Indirect Tax Laws · Offences and Penalties and Ethical Aspects under GST

Compounding of Offences under GST (Section 138 and Rule 162)

Updated 5 October 2026 · Fact-checked

Compounding lets an accused settle a GST offence by paying an amount fixed by the Commissioner, instead of facing prosecution. You apply in FORM GST CPD-01. Compounding is allowed only after tax, interest and penalty are paid, checked when the order is passed in FORM GST CPD-02. Then no further proceedings follow and prosecution abates.

Understand Compounding of Offences (Section 138 and Rule 162)

A GST offence, such as issuing invoices without supply or evading tax above the stated limits, can lead to prosecution under Section 132. Prosecution is slow and costly for both sides. Compounding is a settlement route. The accused pays money and the department drops the criminal case.

Section 138(1) of the CGST Act says any offence under the Act may, either before or after the institution of prosecution, be compounded by the Commissioner. The accused pays the compounding amount to the Central Government or the State Government, as the case may be, in the manner prescribed. The manner is in Rule 162.

Compounding is not a right. The first proviso to Section 138(1) says the section does not apply to:

a person who has already been allowed to compound once for any offence, other than the offences in clauses (a), (b) and (l) of Section 132(1), where clause (l) is covered only so far as it relates to clause (a) or (b);
a person accused of an offence under the CGST Act which is also an offence under any other law in force;
a person accused of an offence in clause (g), (j) or (k) of Section 132(1);
a person convicted of an offence under the Act by a court;
a person accused of an offence in clause (l) of Section 132(1) which is also an offence under clause (g), (j) or (k);
any other class of persons or offences that may be prescribed.

The second proviso says that compounding allowed under the section does not affect proceedings instituted under any other law.

The key condition is that compounding is allowed only after the tax, interest and penalty involved in the offence have been paid. This is checked when the order is passed. It is not a condition for filing the application in FORM GST CPD-01. The compounding amount is an addition to these dues, not a replacement.

Section 138(2) sets the outer limits of the compounding amount. It cannot be less than the higher of ₹10,000 or 50% of the tax involved. It cannot exceed the higher of ₹30,000 or 150% of the tax involved. The amount within these limits is fixed under the Rules and by the Commissioner's order.

Section 138(3) gives the effect. On payment of the compounding amount determined by the Commissioner, no further proceedings shall be initiated under the Act against the accused for the same offence, and any criminal proceedings already initiated for that offence shall stand abated. Proceedings under any other law are not affected.

Key rules to remember

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.

How to solve Compounding of Offences (Section 138 and Rule 162) questions

Any question on compounding can be answered in the provision-facts-conclusion form. Test eligibility first, then procedure, then amount, then effect.

1State the provision: offences under the CGST Act can be compounded by the Commissioner under Section 138, before or after prosecution.
2Check eligibility from the facts against the proviso to Section 138(1): earlier compounding, offence also under another law, a clause (g), (j) or (k) offence, court conviction, or other excluded cases.
3Check the pre-condition. Has the accused paid tax, interest and penalty? If not, compounding cannot be allowed when the order is passed. Payment is not needed just to file the application.
4State the procedure: application in FORM GST CPD-01 to the Commissioner, a report may be called for, and the order is passed in FORM GST CPD-02 allowing or rejecting, within 90 days of receipt of the application.
5Compute the compounding amount using the percentage in the question. Check it against the Section 138(2) limits, then add it to the amount already payable if the total outflow is asked.
6State the effect: after payment, no further proceedings under the Act for the same offence and abatement of pending criminal proceedings. Note that other laws are not affected.
7Write a one-line conclusion that answers the exact question asked.

Quickest way: Four-check method for compounding questions

When to use it: Use this for short MCQs or 5-mark questions where you have only a few minutes.

Check who: the accused applies and the Commissioner decides.
Check bar: offence also under another law, court conviction, a clause (g), (j) or (k) offence or an earlier compounding (with the stated exceptions) means no compounding.
Check money: tax, interest and penalty must be paid before the order allows compounding. Then the compounding amount must be not less than the higher of ₹10,000 or 50% of tax, and not more than the higher of ₹30,000 or 150% of tax.
Check effect: no further proceedings under the Act for that offence and prosecution abates. Other laws stay open.

Common mistakes in Compounding of Offences (Section 138 and Rule 162)

Saying the compounding amount replaces tax, interest and penalty.
Students think compounding is a full settlement of all dues.
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.
Students link settlement with avoiding a court case.
Fix: Section 138 and Rule 162 allow the application before or after prosecution is instituted.
Naming the wrong authority, such as the court or the proper officer.
Confusion with the court's role in compounding under other laws.
Fix: The Commissioner decides and fixes the amount. The application goes to the Commissioner.
Assuming every GST offender can compound.
Students read Section 138(1) and ignore its proviso.
Fix: Check the facts against the proviso: offence also under another law, court conviction, clause (g), (j) or (k) offences, and earlier compounding.
Writing that compounding ends all proceedings, including under other laws.
Overstating the effect of abatement.
Fix: Effect is limited to further proceedings under the Act for the same offence and abatement of criminal proceedings for that offence. Proceedings under other laws are not affected.
Quoting a flat minimum percentage such as 25% for every offence.
Students remember one percentage and apply it everywhere.
Fix: Quote the Section 138(2) limits: minimum the higher of ₹10,000 or 50% of tax, maximum the higher of ₹30,000 or 150% of tax. In numerical questions, use the percentage given.
Mixing up the forms: CPD-01 and CPD-02.
Both forms look alike and carry no hint.
Fix: Remember 01 is the first step, the application, and 02 is the second step, the order.

Worked examples

Example 1

M/s Rathi Traders is accused of an offence under Section 132 involving tax of ₹40,00,000. Prosecution has already been launched. Rathi has paid the tax, interest and penalty in full and applies for compounding. The Commissioner proposes a compounding amount of 75% of the tax involved. Advise on eligibility, procedure, and whether this amount is within the Section 138(2) limits and what it is.

Show the solution

Provision: Section 138 allows the Commissioner to compound any offence under the CGST Act, before or after prosecution. Prosecution already launched is therefore no bar.
Pre-condition: tax, interest and penalty have been paid, so the condition is met.
Eligibility: no fact shows an earlier compounding, an offence under another law, a conviction or any other exclusion, so Rathi is eligible on the given facts.
Procedure: Rathi files FORM GST CPD-01 with the Commissioner. The Commissioner may call for a report and then passes an order in FORM GST CPD-02 allowing or rejecting the application, within 90 days of receipt.
Limits under Section 138(2): minimum = higher of ₹10,000 or 50% × ₹40,00,000 = ₹20,00,000. Maximum = higher of ₹30,000 or 150% × ₹40,00,000 = ₹60,00,000.
Amount: 75% × ₹40,00,000 = ₹30,00,000. This lies between ₹20,00,000 and ₹60,00,000, so it is within the limits.
Effect: on payment as determined, no further proceedings under the Act for that offence, and the pending prosecution stands abated.

Answer: Rathi can apply in FORM GST CPD-01. The compounding amount of ₹30,00,000 is within the Section 138(2) limits of ₹20,00,000 to ₹60,00,000. It is payable in addition to the tax, interest and penalty already paid. On payment, the prosecution abates.

Example 2

Mr. Kumar is accused of a GST offence that is also an offence under another law. He has not yet paid the tax or interest involved. He applies to the Commissioner for compounding and says that he will pay the compounding amount along with the tax. Can the Commissioner compound the offence?

Show the solution

Provision: Section 138 gives the Commissioner power to compound, subject to a proviso with exclusions.
First issue: the offence is also an offence under another law. The proviso to Section 138(1) excludes a person accused of such an offence from compounding.
Second issue: even if he were eligible, compounding is allowed only after the tax, interest and penalty are paid. Mr. Kumar proposes to pay them along with the compounding amount, which does not meet the requirement.
Conclusion: both grounds work against him, and the first is enough by itself.

Answer: No. The Commissioner cannot compound the offence. A person accused of an offence that is also an offence under another law is excluded by the proviso to Section 138(1), and payment of tax, interest and penalty before compounding has not been made.

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.

Practice questions from Offences and Penalties and Ethical Aspects under GST

Compounding of Offences (Section 138 and Rule 162) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Compounding of Offences (Section 138 and Rule 162): frequently asked questions

Who can compound a GST offence?

The Commissioner can compound an offence under the CGST Act, on application by the accused person. The accused must not fall in the excluded categories in the proviso to Section 138(1), such as a person convicted by a court or accused of an offence that is also an offence under another law.

Can I apply for compounding after prosecution has started?

Yes. Section 138 and Rule 162 allow the application before or after the institution of prosecution. If the offence is compounded and the amount is paid, the pending criminal proceedings stand abated.

What is the compounding amount under GST?

Section 138(2) says the amount cannot be less than the higher of ₹10,000 or 50% of the tax involved. It cannot exceed the higher of ₹30,000 or 150% of the tax involved. The amount within these limits is fixed under Rule 162, and it is in addition to tax, interest and penalty.

Do I have to pay tax and penalty before compounding?

Yes. Compounding is allowed only after the tax, interest and penalty involved in the offence have been paid, and this is checked when the order is passed. You do not have to pay them before filing FORM GST CPD-01. The compounding amount is separate.

Does compounding protect me under other laws?

No. Compounding under Section 138 ends further proceedings under the GST Act for that offence. It does not affect proceedings under any other law.