Penalty Conundrum: Diverse Views on Different Sections of CGST Act, 2017

The penal provisions relating to the imposition of penalty under the GST laws are neither novelty nor something strange or extraordinary. There is hardly any dispute or legal challenge to such provisions.

However, there is a great conundrum regarding the provisions related to penalty. The officers, tax professionals and taxpayers ( writer is no exception ) are equally baffled about which provision or Section is to be invoked and where. This is normal and proved by following quotations :

• “Nobody is perfect, we all make mistakes.”
• “We all have flaws, and that’s what makes us human.”
• “To be human is to be imperfect.”

However, despite this, it is human to endeavour to achieve the better.

The term penalty is neither defined under the GST provisions nor under the General Clauses Act. Hence, its meaning has to be determined by the common law practices and general legal jurisprudence and this is a very complex subject. Though it is very difficult and controversial to define term “penalty”, as there are different interpretations of the word, however, for the sake of brevity, penalty can be said to be “legal punishment for a crime or an offence”.

From the above definition, it appears that for imposition of penalty, there ought to be at least the following ingredients : –

1. There should a be a clearly defined law or provision having the force of law, to which the person subject to penalty should be bound to obey;
2. The law should be valid ( promulgated by the legally empowered authority to do so);
3. There should be the officials/ authorities, who are empowered and have the authority to impose penalty with clearly demarcated jurisdiction.
4. There should be a person, natural or corporate, who should be subject of such law;
5. The person should have breached the provision of law by omission or commission;
6. The penalty should be imposed by following the due procedure of law.

There are various types of penalties provided under the CGST Act, 2017 and the parallel provisions in the State GST Acts. The provisions of CGST Act, 2017 in this regard apply ipso facto to the IGST Act, 2017 and UTGST Act, 2017. As the provisions of CGST Act, 2017 and other Acts mentioned ibid are pari-materia with each other, it will suffice to discuss the penalty provisions of CGST, 2017.

The provisions related to the penalty are scattered over the various Chapters and Sections of the CGST Act, 2019.

Sections related with penalty : –

1. Section 29(2) – suspension or cancellation of registration by the proper officer for the reasons enumerated in the sub-section.
2. Section 46 – provides for recovery of late fee for late filing of the statutory returns.
3. Section 50 – charging of interest on the late payment or non payment of tax and irregular input tax credit cases.
4. Section 73 and 74 envisage the imposition of penalty in cases related to the tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised.
5. Sections 122 is the main section dealing with the quantum of penalties to be imposed depending upon the specific breaches mentioned. Sub Section (1) enumerated the various types of breaches; sub section (1A) inserted later on lays down the penalty for the benefiary of the benefit from the offences related to omission and commission mentioned in sub section (1) above; sub section (2) relates to the supply of goods and services without payment of appropriate taxes and related to irregular ITC further splitting this into two sub categories involving fraud, suppression etc. and those without it. Sub Section (3) deals with the imposition of penalty upon the persons involved in aiding and abetting the commission of offences enumerated in sub-section (1) and otherwise dealing with the goods or services or documentation or information etc. as enumerated in this sub section.
6. Section 123 deals with penalty for failure to furnish information return.
7. Section 124 deals with penalty for failure to provide statistics.
8. Section 125 deals with the general penalty in the cases not covered by any specific section of the Act;
9. Section 129 is related to Detention, seizure and release of goods and conveyances in transit and the quantum and procedure for recovery of the tax, interest and penalties.
10. Section 130 deals with the matters of Confiscation of goods or conveyances and levy of penalty.

Now where the conundrum is ?  It lies in the question whether the penalty is liable to be imposed under Section 73, 74,  and/ or 122 in the demand cases. It is pertinent here to mention that these Sections do not expressly empower the officers to impose penalty in the cases related to commission of offences. In fact, Sections 73 and 74 are primarily related to the amount of determination of tax. The powers of the Officers appear to be springing from their appointment under Section 3 of the Act for carrying out the purposes of the Act and also the officers who are authorized under Section 5 of the Act for specified purposes. Further, though there is a reference to the quantum of penalty to be imposed under Section 73(9), but the quantum is not specified in the pari materia Section 74(9). This is irrespective of the fact that Section 74(1) lays down that the proper officer shall issue notice for recovery of the tax, interest and penalty equivalent to tax. But it appears that the proposal to issue show cause notice and specific power of proper officer to determine the quantum of penalty are two different aspects. Herein comes into the play the insertion of Section 122 ( which is contained in the Chapter XIX relating to Offences and Penalties ). Thus, Section 122 is the specific section lays down the quantum of penalties to be levied for particular type of breach of taxable person. Thus, Sections 73 and 74 ( to be read in conjunction with Sections 3 and 5 of the Act )appear to be enabling and empowering Sections. It is apparent that the quantum of penalty has to be determined under Section 122 of the Act, or Sections 123, 124 and 125 also wherever applicable. Hence, it is evident that the show cause notices issued under Sections 73 and 74 without mentioning the provisions of Sections 122 to 125  (as may be applicable) are faulty, though the practice is to the contrary in some cases.

Another point which may be helpful to solve the conundrum of applicability of penalty provisions under different Sections of CGST Act is the pari materia provisions in criminal jurisprudence. For example the concept of “conviction” and “quantum of sentence” are two different though related concepts under the criminal jurisprudence. Once the ingredients for conviction as proved under a particular criminal law, the question of quantum of sentence  ( punishment) comes into play and has to be decided keeping in view the various factors. For example the Indian Penal Code provided for conviction and punishment under different Sections for culpable homicide amounting to murder, i.e. Section 301,  and 302/303 respectively. By applying the reasoning and logic of the  criminal jurisprudence law, it can be inferred that Sections 73 and 74 of CGST Act are enabling provisions empowering the officers to determine the liability of the offender, while Section 122 provides for the quantum of penalty for each specific breach. Section 128 regarding the waiver of penalty by the Government also does not make any reference to Sections 73 and 74 therein while including reference to Sections 122,123 and 125 only. This also leads to the conclusion that Sections 73 and 74 are empowering Sections to determine the liability for penalty while Section 122 is the section providing for quantum of penalty.

The GST law is still in a flux of transition despite being introduced more than 7 years ago. The proposal for insertion of Section 128A after 128 in CGST Act for waiver of the penalty and interest under Section 73 in general and 74 to limited extent has been necessitated because of non-inclusion of these Sections in Section 128 of the Act.

The CBIC has also issued a Circular No. 171/03/2022-GST dated 06.06.2022 (Titled: Clarification on various issues relating to applicability of demand and penalty provisions under the Act …)  containing a clarification that “if penal action is taken under section 74 [or section 73], no penalty for the same act can be imposed under section 122”. This appears to be in contradiction to the general spirit of the penalty provisions referred above. It appears that the CBIC has tried to clarify that penalty has to be imposed under sections 73 / 74 only, and the same excludes penalty under section 122 of the Act, and the various tax professionals are divided over this issue also. But it appears that the said circular has been issued in relation to the cases relating to fake invoices,  and it has been issued keeping in view the point that once the penalty is proposed under Section 74, no separate penalty under Section 122 can be proposed. However, this view seems to be limited and appears to have been clarified in order to avoid  double jeopardy  caused to the offender for imposition of penalty twice, once under Section 74 and secondly under Section 122 as the field formations may be resort to such practices. But the various provisions of the Act read as a whole and in harmony with each other obviate any such occurrence.

In the conclusion, it may be said that while Sections 73 and 74 are empowering provisions to determine liability, Section 122 lays down the quantum of penalty. However, for the sake of clarity, the CBIC may issue necessary clarifications and an effort to tweak the relevant Sections with little alterations/ additions/ modifications may also be attempted.

Besides these provisions contained in the above Sections, there are other types of penalties provided. These Sections deal with the monetary penalties for various acts of omission and commission. In the more serious cases, besides these monetary penalties, punishment by way of conviction and fine are also provided in Section 132 of the Act.

Note: – The questions of discretion of the proper officers for levy of penalty and quantum thereof, the mens rea in taxation penalties and prosecutions have not been delved into in this article to keep the length of the article within limits. These questions require separate expositions.