose penalty in such cases. This is mandatory penalty and proper officer has no discretion regarding not to levy of or in quantum of penalty. However, no penalty shall be imposed on any person without giving him opportunity of being heard.

Penalty u/s 122(2) of the act.

It is pertinent to note section 122(2) is applicable to only registered persons. Since registered persons is also taxable person, provisions of section 122(1) may be attracted. However, only the registered persons who supplies goods or services on which tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilised , comes within ambit and scope of said subsection. And other registered persons who have committed offences under section 122(1) shall be liable to pay penalty under section 122(1).

Plain reading of section 122(2) reveal that, any registered person who supplies any goods or services or both on which any tax has not been paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilized,-

(a) for any reason, other than the reason of fraud or any willful misstatement or suppression of facts to evade tax, shall be liable to a penalty of ten thousand rupees or ten per cent. of the tax due from such person, whichever is higher;

(b) for reason of fraud or any willful misstatement or suppression of facts to evade tax, shall be liable to a penalty equal to ten thousand rupees or the tax due from such person, whichever is higher.

It is pertinent to note that same ingredient of said offences have been inserted in section 73 and 74 of the act, which gives powers to impose penalty during the course of proceeding initiated and issue order under said sections. However, said sections are not independent section to impose penalties. Section 122(2) read with section 127 authorise to the proper officer to impose penalty during the course of proceeding under section 73 or 74. Section 73 and 74 section provides mechanism for demand and recovery of due tax from taxable person and consequential interest and penalties is required to be levied under respective section 50 and 122(2) respectively. It is true that section 127 allows to impose penalties during the proceeding 73 or 74, it should be require to impose by invoking provisions of 122(2) and section 73 or 74. And therefore relevant notice and order to impose penalty should be under both said sections. It is significant note that section 122(2) is enabling provision to impose penalty.

Penalty under section 122(3) of the act.

This section applicable to the persons other that taxable and registered persons. Section 122(3) provides for imposing penalty on following persons who committed the specified default. Accordingly, any person who

(a) aids or abets any of the offences specified in clauses (i) to (xxi) of sub-section (1);

(b) acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with any goods which he knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder ;

(c) receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which he knows or has reasons to believe are in contravention of any provisions of this Act or the rules made thereunder ;

(d) fails to appear before the officer of State tax, when issued with a summon for appearance to give evidence or produce a document in an inquiry;

(e) fails to issue invoice in accordance with the provisions of this Act or the rules made thereunder or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to twenty five thousand rupees. There is discretion regarding quantum of penalty. In view of section 126 of the act, which contain general discipline related to penalty, the penalty imposed under this section shall depend on the facts and circumstances of each case and shall commensurate with the degree and severity of the breach and when a person voluntarily discloses to an officer under this Act the circumstances of a breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the officer under this Act, the proper officer may consider this fact as a mitigating factor when quantifying a penalty for that person.

Penalty on Electronic commerce operator u/s 52.

Where operator fails to furnish required details during the course of proceeding initiated under section 52(12) of the act, be liable to penalty which may extend to Rs 25,000/. This is discretionary penalty. Therefore, general principles prescribed under section 126 required to be adhere while determining amount of penalty. This penalty is in addition to any action liable under section 122. Notice in form DRC-1 is required to be issued to the operator for giving an opportunity of being heard.

Penalty covered under section 10(5) of act.

As per scheme of the act registered persons are required to collect and pay tax on all supplies as per provisions section 9 of the act. However, section 10 allows certain registered persons, having aggregate turnover below prescribed limit, to pay tax at notified lump sum composite rate in lieu of tax payable as per provisions of the act, after compliance of certain eligibility conditions. Where, proper office has noticed that the registered persons has wrongly availed benefit of composition scheme by contravening eligibility conditions, the said person shall be liable for penalty, in addition to tax payable and in such cases provisions of section 73 or 74 will be applicable for determination of such tax and penalty.

Penalty for failure to furnish information return under section 123.

Section 123 of the act provides to impose penalty for failure to furnish information return. Accordingly, if a person who is required to furnish an information return under section 150 fails to do so within the period specified in the notice issued under sub-section (3) thereof, the proper officer may direct, that such person shall be liable to pay a penalty of one hundred rupees for each day of the period during which the failure to furnish such return continues: Provided that the penalty imposed under this section shall not exceed five thousand rupees. This is discretionary penalty and required to impose subject to provisions of section 126.

Penalty under section 73 and 74 of the act.

Section 127 of the act gives powers to the proper officers to impose penalty. Section 127 of the state that where the proper officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings under section 62 or section 63 or section 64 or section 73 or section 74 or section 129 or section 130, he may issue an order levying such penalty after giving a reasonable opportunity of being heard to such person. In view of above and considering provisions of section 122(2) it is seen that first of all persons who have committed offence should be liable to penalty under relevant section. Thereafter, if such person covered under proceeding under section 73 or 74, then such penalty should be recover and impose during the course of said proceedings by invoking provisions of section 122(2). Section 73 or 74 are important provisions which main intention is to demand and recover tax due and amount refund erroneously granted, from a person chargeable with tax. Maximum adjudication orders will be passed u/s 73 or 74 of the act. Provisions of section 73 and 74 of the act deals with demand and recovery of tax and consequential interest and penalty due from the taxable person. It provides for determination of tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilised. These section empower the proper officer to demand and recover tax along with applicable interest u/s 50 of the act and where necessary to impose penalty leviable under the provisions of the act. It is expressly provided in section 73(1) that proper officer should demand tax due and consequential interest u/s 50 and penalties leviable under the act. Further, it is expressly provided in section 74(1) that penalty equivalent to tax due as per notice. Similarly section 73(9) state that proper officer should determine amount of tax due and interest u/s 50 and penalty equivalent to ten percent of tax or ten thousand whichever is higher and issue order. Both these sections provides concessions in amount of penalty if tax due paid along with interest ( and certain percent of penalty in case section 74) within prescribed time limit. Such express provisions has been made in relevant subsections. However, nowhere in these section expressly provided that person shall be liable to penalty. It appears that it provides mechanism to recover amount of penalty while demanding and recovering due tax from the person and therefore quantum of penalty has been specified. Despite of specific insertion of ingredient of offences, which are applicable to section 122(2), in the section 73 and 74, it can not be said that penalty can be imposed independently under said section without invoking provisions of section 122(2) of the act. No express provisions has been made in section 73 and 74 which makes person liable for penalty and to enable proper officer to impose penalty. Co joint reading of section 122(2), 127, 73 and 74 of the act, indicate that during the course of proceeding under 73 and 74 penalty should be imposed where necessary, by exercising powers u/s 122(2) and notice and order should be under 122(2) and 74/74 of the act. Quantum of penalty applicable to normal case and fraud/ suppression case also prescribed in section 73 and 74 of the act respectively. However, where penalty has not imposed during the course of proceeding under these sections, penalty may be imposed under section 122 of the act.

It is pertinent note that penalty under section 73 or 74 of the act is mandatory and by default applicable when any order passed under said sections. Quantum of penalty prescribed for issue of order under section 73 (9) of the act is ten thousand or ten percent of tax due , whichever is higher. However, in view of section 73(8) of the act, if taxable person pays amount of tax u/s 73(5) or in response to notice within 30 days within thirty days of issue of notice then no penalty shall be payable.

However, in respect case covered under section 74 of the act, quantum of penalty is equal to the amount of tax due from such person as a result of order. Taxable person is required to pay penalty equivalent to fifteen percent of tax , where payment of tax and applicable interest is made u/s 74(5) before service of notice. However, where payment of tax , applicable interest is made within thirty days of issue of notice, quantum of penalty will be twenty five percent of tax. Where taxable person after service of order u/s 74(9) of the act, but within thirty days of communication of such order, pays tax along with interest payable thereon u/s 50, then require to pay amount of penalty equivalent to fifty percent of tax of such tax. Onus is on revenue to establish that short payment of tax or erroneous grant of refund or wrongful availment or utilisation of ITC is by reason of fraud, or wilful misstatement or suppression of the facts to evade tax, before initiation of proceeding under section 74 of the act. It is pertinent to note that such concession and incentives prescribed in amount of penalty are not available where penalty proceedings are initiated separately under section 122(1) and (2) of the act.

CBIC has issued Circular No. 76/50/2018-GST 31-12-2018 and clarified the issue of penalty under section 73(11).Whether penalty in accordance with section 73 (11) of the CGST Act should be levied in cases where the return in FORM GSTR-3B has been filed after the due date of filing such return? CBIC has clarified the above issue as under vide Circular No. 76/50/2018-GST 31-12-2018

“As per the provisions of section 73(11) of the CGST Act, penalty is payable in case self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax. It may be noted that a show cause notice (SCN for short) is required to be issued to a person where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised for any reason under the provisions of section 73(1) of the CGST Act. The provisions of section 73(11) of the CGST Act can be invoked only when the provisions of section 73 are invoked. The provisions of section 73 of the CGST Act are generally not invoked in case of delayed filing of the return in FORM GSTR-3B because tax along with applicable interest has already been paid but after the due date for payment of such tax. It is accordingly clarified that penalty under the provisions of section 73(11) of the CGST Act is not payable in such cases. It is further clarified that since the tax has been paid late in contravention of the provisions of the CGST Act, a general penalty under section 125 of the CGST Act may be imposed after following the due process of law. “

In the case of D Rama kotiah & co (2018-TIOL-3108-HC-AP) 26-12-2018 High Court of Andhra Pradesh observed that “ While a show cause notice is required to be issued under Section 74(1) of the APGST Act for recovery of penalty equivalent to the tax specified in the notice, Section 74(5) of the said Act enables the dealer to pay 15% penalty on his own accord before receipt of a notice under Section 74(1) of the Act. Section 74(5) of the APGST Act enables the dealer to avoid payment of penalty beyond 15%, if penalty at 15% is paid before receipt of a show cause notice. That does not mean that, even without a show cause notice being issued, the dealer is obligated to pay penalty at 15% under Section 74(5) of the Act. Section 74(5) of the Act merely enables the petitioner to pay penalty at 15% on his own accord, in which event the assessing authority cannot thereafter issue a notice seeking recovery of the balance 85% penalty (i.e., penalty equivalent to the tax specified in the notice). Whether penalty at 15% should be paid or not is for the assessee to decide. While he would, undoubtedly, run the risk of being subjected to penalty at 100% of the tax specified, the power conferred on the assessing authority to recover penalty, equivalent to the tax specified in the notice, is only after a notice is issued calling upon the petitioner to show cause why penalty should not be imposed on him. The impugned order, to the limited extent the petitioner was called upon to pay penalty at 15%, is set aside.”

In the case of Aathi Hotel the facts on record indicates that though an improper attempt was made by the petitioner to transition the aforesaid credit. The petitioner had however not utilized the same and had also reversed the same on 10.02.2020 after a Show Cause Notice were issued within a period prescribed under Section 73 of TNGST Act, 2017 by invoking Section 74 of the TNGST Act, 2017. However, the Show Cause Notice does not invoke the ingredients to justify the invocation of Section 74 of the TNGST Act, 2017 against the petitioner.

In the case of Aathi Hotels Madras High Court has observed that “ Be that as it may, if the Show Cause Notice issued to the petitioner on 09.05.2019 is to be construed as a notice under Section 74 of the TNGST Act, 2017, the Show Cause Notice should have specifically invoked the ingredients of Section 74(1) of the TNGST Act, 2017. However, the said notice merely states that due to the unavailability of documents to prove admissibility of the ITC, Assessment under Section 74 is proceeded. Thus, the Show Cause Notice dated 31.12.2019 does not meet the requirements of Section 74(9) of the TNGST Act, 2017. “

“In the present case although credit was wrongly attempted to be transitioned, it was never utilized. Further before levying penalty or interest, a proper excise was required to be made by a proper officer under Section 74(10) after ascertaining whether the credit was wrongly availed and wrongly utilised. Though under Sections 73(1) and 74(1) of the Act, proceedings can be initiated for mere wrong availing of Input Tax Credit followed by imposition of interest penalty either under Section 73 or under Section 74 they stand attracted only where such credit was not only availed but also utilised for discharging the tax liability. The proper method would have been to levy penalty under Section 122 of TNGST Act, 2017.”

“Considering the above, I am inclined to hold that the petitioner is not liable to penalty imposed. At the same time, since there was an attempt to wrongly avail credits and utilise the same as and when the tax liability would have arisen, the petitioner is held liable to a token penalty. Considering the gravity of the mistake committed by the petitioner, a penalty Rs.10,000/- is imposed on the petitioner. The impugned order stands partly quashed.”

General penalty u/s 125 of the act.

Section 125 of the act provides to impose general penalty on a person, where such person has contravened provisions of the act and rules made thereunder for which no penalty is separately provided for in this Act. Said penalty may be imposed up to maximum twenty-five thousand rupees. Thus, it is discretionary penalty and not mandatory. This is discretionary penalty and required to impose by considering principles stipulated in section 126. It is mandatory to issue notice in form DRC-1 before imposing penalty.

Whether penalty is mandatory.

In Section 122(1), (1A), (2) and section 73 and 74 of the act clearly specified quantum of penalty either fixed sum or fixed percentage. Plain reading of the provisions of subsection 1, (1A), 2, of section 122 and section 73 and 74, of the act reveals that penalties under said section are mandatory and adjudicating authority has no discretion regarding not to impose penalty or to reduce quantum of penalty. Therefore, it appears that proper officer has no discretion in quantifying amount of penalty. And penalty is required to be imposed if the other necessary requirements are in existence. Section 126 lay down certain principles for determination of quantum of penalty while imposing discretionary penalties. However, it is clearly stated in the section 126(6) that the provisions of this section shall not apply in such cases where the penalty specified under this act is either fixed sum or expressed as a fixed percentage. In view of above it is clear that penalty under said section are mandatory and neither the adjudicating authority nor the appellate authority/ the appellate Tribunal has any kind of discretion in the said penalty proceeding. The provisions of penalty u/s 122(2) and 73 and 74 GST act are Pari Materia with section 11AC read with proviso to section 11(A) of the Central Excise Act and therefore following judgments under said act may be applicable to the GST act.

In the case of Dharmendra Textile Processors (2008) 13 SCC 369 the Supreme Court has held that penalty under section 11AC of Central Excise Act is mandatory and adjudicating authority or appellate authority has no discretion to reduce penalty for any reason.

Supreme court in the case of Rajasthan Spinning and Weaving Mills (2009) 13 SCC 448 held that the decision in Dharmendra Textiles must, therefore, be understood to mean that though the application of section 11-AC would depend upon the existence or otherwise of the conditions expressly stated in section, once the section is applicable in a case the Authority concerned would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub section (2) of section 11-A of Central Excise act.

Discretionary penalties under the act.

It is seen from the relevant penalty provisions that in the following penalty proceedings the proper officer has discretion to impose penalty and in quantum of penalty after considering the facts of the case and general principals laid down in section 126 of the act. In all following section it is clearly stated that penalty may be imposed and may extend up to specified limit. This makes clear that these penalties are not mandatory.

Penalty proceeding in the case of persons specified in section 122(3) clause (a) to (e) of the act.

Penalty proceeding u/s 123 of the act in the cases of persons who have failed to furnish information returns.

Penalty proceeding under section 125 of the act to impose penalty on persons who have contravened provisions of act or rules for which no separate penalty is provided.

In the case of M/s Hindustan steel ltd 25 STC 211 Hon Apex Court on the issue of levy of penalty observed that “ An order imposing penalty for failure to carry out a statutory obligation is the result of quasi criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.”

Issuance of notice mandatory.

It is well settled principle of law that no penalty can be imposed without following principle of natural justice. Express provision to issue show cause notice has been made in section 73,74. Similarly rule 142(1) provide that proper officer shall serve along with notice under section 52,or 73 or 74 or 76 or 122 or 123 or 124 or a25 or 127 or 129 or 130 , a summary thereof electronically in FORM GST DRC 1. Section 127 which enable to impose penalty u/s 122,123 and 125 also contain express provision that penalty should not be imposed without giving opportunity of being heard to such person. Most importantly specific provision has been made in section 126(3) that no penalty shall be imposed on any person without giving him an opportunity of being heard. Therefore, proper officer should issue speaking and reasoned show cause notice and give reasonable opportunity of hearing before imposing penalty. It is necessary to mention relevant facts, details of offence, nature of breach and applicable law, regulation or procedure under which amount of penalty for the breach is proposed in the notice. Vague, ambiguous and non-speaking SCN are not sustainable in the eyes of law and in number of cases High court has quashed such notices and orders based on it.

Time limit to impose penalty.

As such section 122 or 125 or 127 does not provide any time limit to impose penalty. However, where proceeding are initiated under section 62 or 63 or 64 or 73 or 74 time limit applicable to those sections will also applicable to impose penalty.

No penalty for minor breaches.

It is settled principle of law by judicial pronouncement that no penalty should be imposed for technical or minor breaches. These principles have been incorporated in the section 126 of the act under heading ‘Genaral discipline related to penalty ‘. In view of section 126 (1) of the act no officer is authorise to impose penalty for minor breaches. The said section states that no officer under this Act shall impose any penalty for minor breaches of tax regulations or procedural requirements and in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence. It is clarified vide Explanation, for the purpose of this sub-section,––

(a) a breach shall be considered a ‘minor breach’ if the amount of tax involved is less than five thousand rupees;

(b) an omission or mistake in documentation shall be easily rectifiable if the same is an error apparent on the face of record.

However, it is clearly stated in the section 126(6) that the provisions of this section shall not apply in such cases where the penalty specified under this act is either fixed sum or expressed as a fixed percentage. Therefore, this will applicable to only discretionary penalties under section 122(3), 123 and 125 and not to other penalty provisions.

No penalty under two sections for same offence.

It is well settled that penalty cannot be imposed under sections for same offence. It is expressly provided in section 75(13) of the act that where any penalty is imposed under section 73 or 74 , no penalty for the same act or omission shall be imposed on the same person under any other provision of the this act. Accordingly, no penalty can be imposed under two sections for the same offence.

Exemption from penalty to other persons.

It is seen from the provisions of the act that where penalty proceeding initiated u/s 122(1) or (2) against taxable person or registered person for committing specified offence u/s 122(1), penalty proceeding may be initiated against other persons in the same case and for same offence u/s 122(1A) or 122(3). Thus there are penalty proceeding against main person and other persons. As per section 73 (8) and 74 (8) of the act if taxable person pays amount of tax along with interest in response to notice within 30 days within thirty days of issue of notice then no penalty shall be payable and all proceeding in respect of said notice shall be deemed to be closed. Further section 74 (8) of the act state that if taxable person pays amount of tax along with interest and penalty equal to twenty five percent of tax in response to notice within 30 days within thirty days of issue of notice then no penalty shall be payable and all proceeding in respect of said notice shall be deemed to be closed. Similar provisions are also made in section 74(11). Sometimes, where notice are issued to main person and notices are also issued in same proceeding to other persons to impose penalty. In such situation, as per clause (ii) of explanation 1 appended to section 74 of the act , where the notice under same proceeding is issued to the main person liable to tax and some other persons, and such proceeding against the main person have been concluded under section 73 or 74 , the proceeding against all the persons liable to pay penalty under section 122 and 125 are deemed to be concluded.

Order of penalty.

It is now settled principle of law that every order passed by any authority should speaking order. After considering the representation of the taxable person and giving him an opportunity of being heard, it is necessary to confirm whether said person has committed any specified offence which is liable for penalty. The proper officer shall while imposing penalty in an order for breach of law, specify the nature of the breach and applicable act, rules under which penalty the amount of penalty for breach has been specified. As per section 126 of the act amount of discretionary penalty shall always depend on the facts and circumstances of the case and it should be commensurate with the degree and severity of the breach. Therefore, where penalty is discretionary, it is mandatory to state all the facts and to give reasons for imposition of penalty or not to impose penalty or lesser amount of penalty. Non speaking, non-reasoned, cryptic, ambiguous orders are not sustainable in the eyes of law and in number of cases High Courts has quashed such orders.

Hon Supreme Court in the case of Steel Authority of India vs STO 16 VST 181 (SC) 2008 observed that “ Duty of the Authority is to give reason. Reason is the heartbeat of every conclusion and it should be at least be sufficient to indicate application of mind . Affected party has to know why the decision has gone against him.

Penalty under IGST act

As per provisions of the CGST, SGST & IGST act proper officer has been cross empowered to pass any order in respect of assessee under his jurisdiction under these acts . Therefore, composite order under all three act where applicable are being passed. Section 20 of the IGST act states that provisions pertaining to impositions of penalty under CGST act shall mutatis mutandis applicable to IGST act also. According all penalty provisions of Central act shall apply to Integrated tax. Quantum of penalty u/s 73 or 74 read with section 122(2) has direct nexus with tax due as per order, therefore amount of penalty under said section be linked to the quantum of integrated tax demanded, which would naturally be twice of CGST or SGST. Accordingly, while imposing penalty under section 20 of IGST act read with section 73 of CGST act , it should be ten percent of IGST due as per order or 10000 whichever is higher. Example- Amount of penalty would be Rs 15,000/ where amount of IGST is 150,000/ as per order passed u/s 122(2) read with section 20 of IGST act and 73 of CGST act.

Conclusion

Under the act penalties are provided for prescribed offences. Persons who have committed such prescribed offences are liable to penalties. Penalties under section 122(1), (1A), (2) and section 73 and 74 are mandatory penalties. Different penal provisions are made for the offences committed by taxable persons, registered persons and other persons. Penalty specified under said sections is at fixed sum or expressed at fixed percentage. Once the section is applicable in a case the adjudicating authority or the appellate authority concerned would have no discretion in quantifying the amount. Mens rea is not essential element to impose penalty under said sections. No penalty can be imposed on any person without giving him an opportunity of being heard.

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Author ‘Motiram Kanadje‘ is a Retired Joint Commissioner of State Tax and he can be reached via email momakanadje@gmail.com

Disclaimer: Nothing contained in this document is to be construed as legal opinion or view of author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any action taken in reliance thereon.