The GST regime has sparked a debate among experts regarding the appropriate provision for imposing penalties for non-payment, short-payment of tax, and other offenses. The question at hand is whether penalties should be levied under Section 122 or Sections 73/74 of the CGST Act. This article delves into the divided interpretations and their implications.
It is observed that many show cause notices and consequent orders issued under sections 73 / 74 of the CGST Act (“the Act”) propose and consequently impose penalty under clauses (a) or (b) of sub-section (2) of 122 of the Act, as the case may be; whereas numerous others purportedly propose and consequently impose a ten percent / equivalent penalty under sections 73 / 74 itself, without any reference to section 122 of the Act. It is this conflict that has prompted me to write this piece.
Many have interpreted sections 73 / 74 to argue that they are self-sufficient and have independent penalty levying provisions in themselves and the penalty is to be proposed and confirmed under section 73 / 74 only. Although the scheme of the Act provides for a separate chapter of ‘Offences and Penalties’ [Chapter XIX], section 122 whereby appears to provide for levy of penalty in circumstances envisaged by section 73 / 74 of the Act, the aforesaid argument is not wholly inconceivable and I shall attempt to demonstrate that first:
Arguments in favour of section 73 / 74 being independent penalty levying provisions, inter alia, are:
First, sub-section (9) of section 73 provides, in clear terms, for determination of a specified penalty as either 10% or Rs. 10,000, whichever is higher, and does not make any reference to section 122 of the Act. Further, sub-section (11) of section 73 of the Act refers to the penalty as – “penalty under sub-section (9)”, further reinforcing that the penalty is properly levied under section 73(9) only.
Second, sub-section (1) of section 74 also provides for determination of a specified penalty as an amount equivalent to the tax and does not make any reference to section 122 of the Act.
Third, multiple references to section 50 while providing for interest payable indicate that the absence of any reference to section 122 of the Act under section 73 / 74 is perhaps not a mistake simpliciter by the Parliament, rather an intended omission (casus omissus).
Fourth, sub-section (13) of section 75 of the Act provides that:
“Where any penalty is imposed under section 73 or section 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act”
In this regard, CBIC vide 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 …) also clarified that if penal action is taken under section 74 [or section 73], no penalty for the same act can be imposed under section 122. Therefore, penalty has to be imposed under sections 73 / 74 only, and the same excludes penalty under section 122 of the Act.
Fifth, reading-in section 122 of the Act into sections 73 / 74 would frustrate the reduced-penalty mechanisms provided under the said provisions inasmuch section 122 specifies the penalty as a fixed sum/percentage and does not provide for reductions in cases of voluntary payment at various stages i.e. before/after SCN or order. Hence, such a reading-in would render the reduced-penalty mechanisms under section 73 / 74 unworkable and otiose.
Therefore, it appears that it could very well be argued that sections 73 / 74 are self-sufficient provisions insofar as levy and imposition of penalty is concerned.
Although the above arguments sound somewhat attractive, I am constrained to opine that the scheme of the Act does not envisage sections 73 / 74 as independent penalty levying provisions; rather, they merely provide for tax determination mechanisms and proceedings in which penalty can be imposed.
There is a marked difference between ‘levy’ and ‘imposition’ of penalty under the Act. Creation of a penal liability in form of a penalty is a function of the Parliament as a policy decision, whereas, imposition of such penalty on a subject of tax upon certain action/omission is a function of the proper officer.
The statutory expression of this dichotomy is found across provisions of the Act, as such:
First, the scheme of the Act provides for separate chapters for different aspects of tax administration and enforcement. Whereas Chapter XIX [Offences and Penalties], and more particularly, sections 122 to 125 provide for levy of certain penalties in matters of certain actions / omissions; Chapter XV [Demands and Recovery] provides for mechanisms, procedures, and proceedings under which the proper officer, upon proper application of mind, imposes penalty on a person that is later realised by the recovery route, if need be.
Second, section 127 read with section 128 of the Act makes it amply clear that sections 73 / 74 govern the proceedings under which the penalty leviable under section 122 is actually imposed.
Section 127 reads thus:
“Section 127. Power to impose penalty in certain cases: 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.”
Hence, in cases where a penalty leviable under section 122 of the Act cannot actually be imposed on a person for want to any proceedings provision being applicable, an order may be issued under section 127 of the Act.
Further, section 128 reads thus:
“Section 128. Power to waive penalty or fee or both: The Government may, by notification, waive in part or full, any penalty referred to in section 122 or section 123 or section 125 or any late fee referred to in section 47 for such class of taxpayers and under such mitigating circumstances as may be specified therein on the recommendations of the Council.”
Interestingly, section 128 further corroborates the understanding that the liability of a penalty is created under sections 122, 123, and 125 of the Act only, as the power to waive the same, as a matter of policy, has been delegated to the Central Government.
Third, explanation 1 of section 74 makes a clear reference to section 122 by providing that:
“Explanation 1.- For the purposes of section 73 and this section,-
(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122 and 125 are deemed to be concluded.”
Clause (ii) of the explanation specifically treats sections 73 and 74 as ‘proceedings provisions’ whereas section 122 has been treated as a provision under which persons are liable to pay the penalty i.e. ‘penalty levying provision’.
Therefore, it is concluded that creation of liability of penalty is a policy decision of the Parliament (expressed through section 122 and others), whereas, imposition of penalty on a particular person concerned is left to the application of mind by the proper officer (under sections 73 or 74 proceedings and others) and the said leviable penalty becomes payable by the said person upon an order imposing the same being passed under the appropriate proceedings provisions.
If the above discussion was not convincing, the intention of the drafters in having separate chapters for levy of penalty (Chapter XIX) and imposition of penalty (Chapter XV) is further highlighted by a perusal of the Model GST Law, which was initially published in June 2016 by the Empowered Committee of State Finance Ministers. The corresponding provision to section 122 of the Act was section 66 of the Model Law; sub-section (2) whereof provided for penalty on repeat offenders. However, the updated law, which was finally enacted in 2017, replaced the said repeat offender provision with the present one, which provides for liability of penalty under circumstances corresponding to sections 73 and 74.
Therefore, the intention of the legislature is clearly forthcoming inasmuch the Model Law was specifically modified to provide for an independent penalty levying provision in form of sub-section (2) of section 122 for purposes of non-payment, short-payment of tax, etc.
At the cost of reiteration, I emphasize that if separate provisions under separate chapters have been provided in the scheme of the Act; sections 73 / 74 providing for mechanisms of determination of short-payment, non-payment of tax, etc. on one hand, and sections 122 / 123 / 125 providing for liability to / levy of penalty on the other, each of them must be made workable and their role be understood in proper context, by reading the statute as a whole.
Elaborating further in this regard, the specific role of sections 73 / 74 can be ascertained from a perusal of section 10 of the Act, sub-section (5) whereof provides that:
“Section 10. Composition levy: (5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) or sub-section (2A), as the case may be, despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.”
Therefore, section 10 of the Act has specifically bifurcated ‘levy of penalty’ and provision(s) for proceedings of determination and imposition. This only substantiates the interpretation that the role of sections 73 / 74 is limited to being provisions providing for proceedings for determination of short-payment, non-payment of tax, etc. with provisions for levy of such penalty being found elsewhere in the Act.
The erstwhile Central Excise Act, 1944 (“the CEx Act, 1944”) provided for a simple mechanism for levy and imposition of penalty vide section 11AC read with section 11A.
Whereas, section 11A of the CEx Act, 1944 provided for proceedings to determine the amount of duty not levied, short-levied, etc., a separate penalty provision in form of section 11AC of the CEx Act, 1944 provided for levy of penalty as well as the reduced-penalty mechanism.
In contrast, the CGST Act, 2017 bifurcates the levy of penalty and the reduced-penalty mechanism across three provisions placed chapters apart viz. section 122 for levy and sections 73 and 74 for reduction mechanism; thereby creating a confusion as to the nexus between the two.
Nevertheless, it can be understood that similar to the settled scheme of the C.Ex. Act, 1944 – the reduced-penalty mechanism provided under sections 73 / 74 of the CGST Act, 2017 must be harmoniously interpreted to refer to reduction in the penalty levied under section 122 only. For academic purposes, the omission of any reference to section 122 under sections 73 and 74 can perhaps be explained by the fact that section 122 penalty is not the only penalty that can be proposed under section 73 / 74 proceedings – as the proper officer may deem it fit, based on particular facts and circumstances, to propose imposition of other penalties as well – one being section 125 penalty.
Therefore, the apparent conflict may be resolved as such:
The appropriate penalty-levying provision for acts of ‘non-payment, short-payment of tax or tax erroneously refunded or ITC wrongly availed or utilised’ under GST is section 122 of the Act i.e. provision wherein penal liability has been created, and the appropriate penalty-imposing provisions are sections 73 and 74 of the Act i.e. proceedings provisions wherein penalty is actually imposed by the proper officer.
Therefore, in my conclusion, the show cause notices and consequent orders, issued by the proper officer, should make the difference between levy of penalty and imposition of penalty abundantly clear. An illustrative example may be as follows:
Additionally, the CBIC should perhaps take note of this levy-imposition dichotomy and suitably modify Circular No. 171/03/2022-GST dated 06.06.2022 insofar as it professes that penalty is ‘imposed under section 122’. It appears that CBIC has erred at point no. 2 of the said circular in not considering that penalty is never ‘imposed’ under section 122, rather it is ‘levied’ under section 122. This understanding alters the conclusion given by CBIC at point no. 2.
Whereas the circular, as it stands presently, provides that penal action under section 74 will exclude the operation of section 122; the corrected understanding would have the circular profess that the penal action, required to be undertaken under section 74 will necessarily include section 122 penalty.
Levy and imposition of penalty are two distinct yet intertwined events, whereby one cannot operate at the exclusion of the other. Imposition of a section 122 penalty under section 73 / 74 proceedings amounts to imposition of a single penalty under single proceedings only and does not run contrary to sub-section (13) of section 75 of the Act.