CA Final · Indirect Tax Laws

Offences and Penalties and Ethical Aspects under GST: formula sheet

Full chapter guide

Key formulas

Who can compound: Offence under the CGST Act → compounded by the Commissioner → on payment of compounding amount; Allowed before or after prosecution is instituted. Payment goes to the Central Government or the State Government, as the case may be.
Bar (proviso to Section 138(1)): No compounding for: second compounding (other than offences under Section 132(1)(a), (b) and (l), with (l) limited to offences relatable to (a) or (b)); offence also under another law; Section 132(1)(g), (j) or (k) offences; court conviction; a clause (l) offence which is also an offence under clause (g), (j) or (k); other prescribed classes; Check the facts against each category before allowing compounding.
Pre-condition: Compounding allowed only after payment of tax + interest + penalty involved; This is checked when the order is passed. It is not a condition for filing FORM GST CPD-01. The compounding amount is paid in addition to these.
Application: FORM GST CPD-01 → Commissioner (Rule 162); Can be filed before or after prosecution is instituted. Payment of tax, interest and penalty is not a condition for filing.
Order: FORM GST CPD-02 → allowing or rejecting the application; The order is to be passed within 90 days from receipt of the application. Payment of tax, interest and penalty is checked at this stage.
Compounding amount (Section 138(2) limits): Not less than the higher of ₹10,000 or 50% of tax involved; not more than the higher of ₹30,000 or 150% of tax involved; The amount is fixed within these limits under Rule 162 and the Commissioner's order. In the exam, use the percentage given in the question and check that it lies within the limits.
Effect (Section 138(3)): Payment as determined → no further proceedings under the Act for the same offence; pending criminal proceedings stand abated; Proceedings under any other law are not affected.
Tax planning: Action within the letter and spirit of law = lawful; Example: claiming eligible ITC, opting for composition when eligible. No penalty.
Tax avoidance: Action within the letter but against the spirit of law = questionable; May be challenged by the department. Not automatically an offence, so do not call it evasion.
Tax evasion: Deliberate illegal act to reduce tax or wrongly claim credit = offence; Includes fake invoices, false ITC and suppressed turnover. Penalty and possibly prosecution follow.
Fraud test: Intent + false statement or suppression + tax loss or wrong credit = evasion; Intent is the key difference between an honest error and evasion.
CA's duty: Do not assist, certify only what is verified, report as the Code requires; Based on the ICAI Code of Ethics: integrity, objectivity, due care, confidentiality, professional behaviour.

Quick revision

Penalty, confiscation and prosecution are three separate consequences. A single act can attract more than one.
For the tax-evasion offences listed in Section 122(1), such as supply without invoice or issuing invoices without supply, the penalty is the higher of ₹10,000 or the tax evaded, ITC wrongly availed or passed on, or refund wrongly claimed. Other offences carry fixed or different penalties.
Under Section 73 (non-fraud), the penalty is 10% of the tax or ₹10,000, whichever is higher. Under Section 74 (fraud), the penalty is 100% of the tax. Section 74A applies in place of Sections 73 and 74 for periods from FY 2024-25.
Aiding or abetting certain offences can attract a penalty of up to ₹25,000.
Detention of goods in transit under Section 129: for taxable goods, the owner who comes forward pays 100% of the tax as penalty. If the owner does not come forward, the penalty is 200% of the tax payable or 50% of the value of goods reduced by the tax amount paid, whichever is higher.
Confiscation of goods or conveyances is a separate action for serious contraventions, and the owner may be given an option to pay a fine in lieu.
Prosecution under Section 132 is graded by tax amount: over ₹1 crore up to ₹2 crore, imprisonment up to 1 year and fine; over ₹2 crore up to ₹5 crore, up to 3 years and fine; over ₹5 crore, up to 5 years and fine.
Offences where the tax evaded or ITC wrongly availed is above ₹5 crore are cognizable and non-bailable.
Prosecution needs the previous sanction of the Commissioner, and the law presumes a culpable mental state, which the accused can rebut.
Compounding amount is at least the higher of ₹10,000 or 50% of tax involved, and at most the higher of ₹30,000 or 150% of tax involved.
Once compounding is allowed, no further proceedings are started for that offence.
In ethics answers, state the principle, apply it to the facts, and conclude with the action you would take.

Common mistakes

Saying the compounding amount replaces tax, interest and penalty. Fix: Remember that tax, interest and penalty must be paid first. The compounding amount is for the offence only.
Saying compounding is possible only before prosecution starts. Fix: Section 138 and Rule 162 allow the application before or after prosecution is instituted.
Calling every tax saving evasion. Fix: Separate lawful planning and avoidance from evasion. Evasion needs a deliberate illegal act.
Treating avoidance as fully safe. Fix: Add that it can be challenged if it defeats the purpose of the law, and that a CA should advise with caution.

Exam tips

Write the four steps in order: eligibility, application and order forms, amount, effect. Examiners give marks for each.
Always name both forms: FORM GST CPD-01 for the application and FORM GST CPD-02 for the order.
In numerical questions, use the percentage given in the question. Show the working line: percentage × tax involved, and check it against the Section 138(2) limits.
Do not mix compounding (Section 138) with prosecution and punishment (Section 132) in the same answer, but say that compounding is an alternative to prosecution.
In case-scenario MCQs, look for hidden exclusions such as a court conviction, an offence under another law, an earlier compounding, or tax not yet paid.
Always define planning, avoidance and evasion in one line each before applying them to the facts.
In case scenarios, find the intent clue, such as no goods moved or documents prepared after the event.
Cover both sides: the issuer of the fake invoice and the recipient of the credit.