Library / Goods and Services Tax: The Professional's Master Guide

40. Offences, Penalties, Late Fees and Prosecution (Sections 122 to 138)

Chapter XIX of the CGST Act separates civil penalties, imposed by officers after a notice and hearing, from criminal prosecution before a court. Most taxpayers will only meet the first. The second is reserved for large, deliberate evasion.

40.1 Penalties under Section 122

Section 122(1) lists 21 offences, including supply without invoice or with a false invoice, issuing an invoice without supply, collecting tax and not paying it within three months, wrongly availing ITC or refund, falsifying records, obstructing officers and transporting goods without documents. The penalty is Rs. 10,000 or the tax evaded, ITC wrongly availed or refund wrongly taken, whichever is higher.

Section 122(1A), effective from 1 January 2022, extends the penalty to any person who retains the benefit of a transaction covered by clauses (i), (ii), (vii) or (ix) and at whose instance the transaction is conducted. This targets the organisers of fake invoice rings, not only the paper firms. Section 122(3) imposes up to Rs. 25,000 on a person who aids or abets, or deals in goods he knows are liable to confiscation.

Illustration 193: Penalty under section 122

Ravi Enterprises issued invoices of taxable value Rs. 2,00,00,000 without any supply, passing on ITC of Rs. 36,00,000 at 18%.

Step 1: Penalty on Ravi Enterprises: higher of Rs. 10,000 and Rs. 36,00,000 = Rs. 36,00,000.

Step 2: Mahesh, who organised the scheme and retained the benefit, is liable under section 122(1A) to a penalty equal to the ITC passed on: Rs. 36,00,000.

Step 3: A trader who failed to issue an invoice on a supply with tax of Rs. 6,500 faces a penalty of Rs. 10,000, since the minimum is higher than the tax.

Two newer penalties target specific sectors. Section 122A imposes Rs. 1 lakh for each machine not registered under the special procedure for notified goods such as pan masala and tobacco products, with seizure and confiscation of the machine. Section 122B, from the Finance Act, 2025, imposes the higher of Rs. 1 lakh or 10% of tax payable for contravening the track and trace mechanism under section 148A.

40.2 Other Penalties and General Disciplines

Section	Default	Penalty
123	Failure to file information return (section 150)	Rs. 100 per day, up to Rs. 5,000
124	Failure to furnish statistics	Up to Rs. 10,000; Rs. 100 per day continuing, up to Rs. 25,000
125	Any contravention with no separate penalty	Up to Rs. 25,000
127	Power to impose penalty in cases not covered by assessment or demand proceedings	After notice and hearing

Section 126 guards against petty penalties. No penalty is imposed for minor breaches, meaning tax involved of less than Rs. 5,000, or for easily rectifiable mistakes made without fraudulent intent or gross negligence. Every penalty must depend on the facts, follow a show cause notice and hearing, and be explained in the order. Voluntary disclosure is a mitigating factor. The section does not apply where the penalty is a fixed sum or fixed percentage.

Illustration 194: Minor breach under section 126

Kavya Stores, through a billing error, charged 5% instead of 18% on a small batch of goods and corrected it when the error was noticed. The tax short paid was Rs. 4,200. The tax involved is less than Rs. 5,000 and there was no fraud or gross negligence, so this is a minor breach. The officer may recover the tax and interest but cannot levy penalty under section 125.

40.3 Late Fees and Waivers (Sections 47 and 128)

Late fees are a separate levy under section 47. Section 128 allows the Government to waive penalty or late fee in part or full by notification, and it has been used for amnesty schemes for pending GSTR-3B, GSTR-4, GSTR-9 and GSTR-10 filings.

Illustration 195: Late fee computations

GSTR-3B filed 47 days late; aggregate turnover Rs. 3 crore. Fee: 47 x Rs. 50 = Rs. 2,350 (Rs. 1,175 CGST and Rs. 1,175 SGST); within the Rs. 5,000 cap.

Nil GSTR-3B filed 38 days late: 38 x Rs. 20 = Rs. 760, capped at Rs. 500.

GSTR-9 filed 150 days late; turnover Rs. 4 crore. Fee: 150 x Rs. 50 = Rs. 7,500; cap 0.04% of Rs. 4 crore = Rs. 16,000. Payable: Rs. 7,500.

40.4 Mens Rea and Civil Penalties

Judicial view: Is intent needed for penalty?

Hindustan Steel Ltd. v. State of Orissa (Supreme Court, 1969): Penalty is not imposed merely because it is lawful to do so. It is ordinarily imposed where the party acted deliberately in defiance of law, was guilty of dishonest conduct, or acted in conscious disregard of its obligation. No penalty for a technical breach or a bona fide belief.

Union of India v. Dharmendra Textile Processors (Supreme Court, 2008): A civil penalty for breach of a statutory obligation does not require proof of mens rea unless the provision requires it.

Under GST, section 126 codifies much of Hindustan Steel, while penalties under section 74 and the fraud limb of section 74A carry intent within their own words. For fixed penalties under section 122, Dharmendra Textile is cited by the department; the taxpayer should rely on section 126 and the facts.

40.5 Prosecution (Sections 132 to 138)

Prosecution is for deliberate offences under section 132(1), such as supply without invoice, fake invoices, and fraudulent ITC or refund. The Finance Act, 2023 raised the thresholds and decriminalised obstruction of officers, tampering with evidence and failure to supply information.

Amount of tax evaded, ITC or refund	Punishment
More than Rs. 5 crore	Imprisonment up to 5 years and fine; cognizable and non-bailable
More than Rs. 2 crore, up to Rs. 5 crore	Up to 3 years and fine
Fake invoices only: more than Rs. 1 crore, up to Rs. 2 crore	Up to 1 year and fine
Repeat conviction	Up to 5 years and fine for each later offence

Sanction and cognisance: no prosecution without the previous sanction of the Commissioner; only a Magistrate of the first class or higher can try it (section 134).
Presumption: in any prosecution requiring a culpable mental state, the court presumes it; the accused may prove otherwise beyond reasonable doubt (section 135).
Companies: every person in charge of and responsible for the conduct of business is deemed guilty unless he proves lack of knowledge or due diligence (section 137).
Compounding: under section 138, the Commissioner may compound on payment of 25% to 100% of the tax involved, after tax, interest and penalty are paid. It is not available to a person accused of issuing invoices without supply under section 132(1)(b), a person convicted by a court, a person who has compounded specified offences earlier, and other prescribed classes.

Illustration 196: Compounding amount

Bansal Polymers wrongly availed ITC of Rs. 2,40,00,000 and has paid tax, interest and penalty. Compounding amount: minimum 25% = Rs. 60,00,000; maximum 100% = Rs. 2,40,00,000. On payment, no further proceedings are started under the Act and pending criminal proceedings abate.

Chapter summary

• Section 122 penalty is Rs. 10,000 or the tax involved, whichever is higher; section 122(1A) reaches the person at whose instance fake transactions are done.

• Sections 122A and 122B add penalties for unregistered machines and track and trace breaches; section 125 is the residuary penalty up to Rs. 25,000.

• Section 126 bars penalty for minor breaches (tax below Rs. 5,000) and easily rectifiable mistakes, and requires notice, hearing and reasons.

• Late fees under section 47 are capped by turnover; section 128 allows waiver by notification.

• Prosecution generally needs more than Rs. 2 crore (Rs. 1 crore for fake invoices), Commissioner's sanction, and is cognizable only above Rs. 5 crore.

• Compounding costs 25% to 100% of tax, and is barred for fake invoice cases and persons already convicted.