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GST Act | Small Businesses: Decriminalisation of GST Act: Why it can be a big reprieve for small businesses in India


The introduction of Goods and Services Tax (GST) was a bold step towards digital transformation of tax administration. GST introduced the concept of uniform tax on supply of goods and services and subsumed over 17 large taxes and 13 cess. The new system was framed to be much more transparent in nature, easy to monitor, administer, simplified the registration processes, and significantly reduce the compliance filing requirements.

Pre-GST, indirect taxes were divided into several Central Taxes (i.e. central excise, service tax, central sales tax, etc.) and State Specific Taxes (i.e. VAT, entry taxes, etc.). These indirect taxes created a complicated regulatory framework with severe consequences for non-compliance.

The Central Excise Act provided for harsh penal provisions for non-compliances which included monetary penalties as well as criminal provisions like imprisonment between 3-7 years. The regulators had the rights to initiate criminal proceedings in case of the below mentioned circumstances:

  • Possession of goods mentioned under schedule II (tobacco, pan masala, rubber tyres, etc.) of the act in a quantity that ‘exceeds’ the prescribed limit
  • Cases where assessee evades tax liability or takes incorrect / false credit of duty;
  • Failure on part of assessee to provide required information
  • Cases where assessee deals in goods which were liable for confiscation

With so many inter-lacing compliances, businesses had a hard time covering all their compliance obligations.

Chapter XIX of the CGST Act codifies the offences and penalties in the present times. Section 122 of the Act lists 21 offences, which may directly or indirectly lead to tax evasion, which can trigger a penal provision equal to tax evaded by the assessee. Other section related to submission of returns and statistical data highlights a maximum penalty of Rs 5,000 and Rs 25,000 respectively.

Section 132 of the Acts defines the criminal provisions for certain sets of offenses. The section specifies around 11 offenses which may trigger criminal proceedings. Some of these offences are:

  • Supply of goods or services without issue of any invoice with the intention to evade tax
  • Issue an invoice without supply of goods or services leading to wrongful availment or utilisation of input tax credit or refund of tax;
  • Availment of input tax credit abovementioned invoice or fraudulent availment if input tax credit without any invoice
  • Collects any amount as tax but fails to pay the same to the Government within 03 months
  • Falsifies or substitutes financial records or produces fake accounts with an intention to evade payment of tax
  • Attempt to commit or abate any offense

In such cases, an assessee may be punishable with an imprisonment for a term with fine based on the quantum of the amount of tax evaded / input tax credit wrongly availed / refund wrongly taken:

  • Value exceeds Rs 5 cr: Imprisonment may extend to 5 years
  • Value exceeds Rs 2 cr: Imprisonment may extend to 3 years
  • Value exceeds Rs 1 cr: Imprisonment may extend to 1 years

What changed with GST?

Although there were either minimal or no criminal provisions in some of the Pre-GST tax regime (like Service tax, VAT) with more focus on penal provisions, the Central Excise Act listed down harsher criminal provisions with jail terms varying from 3 year to 7 years along with higher penal provisions (10% – 50% of Tax evasion). These provisions were also made applicable to offenses like possessing certain goods above a certain limit or to dealing with certain goods that are liable for confiscation or failure to provide required information, etc.

GST Act linked the criminal provisions to intent of the assessee (i.e. willful or fraudulent evasion of duty) and also associated the jail term to the “Quantum of tax evaded / input tax credit wrongly availed / refund wrongly taken” i.e. higher the value of tax evasion, the longer the jail term.

Proposed Changes in GST ACT

To promote ease of doing business for small businesses and clearly distinguish between minor offenses and willful evasion of duty, government is initiating one of the major overhauls of the GST provisions after 5 years. The initiative is likely to raise the threshold limit for launching criminal proceedings and also revisit the current compounding provisions as well.

The proposal is to increase the limits to Rs 20 crore and possibility of reducing the jail term for instances where tax evasion value does not exceed Rs 5 crore. Additionally, it is expected that the revised provisions may also eliminate the provision of attachment of assessee’s property in case the tax evasion does not exceed the new threshold limits.

In recent years, there have been several policy decisions being taken to promote ease of doing business in India. One of the most prevalent of them is the push for decriminalization of laws, rules, and regulations that govern business activity.

(The writer is co-founder & director of TeamLease RegTech)

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