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Indirect Tax Laws and Practice · Inspection, Search, Seizure, Arrest and Prosecution

Prosecution and Compounding of Offences under GST

Updated 11 October 2026 · Fact-checked

Prosecution under GST means criminal proceedings for offences listed in Section 132, started only with the Commissioner's previous sanction. Compounding under Section 138 lets the accused settle by paying tax, interest, penalty and a compounding amount of 25% to 100% of the tax involved. Section 135 presumes a culpable mental state, which the accused must disprove beyond reasonable doubt.

Understand Prosecution, Compounding and Related Provisions

GST has civil consequences (tax, interest, penalty) and criminal ones (imprisonment and fine). Section 132 lists the offences that attract prosecution, such as supplying without invoice to evade tax, issuing invoices without supply, fraudulently availing input tax credit, collecting tax but not paying it beyond three months, falsifying records, and attempting or abetting these. Punishment depends on the amount of tax evaded, credit wrongly availed or refund wrongly taken.

No one can be prosecuted under Section 132 without the previous sanction of the Commissioner. Most offences are non-cognizable and bailable. The exception is an offence under clause (a), (b), (c) or (d) of Section 132(1) punishable under clause (i), that is, where the amount exceeds five hundred lakh rupees. That is cognizable and non-bailable.

Section 135 deals with mental state. Where an offence needs a culpable mental state, the court presumes it exists. The accused can defend by proving he had no such mental state. Culpable mental state includes intention, motive, knowledge of a fact, and belief or reason to believe a fact. A fact is proved only when the court believes it beyond reasonable doubt, not merely on a preponderance of probability. So the burden on the accused is heavy.

Section 138 allows compounding: the Commissioner may compound an offence, before or after prosecution starts, on payment of a compounding amount. Once the amount is paid, no further proceedings are initiated for the same offence, and criminal proceedings already begun stand abated. Compounding is not available in some cases, and it is allowed only after tax, interest and penalty are paid.

Rule 162 of the CGST Rules gives the procedure: application in FORM GST CPD-01, a report from the concerned officer, and an order in FORM GST CPD-02 within ninety days of receipt, after a hearing.

Key rules to remember

Compounding amount range (Section 138(2))
Minimum 25% of tax involved; maximum 100% of tax involved
The actual amount is as prescribed in Rule 162(3A), within this range.
Rule 162(3A): clauses (a), (c), (d), (e) of Section 132(1)
Punishable under clause (i) of s.132(1): 50% to 75% of the amount. Punishable under clause (ii): 40% to 60% of the amount.
Amount means tax evaded, ITC wrongly availed or utilised, or refund wrongly taken.
Rule 162(3A): clauses (f), (h), (i) of Section 132(1)
25% of tax evaded
Same for both punishment categories.
Rule 162(3A): attempt or abetment
25% of the amount of tax evaded, ITC wrongly availed or utilised, or refund wrongly taken
Applies to attempt or abetment of offences in clauses (a), (c) to (f), (h) and (i).
More than one category
Compounding amount = the higher amount prescribed
Proviso to Rule 162(3A).
Punishment bands (Section 132(1))
Above ₹500 lakh: up to 5 years and fine. Above ₹200 lakh up to ₹500 lakh: up to 3 years and fine. Above ₹100 lakh up to ₹200 lakh: up to 1 year and fine, for a clause (b) offence only. Clause (f): up to 6 months or fine or both.
Imprisonment under clauses (i) to (iii) is normally not less than six months, unless the court records special and adequate reasons (Section 132(3)).
Second conviction (Section 132(2))
Up to 5 years and fine
Applies to each subsequent conviction.
Rule 162 timelines
Order within 90 days of receipt of application; pay compounding amount within 30 days of receiving order
Failure to pay in 30 days makes the order void.

How to solve Prosecution, Compounding and Related Provisions questions

For any question on prosecution or compounding, identify the offence, the amount, then the consequence and procedure.

  1. 1Identify the clause of Section 132(1) the facts fall under (for example, no invoice, fake invoice, ITC without invoice, tax collected but not paid beyond three months, falsified records).
  2. 2Note the amount of tax evaded, ITC wrongly availed or refund wrongly taken, and check it against the thresholds in ₹ lakh.
  3. 3Fix the punishment band, and check whether the offence is cognizable and non-bailable (clauses (a) to (d), amount above ₹500 lakh) or otherwise non-cognizable and bailable.
  4. 4Check sanction: no prosecution without the previous sanction of the Commissioner.
  5. 5If mental state matters, apply Section 135: it is presumed, and the accused must disprove it beyond reasonable doubt.
  6. 6Test compounding eligibility under Section 138(1) provisos: no earlier compounding for the listed offences, no offence under clause (b), no earlier conviction by a court. Tax, interest and penalty must first be paid.
  7. 7Compute the compounding amount from Rule 162(3A) by clause and punishment category. If more than one category applies, take the higher.
  8. 8State the procedure: FORM GST CPD-01, officer's report, hearing, FORM GST CPD-02 within 90 days, payment within 30 days, and abatement of proceedings on payment.

Quickest way: Clause, amount, category, percentage

When to use it: For numerical questions asking for the compounding amount or eligibility.

  1. Write the clause of Section 132(1) and the amount in ₹ lakh.
  2. If the amount is above ₹200 lakh, it is punishable under clause (i) or (ii); pick the column accordingly (above ₹500 lakh: clause (i); above ₹200 lakh up to ₹500 lakh: clause (ii)).
  3. Clauses (a), (c), (d), (e): 50% to 75% for clause (i), 40% to 60% for clause (ii). Clauses (f), (h), (i) and attempt/abetment: 25%.
  4. Check for a bar: clause (b), earlier compounding, or earlier conviction means no compounding.
  5. Add the rider: tax, interest and penalty must be paid first.

Common mistakes in Prosecution, Compounding and Related Provisions

  • Saying compounding is allowed for any offence at any time.

    Students remember only the first line of Section 138.

    Fix: Always check the exclusions: an earlier compounding for listed offences, an offence under clause (b), an earlier conviction by a court, and any other prescribed class.

  • Treating compounding as a substitute for paying tax, interest and penalty.

    The word compounding suggests a settlement of everything.

    Fix: Remember the proviso: compounding is allowed only after tax, interest and penalty are paid. The compounding amount is additional.

  • Applying the percentage as 25% to 100% of tax for every offence.

    Mixing Section 138(2) limits with the Rule 162(3A) table.

    Fix: Section 138(2) sets the outer limits. Rule 162(3A) gives the specific percentage by clause and punishment category.

  • Saying the prosecution must prove the guilty mind under Section 135.

    Students carry over the general criminal law idea.

    Fix: Under Section 135 the court presumes it. The accused must prove its absence beyond reasonable doubt, not merely on probability.

  • Calling all GST offences non-bailable, or all bailable.

    Section 132(4) and (5) are read in a hurry.

    Fix: Only clauses (a) to (d) offences punishable under clause (i) (above ₹500 lakh) are cognizable and non-bailable. All others are non-cognizable and bailable.

  • Forgetting the sanction requirement and the 30-day payment deadline.

    Procedure details seem minor.

    Fix: Remember: Commissioner's previous sanction for prosecution; payment of the compounding amount within 30 days of the order, else the order is void.

Worked examples

Example 1

Rohan Traders Pvt. Ltd. supplied goods without issuing invoices, with intent to evade tax, evading tax of ₹3,00,00,000. It has not been convicted earlier or allowed to compound before. After paying tax, interest and penalty, it applies for compounding. (a) What is the maximum punishment? (b) What range of compounding amount applies?

Show the solution
  1. The offence falls under Section 132(1)(a). Tax evaded is ₹3 crore, that is ₹300 lakh.
  2. ₹300 lakh exceeds ₹200 lakh but does not exceed ₹500 lakh, so it is punishable under clause (ii): imprisonment up to three years and fine.
  3. It is not above ₹500 lakh, so it is not cognizable and non-bailable. It is non-cognizable and bailable.
  4. Compounding: no bar applies (no earlier compounding, no conviction, not a clause (b) offence), and tax, interest and penalty are paid.
  5. Rule 162(3A) for clause (a) under clause (ii): minimum 40% and up to 60% of the tax evaded.
  6. Minimum = 40% × ₹3,00,00,000 = ₹1,20,00,000. Maximum = 60% × ₹3,00,00,000 = ₹1,80,00,000.

Answer: Maximum punishment is imprisonment up to three years and fine. The compounding amount ranges from ₹1,20,00,000 to ₹1,80,00,000.

Example 2

Meera Enterprises falsified its financial records to evade tax of ₹40,00,000. It has never compounded before. After paying tax, interest and penalty, it applies under Rule 162. Determine the compounding amount, the punishment, and the deadline to pay once the order is received.

Show the solution
  1. The offence is under Section 132(1)(f): falsifying records with intent to evade tax.
  2. Under Section 132(1)(iv), punishment is imprisonment up to six months or fine or both.
  3. Rule 162(3A) for clause (f): amount equivalent to 25% of tax evaded.
  4. 25% × ₹40,00,000 = ₹10,00,000.
  5. The Commissioner decides by order in FORM GST CPD-02 within ninety days of receipt of the application, after a hearing.
  6. Meera must pay within thirty days of receiving the order and furnish proof. If not, the order is void.

Answer: Compounding amount is ₹10,00,000, payable within 30 days of the order. Punishment otherwise: up to six months, or fine, or both.

Exam tips

  • For MCQs, memorise the limits: 25% to 100% in Section 138(2), 25% for clauses (f), (h), (i) and attempts, and the 90-day and 30-day periods.
  • In case scenarios, check bars to compounding before computing any amount.
  • State the legal basis for each point: Section 132, 135, 138 and Rule 162. Cite section numbers only as in the Act.
  • In written answers, show the sequence: payment of tax, interest and penalty; application in CPD-01; order in CPD-02; payment; abatement.
  • Do not mix up the thresholds. ₹500 lakh and ₹200 lakh decide both punishment and the compounding column.

Practice questions from Inspection, Search, Seizure, Arrest and Prosecution

Prosecution, Compounding and Related Provisions in other exams

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

Prosecution, Compounding and Related Provisions: frequently asked questions

Can an offence be compounded after prosecution has started?

Yes. Section 138(1) allows compounding either before or after the institution of prosecution. On payment of the compounding amount, criminal proceedings already started for that offence stand abated.

Who can compound a GST offence and how?

The Commissioner compounds the offence. The applicant files FORM GST CPD-01, and the Commissioner passes an order in FORM GST CPD-02 within ninety days, after giving a hearing and considering an officer's report.

What does Section 135 presume?

In prosecutions needing a culpable mental state, the court presumes it exists. This includes intention, motive, knowledge of a fact, and belief or reason to believe a fact. The accused must prove the absence of such a state beyond reasonable doubt.

What happens if the compounding amount is not paid on time?

The applicant must pay within thirty days of receiving the order. If not, the order is vitiated and void, so the person can be proceeded against.

Can immunity from compounding be withdrawn?

Yes. The Commissioner may withdraw the immunity if the person concealed material particulars or gave false evidence during compounding. The person may then be tried as if no immunity had been granted.