If you are a registered taxpayer, and not received any kind of notice from the department, you are the luckiest one right. Since, the implementation of the Goods and Services Tax (GST) Act in India has gone through many ups and downs and regular updates that make a registered taxpayer very difficult to follow compliance.
As per GST Act (CGST and SGST Act along with IGST Act), there are provisions of demand and recovery outlined in the Section 73 and Section 74. In these sections, the demand of tax is recovered along with interest and penalty.
In this article, I will discuss the penalty provisions imposed on the taxpayer at different stages under Section 73 and Section 74, related calculations and how you can avoid it.
Legal Provisions of Penalty under Section 73
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.
(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.
(9) The proper officer shall, after considering the representation, if any, made by a person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order.
Overview of Section 73
Section 73 deals with penalties for tax shortfalls that occur without any intention of fraud or willful misstatement. This includes inadvertent errors or misinterpretations by the taxpayer.
So, it can be drawn that –
| Scenario | Penalty under Section 73 |
| Tax and interest paid before issuance of Show Cause Notice (SCN) or voluntarily (refer Sec 73(5)) | No penalty |
| Tax and interest paid within 30 days from the issuance of SCN (refer Sec 73(8)) | No penalty |
| Tax and interest not paid within 30 days from the issuance of SCN (refer Sec 73(9)) | Penalty of 10% of the tax or ₹10,000, whichever is higher |
Legal Provisions of Penalty under Section 74
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.
(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.
(8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.
(11) Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded.
Overview of Section 74
Section 74, on the other hand, addresses penalties for tax shortfalls that result from deliberate fraud, willful misstatement, or suppression of facts. The penalties under this section are significantly harsher to deter fraudulent activities.
So, it can be drawn that –
| Scenario | Penalty under Section 74 |
| Tax and interest paid before issuance of Show Cause Notice (SCN) or voluntarily (refer Sec 74(5)) | Penalty – 15% of tax |
| Tax and interest paid within 30 days from the issuance of SCN (refer Sec 74(8)) | Penalty – 25% of tax |
| Tax and interest paid within 30 days of communication of the order (refer Sec 74(11)) | Penalty of 50% of the tax |
| Tax and interest not paid within 30 days of communication of the order (refer Sec 74(1)) | Penalty of 100% of the tax |
Note: These provisions of Section 73 and 74, are the same under CGST Act and respective SGST Act 2017. So, you need to get confused when I discuss penalties under CGST Act. They are imposed similarly under CGST Act and respective SGST Act 2017.
Legal Provisions of Penalty under IGST Act
Section 20. Subject to the provisions of this Act and the rules made thereunder, the provisions of Central Goods and Services Tax Act relating to,–
(xvi) demands and recovery;
Provided that in cases where the penalty is leviable under the Central Goods and Services Tax Act and the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act, the penalty leviable under this Act shall be the sum total of the said penalties.
So, in simple terms, the IGST Act includes a provision where the penalty under IGST shall be the sum total of the penalties levied under the Central Goods and Services Tax (CGST) Act and the State Goods and Services Tax (SGST) Act or the Union Territory Goods and Services Tax (UTGST) Act.
Note: there are no special provisions laid down under iGST Act 2017 for demand and recovery. The demand and recovery is made as Section 73 and 74 of the CGST Act 2017, read with IGST Act 2017 only when there is demand of tax under IGST head.
Steps to Calculate Penalties under Section 73
- Identify the tax shortfall: Determine the amount of tax that was short-paid or erroneously refunded.
- Interest Calculation: Interest is calculated on the tax shortfall at a rate of 18% per annum from the due date till the actual date of payment.
- Penalty Calculation: Section 73 prescribes a penalty of 10% of unpaid tax amount (subject to minimum of INR 20,000 under CGST & SGST or/and INR 20,000 under IGST). However, taxpayers can claim waiver of penalty by paying the tax & interest demand within 30 days of issuance of notice.
Example
- Central Tax dues: ₹30,000
- State Tax dues: ₹30,000
- CGST Interest: 18% per annum for 3 months = ₹30,000 × 18% × 3/12 = ₹1,350
- SGST Interest: 18% per annum for 3 months = ₹30,000 × 18% × 3/12 = ₹1,350
- CGST Penalty: 10% of ₹30,000 or ₹10,000 whichever is higher= ₹10,000 or
- SGST Penalty: 10% of ₹30,000 or ₹10,000 whichever is higher= ₹10,000 or
- Total payable: ₹60,000 (shortfall) + ₹2,700 (interest) + ₹20,000 (penalty) = ₹82,700
For illustration purposes, I have taken 3 months for the calculation of interest only. The interest varies as per the payment and the date you pay the tax dues.
Steps to Calculate Penalties under Section 74
- Identify the tax shortfall: Determine the amount of tax that was short-paid or erroneously refunded.
- Interest Calculation: Interest is calculated on the tax shortfall at a rate of 18% per annum from the due date till the actual date of payment.
- Penalty Calculation: The penalty is equal to 100% of the unpaid tax amount. However, a taxpayer can claim partial waiver of penalty by paying the demand within the timelines discussed above.
Example
- Central Tax dues: ₹40,000
- State Tax dues: ₹40,000
- CGST Interest: 18% per annum for 4 months = ₹40,000 × 18% × 4/12 = ₹2,400
- SGST Interest: 18% per annum for 4 months = ₹40,000 × 18% × 4/12 = ₹2,400
- CGST Penalty: 100% of ₹40,000 = ₹40,000
- SGST Penalty: 100% of ₹40,000 = ₹40,000
- Total payable: ₹80,000 (shortfall) + ₹4,800 (interest) + ₹80,000 (penalty) = ₹1,64,800
For illustration purposes, I have taken 4 months for the calculation of interest only. The interest varies as per the payment and the date you pay the tax dues. Also, I have considered that you pay 100% penalty but it may vary based on the different scenarios mentioned above in the table.
Steps to Calculate Penalties under IGST
As you know, Section 20 of the IGST states that the penalty under IGST should be the sum of CGST and SGST penalty. It does not depend on the tax liability of IGST.
Example
- Central Tax dues: ₹40,000
- State Tax dues: ₹40,000
- IGST dues: ₹60,000
- CGST Penalty as per Section 73: ₹10,000
- SGST Penalty as per Section 73: ₹10,000
- IGST Penalty as per Section 73: ₹20,000 (sum of penalties imposed under CGST and SGST)
- Total Dues to pay: ₹40,000 (CGST) + ₹40,000 (SGST) + ₹60,000 (IGST) + Interest as applicable @18% + ₹10,000 (CGST Penalty) + ₹10,000 (SGST Penalty) + ₹20,000 (IGST Penalty) = 1,80,000 (plus applicable interest)
FAQs related to Penalty
- What is the penalty rate under Section 73 if paid after 30 days of date of notice?
- The penalty rate remains at 10% of the unpaid tax amount (subject to minimum of ₹20,000 under CGST & SGST or/and ₹20,000 under IGST).
- What is the maximum penalty under Section 74?
- The maximum penalty is equal to 100% of the unpaid tax amount. However, a taxpayer can claim partial waiver of penalty by paying the demand within the timelines discussed above.
- Is interest calculated differently under Sections 73 and 74?
- No, the interest rate of 18% per annum applies to both sections from the due date to the payment date.
- How is the IGST penalty calculated if there are shortfalls in CGST and SGST?
- The IGST penalty is the sum total of the penalties under CGST and SGST, as Section 20 of the IGST Act 2017.
- Should I have to pay a penalty for small tax amount dues?
- As per Section 73, the penalty is 10% of unpaid tax amount (subject to minimum of ₹20,000 under CGST & SGST or/and ₹20,000 under IGST), so if you have unpaid tax dues of ₹500 under IGST, a maximum penalty of ₹20,000 can be imposed. However, a maximum penalty of INR 500 can be imposed under section 74. Penalty waiver can be availed by paying early as discussed above.
Conclusion
Understanding the penalties under Sections 73 and Section 74 of the GST Act is essential for maintaining compliance and avoiding unnecessary financial burdens. Accurate calculation of penalties and timely payment can save taxpayers from significant fines and legal issues. Always consult a tax professional to ensure you are interpreting and applying the GST laws correctly. Read this – Understanding GST on Place of Supply with Examples and FAQs
By staying informed and proactive, businesses can manage their tax obligations efficiently and avoid the pitfalls of non-compliance.
