GST Prosecution & Penalty - Complete Guide on Offences, Procedures, Sections & Compounding

The Goods and Services Tax (GST) framework in India includes stringent prosecution and penalty provisions to ensure compliance and deter tax evasion. Under the CGST Act, 2017 (Chapters XIX and XX), various offences attract penalties ranging from monetary fines to imprisonment, depending on the gravity and intent behind the violation. GST prosecution mechanisms distinguish between minor compliance lapses (attracting only penalties) and serious offences (inviting both penalties and criminal prosecution). Understanding these provisions is crucial for every GST-registered business to avoid inadvertent violations, respond appropriately to notices, and utilize remedies like compounding when available. The penalty provisions under GST are designed with a graded structure - Section 122 covers general penalties, Section 125 deals with false statements, Section 129 handles detention and seizure of goods, Section 130 covers confiscation and penalties on conveyances, while Sections 132 covers prosecution for cognizable and non-cognizable offences. Additionally, the law provides for arrest and bail provisions (Section 69), search and seizure powers (Section 67), and the compounding of offences (Section 138) which allows businesses to settle certain violations by paying compounding amounts without going through prolonged prosecution. This comprehensive guide for FY 2026-27 covers all aspects of GST prosecution and penalties including types of offences (cognizable vs non-cognizable), detailed penalty provisions under various sections, prosecution procedures, arrest and bail conditions, search and seizure powers, compounding mechanism, practical case studies, latest amendments, and 25+ FAQs to help businesses navigate these critical provisions and ensure GST compliance while protecting their rights.

📑 Quick Navigation - Jump to Section

⚖️ Overview of GST Prosecution & Penalty
🚨 Types of Offences Under GST
💰 Section 122 - General Penalty Provisions
📋 Section 125 - Penalty for False Statement
🚛 Section 129 - Detention & Seizure of Goods
🚗 Section 130 - Confiscation of Conveyances
⚖️ Section 132 - Prosecution Provisions
🔒 Arrest & Bail Provisions - Section 69
🔍 Search & Seizure - Section 67
🤝 Compounding of Offences - Section 138
📝 Prosecution Procedure - Step by Step
🛡️ Defenses & Rights of Taxpayers
📊 Practical Case Studies
📰 Latest Amendments & Updates
💡 Compliance Tips to Avoid Penalties
❓ FAQs

Overview of GST Prosecution & Penalty Framework

GST Prosecution & Penalty - Key Concepts

What is Prosecution under GST?

Prosecution means initiating criminal proceedings against a person for committing offences under GST laws, which may result in imprisonment along with monetary penalties.

What is Penalty under GST?

Penalty is a monetary punishment imposed for violations of GST provisions, separate from the tax and interest liability.

Key Differences:

Aspect	Penalty	Prosecution
Nature	Civil/Administrative	Criminal
Consequence	Monetary fine only	Imprisonment + fine
Applicable To	All offences under GST	Only serious offences (Section 132)
Authority	GST Officer (Adjudicating Authority)	Court (after complaint by GST Officer)
Compounding	Generally possible (Section 138)	Possible for specified offences only

Legal Framework:

Chapter XIX (Sections 122-131): Penalty provisions
Chapter XX (Sections 132): Prosecution provisions
Section 138: Compounding of offences
Section 69: Power to arrest
Section 67: Power of inspection, search and seizure

Dual System - Penalty AND Prosecution

Important: Under GST, for serious offences, BOTH penalty and prosecution can be initiated simultaneously. This means:

The taxpayer may have to pay penalty under Section 122/125
AND simultaneously face prosecution under Section 132 with potential imprisonment
These are independent proceedings - one doesn't bar the other
However, compounding (if done) can provide relief from prosecution for specified offences

Example: A person issues fake invoices worth ₹10 crore. He can face:

Penalty up to ₹10 crore under Section 122(1)(ix)
AND Prosecution under Section 132(1)(c) with imprisonment up to 5 years

Types of Offences Under GST

GST offences are classified into different categories based on severity:

1. Cognizable and Non-Bailable Offences

Cognizable Offences (Most Serious) - Section 132(1)

Where tax sought to be evaded OR ITC availed OR refund claimed exceeds ₹5 Crore

Punishment: Imprisonment up to 5 years + fine

Nature:

Cognizable: Police can arrest without warrant
Non-Bailable: Bail not automatic, requires court approval
Serious: Treated similar to major economic offences

Examples:

Fake invoice racket involving ₹6 crore tax evasion
Wrong refund claims totaling ₹5.5 crore
Fraudulent ITC availed exceeding ₹5 crore

2. Non-Cognizable but Prosecution-Worthy Offences

Offences under Section 132(1) - Amount between ₹2 Crore to ₹5 Crore

Where tax sought to be evaded OR ITC availed OR refund claimed: ₹2 Crore to ₹5 Crore

Punishment: Imprisonment up to 5 years + fine

Nature:

Non-Cognizable: Arrest requires warrant/permission
Bailable: Bail as a matter of right
Still Serious: Prosecution can be launched

3. Minor Offences (Only Penalty, No Prosecution)

Offences Attracting Only Penalty - Below ₹2 Crore

Where violation amount is less than ₹2 Crore OR general compliance violations

Consequences: Only penalty under Section 122/125/129/130 - NO prosecution

Examples:

Late filing of GST returns
Wrong ITC claims below threshold
Non-compliance with e-way bill requirements (goods in transit)
Minor procedural violations

Classification Based on Nature of Violation

Type of Offence	Section	Threshold for Prosecution	Max Penalty	Max Imprisonment
Tax Evasion	122(1), 132(1)(a)	₹2 Crore	₹25,000 or tax amount, whichever higher	5 years
Fraudulent ITC	122(1), 132(1)(b)	₹2 Crore	₹25,000 or ITC amount, whichever higher	5 years
Wrong Refund	122(1), 132(1)(c)	₹2 Crore	₹25,000 or refund amount, whichever higher	5 years
Fake Invoices	122(1)(ix), 132(1)(c)	₹2 Crore	Tax amount involved	5 years
Obstruction	122(3), 132(1)(f)	Always prosecutable	₹25,000	5 years
Tampering Records	122(2), 132(1)(h)	Always prosecutable	₹25,000	5 years
False Statement	125, 132(1)(i)	Always prosecutable	Tax amount involved	5 years

Section 122 - General Penalty Provisions

Section 122 is the main penalty provision covering majority of GST violations. It specifies penalties for various offences without intent to evade tax.

Section 122(1) - List of 21 Offences

Offences and Penalties under Section 122(1)

Penalty Amount: ₹10,000 OR Tax Amount involved, whichever is HIGHER

Minimum Penalty: ₹10,000 (even if tax amount is less)

Maximum Penalty: Equal to tax amount (no upper limit if tax amount high)

Complete List of 21 Offences under Section 122(1):

Clause	Offence Description	Common Scenario
(i)	Supply of goods/services without invoice OR with false/incorrect invoice	Selling goods without generating GST invoice
(ii)	Issues invoice without actual supply of goods/services	Fake invoice issuance
(iii)	Collects tax but fails to pay to Government (beyond 3 months from due date)	Collected GST from customer but not deposited
(iv)	Avails or utilizes ITC without actual receipt of goods/services	Wrong ITC claims
(v)	Fraudulently obtains refund	Fake documents for refund claim
(vi)	Takes ITC using invoice/document issued by suspended/cancelled registration	ITC on invoices from blacklisted suppliers
(vii)	Furnishes false information/documents during registration	Fake address/documents for GST registration
(viii)	Obstructs or prevents GST officer from discharge of duties	Not allowing inspection, hiding documents
(ix)	Transports goods without proper documents	No e-way bill or invoice during transport
(x)	Suppresses turnover leading to tax evasion	Under-reporting sales
(xi)	Takes/distributes ITC in contravention of provisions	Wrongly distributing ITC by ISD
(xii)	Falsifies financial records/produces fake documents	Creating bogus purchase records
(xiii)	Fails to register despite being liable	Turnover above threshold but not registered
(xiv)	Furnishes false information regarding registration particulars	Wrong business activity mentioned in registration
(xv)	Attempts to evade tax OR wrongfully avails/uses ITC OR obtains refund wrongfully	Any attempt even if not successful
(xvi)	Fails to maintain proper accounts/documents as required	No books of accounts maintained
(xvii)	Fails to furnish information/documents called for by authorities	Not responding to notices
(xviii)	Supplies/receives goods in contravention of provisions leading to tax evasion	Bogus transactions for tax evasion
(xix)	Destroys/tampers material evidence/documents	Deleting records before inspection
(xx)	Fails to appear before authorities when summoned	Not appearing for personal hearing
(xxi)	Any other act/omission which constitutes offence under CGST Act but not specified	Catch-all provision

Section 122(1A) - Penalty on Operator of E-commerce Platform

Applicable to: E-commerce operators (like Amazon, Flipkart, Swiggy, Zomato)

Penalty: ₹25,000 for each violation

Offences:

Allows supply through its platform by unregistered person liable for registration
Fails to deduct TDS under Section 51
Fails to furnish information/documents to authorities

Section 122(2) - Penalty for Abetment

Applicable to: CA, CS, CMA, Advocate, Tax Consultant who helps/abets any offence

Penalty: ₹25,000

Examples:

CA knowingly certifies fake financial statements
Consultant helps in creating fake invoices
Advocate advises illegal methods to evade tax

Note: This is IN ADDITION to prosecution of the professional under Section 132

Section 122(3) - Penalty for Obstruction

Offence: Obstructs or prevents GST officer from performing duties

Penalty: ₹25,000

Examples:

Not allowing officer to inspect premises
Refusing to produce documents
Physically blocking officer's entry
Threatening officer

Important: This offence ALSO attracts prosecution under Section 132(1)(f) with imprisonment up to 5 years

Practical Example - Section 122 Penalty Calculation

Case: M/s XYZ Traders issued invoices worth ₹50 lakh without actual supply of goods (fake invoices). Tax component = ₹9 lakh (18% GST).

Offence: Clause (ii) of Section 122(1) - Issues invoice without supply

Penalty Calculation:

Tax amount involved: ₹9 lakh
Minimum penalty: ₹10,000
Rule: Higher of (tax amount OR ₹10,000)
Penalty Imposed: ₹9 lakh (since ₹9 lakh > ₹10,000)

Additional Consequences:

If amount > ₹2 crore: Prosecution under Section 132 also (here not applicable as only ₹50 lakh)
ITC reversal if buyer claimed ITC on these fake invoices
Interest on tax amount at 18% p.a.
Possible cancellation of registration

Section 125 - Penalty for False Statement/Suppression of Facts

Section 125 - General Penalty for Contraventions

Applicability: When person contravenes GST provisions for which NO specific penalty is provided under Section 122, 129 or 130

Penalty:

₹25,000 OR
Amount of tax involved, whichever is HIGHER

Examples of Section 125 Applicability:

Contravention	Penalty
Fails to file GSTR-1 (without tax impact)	₹25,000 (if no tax involved) OR tax amount if any
Wrong classification of goods/services leading to lower tax payment	₹25,000 OR tax short-paid, whichever higher
Fails to issue invoice as required (but not covered under 122)	₹25,000 OR tax, whichever higher
Violates composition scheme conditions	₹25,000 OR tax difference, whichever higher
Any other violation not specifically covered	₹25,000 minimum

Difference from Section 122:

Section 122: Specific offences listed (21 types) - penalty is ₹10,000 or tax
Section 125: Catch-all provision for other violations - penalty is ₹25,000 or tax
Section 125 is residual provision - applies when no other penalty section applicable

Section 129 - Detention, Seizure & Release of Goods and Conveyances in Transit

Section 129 deals with goods and conveyances (vehicles) found in contravention during transport. This is one of the most frequently encountered provisions.

When Can Goods Be Detained/Seized?

Circumstances for Detention under Section 129(1)

Proper officer can detain/seize goods if:

Tax Not Paid or Short-Paid: Goods transported with intent to evade tax
Documents Missing: Goods moved without:
- Proper invoice
- E-way bill (where required)
- Other required documents
Violation of Rules: Goods transported in contravention of GST provisions
ITC Wrongly Availed: Goods transported where ITC wrongly taken or utilized

Common Scenarios:

Truck carrying goods without e-way bill
Invoice amount doesn't match actual value of goods
Goods being transported by unregistered person (liable to register)
E-way bill generated but goods description doesn't match
Expired e-way bill (validity period over)

Penalty and Tax Payment for Release of Goods - Section 129(1)

Scenario	Tax to be Paid	Penalty	Total Amount for Release
Owner of goods comes forward	100% of tax (applicable GST)	100% of tax amount OR ₹25,000, whichever is LESS	Tax + Penalty
Owner doesn't come, transporter pays	100% of tax	200% of tax amount OR ₹25,000, whichever is LESS	Tax + Higher Penalty

For Owner: Tax + Min(100% of tax, ₹25,000)
For Transporter (if owner absent): Tax + Min(200% of tax, ₹25,000)

Example - Section 129 Penalty Calculation

Scenario 1: Small Amount

Goods worth ₹1,00,000 seized. GST @ 18% = ₹18,000. No e-way bill.

If Owner Pays:

Tax: ₹18,000
Penalty: Min(100% of ₹18,000, ₹25,000) = ₹18,000
Total: ₹36,000

If Transporter Pays (owner absent):

Tax: ₹18,000
Penalty: Min(200% of ₹18,000 = ₹36,000, ₹25,000) = ₹25,000
Total: ₹43,000

Scenario 2: Large Amount

Goods worth ₹10,00,000 seized. GST @ 28% = ₹2,80,000. Documents missing.

If Owner Pays:

Tax: ₹2,80,000
Penalty: Min(100% of ₹2,80,000 = ₹2,80,000, ₹25,000) = ₹25,000
Total: ₹3,05,000

If Transporter Pays:

Tax: ₹2,80,000
Penalty: Min(200% of ₹2,80,000 = ₹5,60,000, ₹25,000) = ₹25,000
Total: ₹3,05,000 (same as owner, capped at ₹25,000)

Key Insight: Penalty is capped at ₹25,000 maximum under Section 129, regardless of tax amount!

Procedure for Release of Detained Goods - Section 129(2)

Step-by-Step Process for Goods Release

Step 1: Detention by Officer

Proper officer intercepts goods in transit
Issues detention order (Form GST MOV-06)
Seizes goods and conveyance
Prepares detention/seizure memo

Step 2: Notice Issuance

Officer issues notice (Form GST MOV-07) specifying:
- Tax amount payable
- Penalty amount
- Reason for detention
- Time limit for response (usually 7 days)

Step 3: Payment for Release

Owner/transporter pays:
- Applicable tax
- Penalty as per Section 129(1)
Payment via Form GST DRC-03
Proof of payment submitted to officer

Step 4: Release Order

Officer issues release order (Form GST MOV-08)
Goods and conveyance released immediately
If goods perishable, released on bank guarantee/security

Time Limit: Should be completed within 7 days from detention (in practice, can take longer)

What if Goods Not Released? - Section 129(4)

If owner/transporter doesn't pay within 7 days:

Adjudicating Authority initiates confiscation proceedings
Issues Show Cause Notice (Form GST MOV-09)
Provides opportunity of hearing
May order confiscation of goods
Person can get goods released by paying:
- Fine: Equal to market value of goods, OR
- Penalty + Tax: If opts for penalty route instead of confiscation

If goods perishable or hazardous: May be sold immediately, proceeds kept with department

Section 130 - Confiscation of Goods or Conveyances & Levy of Penalty

Section 130 deals with confiscation (permanent seizure) of goods and vehicles used for transporting such goods.

When Can Goods/Conveyance Be Confiscated?

Circumstances for Confiscation - Section 130(1)

Goods liable for confiscation if:

Supplied or received in contravention of GST provisions to evade tax
Not accounted for in books to evade tax
Supplied without invoice OR on false invoice to evade tax
Being concealed
Owner of goods is not traceable
Goods doesn't tally with documents
ITC availed on such goods is not within GST provisions

Conveyance (vehicle) liable for confiscation if:

Used for transporting goods liable for confiscation (above scenarios)
Exception: Vehicle can avoid confiscation if owner proves he was not party to misuse and exercised due diligence

Example: Truck carrying goods without e-way bill - truck can be confiscated along with goods (unless owner proves innocence)

Option to Pay Fine Instead of Confiscation - Section 130(2)

Redemption Fine (Pay Fine, Get Goods Back)

Person can get confiscated goods/conveyance released by paying "fine in lieu of confiscation"

Fine Amount:

Confiscated Item	Fine Amount (in lieu of confiscation)
Goods	Upto market value of goods confiscated
Conveyance (Vehicle)	₹2 lakh for goods carriage ₹1 lakh for passenger conveyance

How it works:

Adjudicating Authority orders confiscation
BUT gives option to pay fine
If fine paid within time limit, goods/vehicle released
If fine not paid, goods permanently confiscated and sold

Practical Approach: Authorities usually provide redemption fine option rather than permanently confiscating, as it realizes revenue for government

Example - Section 130 Confiscation & Fine

Case: Truck intercepted carrying mobile phones worth ₹50 lakh. Invoices show value as only ₹20 lakh. Clear case of tax evasion and false invoices.

Proceedings:

Step 1: Detention (Section 129)

Goods and truck detained
Notice issued for immediate release on payment of tax + penalty
Owner doesn't pay

Step 2: Confiscation Proceedings (Section 130)

Show Cause Notice issued for confiscation
After hearing, Adjudicating Authority orders:
- Confiscation of goods (mobile phones worth ₹50 lakh)
- Confiscation of truck (goods carriage vehicle)

Step 3: Option Given - Pay Fine

For Goods: Fine in lieu of confiscation = up to ₹50 lakh (market value)
For Truck: Fine = ₹2 lakh (goods carriage)
Total Fine Option: Up to ₹52 lakh

Step 4: Owner's Decision

Option A: Pay fine of (say) ₹40 lakh for goods + ₹2 lakh for truck = ₹42 lakh, get everything back
Option B: Don't pay fine, goods permanently confiscated and sold by department, truck auctioned

Result: Most owners pay redemption fine as goods worth more than fine amount

Section 132 - Prosecution Provisions

Section 132 is the criminal prosecution provision under GST - the most serious consequence. It provides for imprisonment along with fine.

Offences Liable for Prosecution - Section 132(1)

List of Prosecutable Offences under Section 132(1)

General Threshold: Prosecution applicable where tax sought to be evaded OR ITC wrongly availed/utilized OR refund wrongly taken exceeds ₹2 Crore

However, certain offences are ALWAYS prosecutable regardless of amount

Clause	Offence	Threshold for Prosecution	Imprisonment
(a)	Supply of goods/services without issue of invoice OR issues false/wrong invoice with intent to evade tax	Tax > ₹2 Crore	Up to 5 years + fine
(b)	Issues invoice/bill without actual supply of goods/services leading to wrongful ITC availed by recipient	ITC > ₹2 Crore	Up to 5 years + fine
(c)	Avails ITC using false/fake invoice OR by other fraudulent means	ITC > ₹2 Crore	Up to 5 years + fine
(d)	Collects tax but wilfully fails to pay to Government beyond 3 months	Tax > ₹2 Crore	Up to 5 years + fine
(e)	Evades tax, fraudulently avails/uses ITC, or fraudulently obtains refund	Tax/ITC/Refund > ₹2 Crore	Up to 5 years + fine
(f)	Obstructs or prevents officer from discharge of duties	ALWAYS (No threshold)	Up to 5 years + fine
(g)	Acquires possession or deals in goods knowing they are liable for confiscation	Goods value > ₹2 Crore	Up to 5 years + fine
(h)	Receives/deals in supply of services knowing they involve tax evasion	Tax > ₹2 Crore	Up to 5 years + fine
(i)	Tampers/destroys material evidence or documents	ALWAYS (No threshold)	Up to 5 years + fine
(j)	Fails to supply information OR supplies false information	ALWAYS (No threshold)	Up to 5 years + fine
(k)	Attempts to commit or abets commission of above offences	As per main offence	Up to 5 years + fine

Punishment - Section 132(1)

Imprisonment Terms

Amount of Tax/ITC/Refund Involved	Type of Offence	Maximum Imprisonment	Nature
Above ₹5 Crore	Cognizable & Non-bailable	5 years	Police can arrest without warrant; Bail requires court approval
₹2 Crore to ₹5 Crore	Non-cognizable but Bailable	5 years	Arrest requires warrant; Bail as right
Below ₹2 Crore	NO Prosecution (only penalty)	-	Only penalty under Section 122/125

Additional Provisions:

Fine: In addition to imprisonment, court may impose fine (no limit specified)
Second or Subsequent Offence: Minimum imprisonment increased (practice varies)
Corporate Offenders: Company AND its directors/key personnel can be prosecuted

Who Can Be Prosecuted? - Section 132(2) to (5)

Liability of Different Persons

1. Companies - Section 132(2)

If offence committed by Company:

Company liable
AND every person who at time of offence was in-charge of and responsible for conduct of business
Directors, Manager, Secretary, etc. deemed guilty
Exception: Person can prove:
- Offence committed without his knowledge, OR
- He exercised all due diligence to prevent offence

With Consent/Connivance: If proved that offence committed with consent or connivance of director/manager, that person ALSO liable for prosecution

2. Partnership Firms - Section 132(3)

If offence committed by Firm:

Firm liable
Every partner deemed guilty and liable
Exception: Partner can prove offence committed without his knowledge or he exercised due diligence

3. Limited Liability Partnerships (LLP) - Section 132(3)

Same as partnership firms - LLP and every partner liable

4. Hindu Undivided Family (HUF) - Section 132(4)

If offence committed by HUF:

Karta (Head) liable
Every member who was in-charge deemed guilty

5. Trust - Section 132(5)

If offence committed by Trust:

Trustees liable

Protection from Prosecution - Section 132(4)

When Prosecution Cannot Be Launched - Section 132(4)

No prosecution if:

Tax + Interest + Penalty PAID: Person has paid tax, interest due, and penalty under Section 73 or 74 before filing of prosecution complaint
Compounding Done: Offence has been compounded under Section 138 (compounding application accepted and amount paid)

Practical Implication: If you realize that you're in trouble, quickly pay all dues including penalty BEFORE complaint filed - prosecution can be avoided!

Important Timing:

Payment must be made before filing of complaint in court
Once complaint filed, payment doesn't bar prosecution (though may be considered as mitigating factor by court)
This is major incentive for voluntary compliance

Example - Section 132 Prosecution

Case: M/s ABC Enterprises runs fake invoice racket. Issues invoices worth ₹30 crore without actual supply of goods. Recipients avail ITC of ₹5.4 crore (18% GST).

Analysis:

Offence:

Section 132(1)(b) - Issues invoice without supply leading to wrongful ITC
ITC involved: ₹5.4 crore (above ₹5 crore threshold)

Nature:

Cognizable & Non-bailable (amount > ₹5 crore)
Police can arrest without warrant
Bail not automatic, requires court permission

Prosecution:

Imprisonment: Up to 5 years
Fine: As determined by court (could be substantial)
Who can be prosecuted:
- Company - M/s ABC Enterprises
- Directors - All directors of company
- Key managerial persons - Managing Director, CFO, etc.
- Anyone with consent/connivance

Penalty (separate from prosecution):

Under Section 122(1)(ii): ₹5.4 crore (tax amount involved)
Interest @ 18% p.a. from date of wrongful ITC till payment

How to Avoid Prosecution:

If detected BEFORE complaint filed: Pay full tax (₹5.4 crore) + interest + penalty
OR apply for compounding under Section 138
Once these done, prosecution cannot be launched

Actual Outcome (typical):

Department issues Show Cause Notice
Company pays tax + interest + penalty IMMEDIATELY
Applies for compounding
Compounding granted on payment of compounding amount
Prosecution avoided, but heavy financial hit taken

Arrest & Bail Provisions - Section 69

Section 69 grants power to arrest to GST officers in cases of serious offences. This is one of the most feared provisions.

When Can Person Be Arrested? - Section 69(1)

Conditions for Arrest under GST

Commissioner can authorize arrest if:

Reasons to Believe: Person has committed offence specified in Section 132(1) OR Section 132(2)
Amount Threshold: Tax sought to be evaded OR ITC wrongly availed/utilized OR refund wrongly claimed exceeds ₹5 Crore
Nature of Offence: Offence must be cognizable and non-bailable

Important Limitations:

Only Commissioner or officer authorized by him can arrest (not junior officers)
Must have "reasons to believe" (documented grounds required)
Arrest must be for offences listed in Section 132
Amount must exceed ₹5 crore (for cognizable offences)

Who Can Be Arrested:

Individual proprietor
Partners of firm
Karta of HUF
Directors of company
Key managerial personnel
Any person found responsible for offence

Procedure for Arrest - Section 69(2) & (3)

Arrest Procedure under GST

Step 1: Authorization

Commissioner must authorize the arrest in writing
Authorization should specify grounds and offence

Step 2: Arrest

Authorized officer arrests person
Person informed of grounds of arrest
Arrest memo prepared

Step 3: Inform Person of Grounds - Section 69(2)

Person must be informed of grounds of arrest
Cannot be arrested without informing reason

Step 4: Production Before Magistrate - Section 69(3)

Person arrested must be produced before Magistrate within 24 hours
24 hours excludes journey time from place of arrest to Magistrate court
Cannot be detained beyond 24 hours without Magistrate's order

Step 5: Magistrate's Order

Magistrate may:
- Grant police custody (for investigation)
- Send to judicial custody (jail)
- Grant bail (if offence bailable)

Bail Provisions - Section 132(1) proviso

Bail - When and How?

For Offences above ₹5 Crore (Cognizable & Non-Bailable):

Bail NOT automatic
Person must approach court with bail application
Court has discretion to grant or refuse bail
Usually granted on conditions:
- Furnishing heavy bail amount/surety
- Surrendering passport
- Regular appearance before investigating officer
- Not leaving country without permission

For Offences between ₹2-5 Crore (Non-Cognizable but Bailable):

Bail as a matter of right
Court must grant bail on furnishing bail bond
Cannot be refused bail (except in exceptional circumstances)

Supreme Court Guidelines on Arrest:

Arrest should be last resort, not routine
Must record reasons for arrest
Arrest not warranted if person cooperating
If person paying dues and cooperating, arrest not necessary

⚠️ Recent Strictness on Arrests

Post-2022 Trend: Following Supreme Court criticism of arbitrary GST arrests, guidelines issued:

Board Instructions: CBIC has issued instructions that arrest should be exceptional, not routine
Commissioner's Personal Satisfaction: Commissioner himself must be satisfied, cannot be delegated
Reasons to be Recorded: Written reasons for arrest must be recorded before arrest
Cooperating Persons: If person cooperating in investigation, arrest generally not made
Bail More Liberal: Courts granting bail more liberally if person paying dues

Practical Reality (2026): Arrests have reduced significantly compared to 2018-2021 period. Now mostly for very large fake invoice cases with non-cooperating accused.

Search & Seizure Powers - Section 67

Section 67 empowers GST officers to conduct search and seizure at business premises.

When Can Search Be Conducted? - Section 67(1)

Search Powers under GST

Commissioner or authorized officer can search if:

Reasons to Believe: Person has:
- Secreted/stored goods in contravention of GST provisions, OR
- Kept accounts/documents which may be useful for proceedings
Person likely to conceal: Such goods, accounts or documents

Places That Can Be Searched:

Place of business
Any other place (residence, warehouse, etc.)
Any vehicle/vessel/aircraft

Authorization Required:

Commissioner level officer must authorize search
Search warrant must be issued before search
Warrant should specify place, reason, and items to be searched

Search Procedure - Section 67(2) to (7)

Step-by-Step Search Process

Step 1: Authorization & Warrant

Commissioner issues search authorization
Team formed (usually 3-5 officers)
Search warrant prepared specifying premises and grounds

Step 2: Entry & Search

Officers reach premises (usually early morning 6-7 AM)
Show search warrant to occupier/representative
If no one present or entry refused, can break open locks
Search conducted in presence of two independent witnesses

Step 3: Seizure

Officers seize:
- Goods: Found to be liable for confiscation
- Documents: Books, accounts, computer files, hard disks
- Cash: If suspected to be from suppressed sales
Seizure list (panchnama) prepared listing all seized items
Signed by officers, occupier, and witnesses

Step 4: Inventory & Receipt

Detailed inventory of seized goods/documents made
Receipt issued to person (Form GST INS-02)
Copy given to occupier

Step 5: Return of Documents - Section 67(6)

Documents to be returned within 30 days after certified copies taken
In practice, may take longer (2-3 months)
Computer hard disks cloned and originals sometimes returned

Step 6: Release of Seized Goods - Section 67(7)

Goods must be released on provisional basis if person:
- Furnishes security (bank guarantee or FD), OR
- Pays penalty as per Section 129 provisions
Goods cannot be retained indefinitely without order

Rights of Person During Search

Your Rights:

See Authorization: Ask to see search warrant and authorization - officers must produce
Call Lawyer/CA: You can call your professional advisor immediately
Witnesses Present: Insist on proper witnesses (not department persons)
Verify Inventory: Check seized items list carefully before signing panchnama
Take Photos/Videos: You can document the search process (not prohibited)
Don't Sign Blank Papers: Never sign blank papers or incomplete statements
Statement Rights: If statement recorded, you have right to:
- Read statement before signing
- Make corrections
- Add clarifications
- Refuse to sign if not satisfied (will be noted)
Copy of Panchnama: Insist on receiving copy of search panchnama immediately

What Officers CANNOT Do:

Cannot search residential premises without specific authorization
Cannot physically harm or threaten
Cannot take items not related to GST offences
Cannot keep documents beyond reasonable period
Cannot detain you at premises indefinitely

Challenging Search/Seizure

If You Believe Search Was Illegal:

Writ Petition: File in High Court under Article 226 challenging search
Grounds for Challenge:
- No proper authorization
- Search beyond authorized premises
- Seized items not related to GST
- Procedural violations
- No reasons to believe recorded
Relief: Court can:
- Quash search
- Order return of seized goods/documents
- Restrain department from further action based on illegal search

Compounding of Offences - Section 138

Compounding is a mechanism to settle offences by paying compounding amount, thereby avoiding prosecution. It's like an "out-of-court settlement" with the tax department.

What is Compounding?

Compounding of Offences - Section 138

Meaning: A process by which person can get relief from prosecution by paying a compounding amount (monetary settlement) as determined by Commissioner

Effect of Compounding:

Prosecution Stops: No criminal proceedings or they get terminated
No Imprisonment: Person avoids jail sentence
No Criminal Record: No conviction recorded
BUT Penalty Still Payable: Compounding doesn't waive penalties under Section 122/125

What Compounding Does NOT Waive:

Tax liability
Interest
Penalties under Section 122, 125, 129, 130
Only provides relief from PROSECUTION (criminal liability)

Which Offences Can Be Compounded? - Section 138(1)

Compoundable Offences

All offences under Section 132 can be compounded EXCEPT:

Person previously convicted for same offence by court
Offence involving loss of revenue > ₹5 crore (earlier limit was different, now uniform)

Practically: Most prosecutions under Section 132 are compoundable if:

This is first-time offence (not repeat offender)
Amount involved doesn't exceed threshold
Person agrees to pay compounding amount

Examples of Compoundable Offences:

Fake invoice issuance (if first time and amount ≤ ₹5 crore)
Wrong ITC availment with intent to evade
Tax collection but non-payment to government
Obstruction to officers
Tampering with records

Compounding Amount - Section 138(2)

Stage of Proceedings	Minimum Compounding Amount	Maximum Compounding Amount
BEFORE filing of prosecution complaint in court	50% of tax involved	150% of tax involved
AFTER filing of prosecution complaint	100% of tax involved	200% of tax involved

Apply Early for Compounding = Lower Compounding Amount
(50%-150% vs 100%-200% of tax)

How Compounding Amount is Determined:

Commissioner has discretion to fix amount within above range
Factors considered:
- Nature and gravity of offence
- Whether first-time or repeat
- Amount of tax involved
- Conduct of person (cooperation or not)
- Mitigating circumstances
Usually, for first-time offenders showing remorse and paying all dues, amount fixed at lower end
For deliberate, large-scale fraud, amount closer to maximum

Procedure for Compounding - Section 138(3) to (9)

Step-by-Step Compounding Process

Step 1: Application for Compounding

Person files application to Commissioner in Form GST CPD-01
Application should contain:
- Details of offence
- Stage of proceedings
- Tax, interest, penalty already paid
- Request for compounding
- Undertaking to pay compounding amount
Supporting documents attached (SCN, orders, payment proof, etc.)

Step 2: Payment of Compounding Amount (Initial)

Along with application, person must pay 25% of compounding amount (estimated)
If exact amount unknown, pay 25% of maximum compounding amount
This is mandatory for application to be considered

Step 3: Commissioner's Consideration

Commissioner examines application
May call for additional documents/information
May grant personal hearing
Determines compounding amount within statutory limits

Step 4: Compounding Order - Form GST CPD-02

Commissioner passes order either:
- Allowing compounding: Fixes compounding amount
- Rejecting application: If not satisfied or offence non-compoundable
Order communicated to applicant

Step 5: Payment of Balance Amount

Person pays balance compounding amount (already paid 25%)
Payment within 30 days of order
If not paid, compounding order stands withdrawn

Step 6: Certificate of Compounding - Form GST CPD-03

After full payment, Commissioner issues Certificate of Compounding
This certificate is proof that offence has been compounded
Person gets copy

Step 7: Effect on Prosecution

If prosecution not yet filed: Department will not file complaint
If prosecution already filed: Department files application in court for withdrawal of complaint. Court usually allows withdrawal upon seeing compounding certificate.

Time Limit: Commissioner should decide application within 180 days from receipt (though can extend with reasons)

Example - Compounding Calculation

Case: Mr. Sharma issued fake invoices worth ₹3 crore. GST component = ₹54 lakh. Show Cause Notice issued proposing prosecution under Section 132(1)(b). Prosecution complaint not yet filed in court.

Compounding Application:

Tax Involved: ₹54 lakh

Compounding Amount Range (before complaint filed):

Minimum: 50% of ₹54 lakh = ₹27 lakh
Maximum: 150% of ₹54 lakh = ₹81 lakh

Step 1: Application Filed

Mr. Sharma files compounding application (Form GST CPD-01)
Pays 25% of estimated compounding amount upfront = 25% of ₹81 lakh = ₹20.25 lakh

Step 2: Commissioner's Order

After considering gravity, first-time offence, cooperation, Commissioner fixes compounding amount at ₹40 lakh (mid-range)

Step 3: Balance Payment

Balance amount: ₹40 lakh - ₹20.25 lakh = ₹19.75 lakh
Mr. Sharma pays balance within 30 days

Step 4: Certificate Issued

Commissioner issues Compounding Certificate
Prosecution complaint will NOT be filed
Mr. Sharma avoids criminal prosecution and jail

Total Financial Hit to Mr. Sharma:

Tax: ₹54 lakh (must be paid separately)
Interest @ 18% p.a.: (Say) ₹8 lakh
Penalty u/s 122: ₹54 lakh (equal to tax)
Compounding Amount: ₹40 lakh
TOTAL: ₹1.56 crore

But Benefit: No jail time, no criminal record, business can continue

Important Points about Compounding

⚠️ Key Things to Know About Compounding

No Bar on Assessment: Compounding doesn't stop assessment proceedings. Tax, interest, penalty still payable.
No Multiple Compounding: Person whose application rejected cannot apply again for same offence
Second Offence Not Compoundable: If person previously convicted for same offence by court, compounding not available
Compounding Not a Right: Commissioner has discretion. No automatic compounding.
Withdrawal if Not Paid: If compounding amount not paid within 30 days, compounding order stands withdrawn automatically
No Refund: Compounding amount once paid is not refundable even if later person proves innocence
Apply Early: Better to apply before prosecution complaint filed - lower compounding amount (50-150% vs 100-200%)
Not Admission of Guilt: Legally, applying for compounding is not admission of guilt, but practically treated as such

Prosecution Procedure - Step by Step

Understanding how prosecution actually proceeds helps in taking timely defensive action.

Complete Prosecution Process under GST

Stage 1: Investigation

GST Department receives intelligence or detects irregularities
Investigation initiated - statements recorded, documents called, searches conducted
Officers gather evidence of offence
Quantum of tax evasion/ITC/refund calculated

Stage 2: Show Cause Notice (SCN)

Department issues SCN proposing:
- Demand of tax + interest
- Imposition of penalty
- Initiation of prosecution proceedings
Person given opportunity to respond (usually 30-90 days)

Stage 3: Adjudication

Personal hearing granted
Adjudicating Authority considers reply and evidence
Order passed confirming:
- Tax demand
- Interest
- Penalty u/s 122/125
- Recommendation for prosecution (if offence under Section 132)

Stage 4: Commissioner's Sanction for Prosecution - Section 132(5)

Mandatory Sanction Required: Commissioner (or Additional/Joint Commissioner) must accord sanction before filing prosecution complaint
Sanction application sent with case details, evidence, quantum
Commissioner examines and grants sanction if satisfied
Without Sanction: Court will dismiss prosecution complaint

Stage 5: Filing of Complaint in Court

After sanction, prosecution complaint filed in Judicial Magistrate's Court
Complaint contains:
- Details of accused
- Offence committed (Section 132 clause specified)
- Evidence/documents
- List of witnesses
- Prayer for punishment
Court registers case and issues summons to accused

Stage 6: Court Proceedings

Appearance: Accused appears (personally or through lawyer)
Bail Application: If arrested, applies for bail
Charge Framing: Court frames charges after hearing both sides
Trial: Regular trial proceedings:
- Prosecution presents evidence and witnesses
- Cross-examination by defense
- Defense presents its case
- Arguments on both sides
Judgment: Court delivers judgment (conviction or acquittal)

Stage 7: Sentencing (if convicted)

If found guilty, court hears on quantum of sentence
Sentence pronounced (imprisonment + fine)

Stage 8: Appeal (if convicted)

Accused can appeal to Sessions Court
Further appeal to High Court
Final appeal to Supreme Court

Total Time: Prosecution proceedings typically take 3-7 years from complaint to final judgment (varies widely)

Defenses & Rights of Taxpayers

How to Defend Against GST Prosecution/Penalty

1. Procedural Defenses

No Proper SCN: Show Cause Notice not issued or defective
No Personal Hearing: Opportunity of hearing not provided
No Sanction: Commissioner's sanction for prosecution not obtained (mandatory u/s 132(5))
Limitation Expired: SCN issued beyond time limit
Illegal Search: Search conducted without proper authorization
Violation of Natural Justice: Principles of natural justice not followed

2. Substantive Defenses

No Offence Committed: Acts alleged don't constitute offence under GST
Bona Fide Belief: Actions based on genuine interpretation of law
No Intent to Evade: No mens rea (guilty mind) - genuine mistake/error
Below Threshold: Amount involved below ₹2 crore (for prosecution) or other thresholds
Already Paid: Tax, interest, penalty already paid before complaint filed
Documents Genuine: All invoices/documents genuine, ITC legitimately availed
Due Diligence Exercised: All reasonable care taken to comply

3. Mitigating Factors

First-Time Offender: No previous history of violations
Cooperation: Full cooperation with investigation
Voluntary Disclosure: Self-disclosed error before detection
Payment of Dues: Promptly paid all tax, interest, penalty
Professional Advice: Acted on advice of CA/tax consultant
Small Scale Business: Not large-scale organized fraud

4. Constitutional Defenses

Arbitrary/Unreasonable: Action disproportionate to violation
Violation of Article 14: Discriminatory treatment
Violation of Article 21: Illegal arrest/detention
Ultra Vires: Provision itself unconstitutional

Your Rights During Proceedings

Right to Remain Silent: Cannot be forced to give incriminating statement (Article 20(3))
Right to Legal Representation: Can engage CA/lawyer at all stages
Right to Cross-Examine: Can cross-examine department witnesses
Right to Present Evidence: Submit documents and call witnesses
Right to Appeal: Against every adverse order
Right to Compounding: Apply for compounding of offences
Right against Arbitrary Arrest: Arrest must follow procedure
Right to Bail: Cannot be denied bail arbitrarily (for bailable offences)
Right to Fair Trial: Entitled to fair, impartial trial
Presumption of Innocence: Innocent until proven guilty

Practical Case Studies

Case Study 1: Fake Invoice Racket

Facts:

M/s XYZ Enterprises registered under GST
Issued invoices worth ₹100 crore without actual supply of goods
Recipients availed ITC of ₹18 crore
Investigation revealed organized racket involving 50+ fake firms

Proceedings:

Search: Simultaneous searches at 15 locations, documents/computers seized
Arrest: 3 directors arrested (amount > ₹5 crore - cognizable)
SCN Issued: Demanding ₹18 crore tax + interest + penalty
Prosecution: Complaint filed u/s 132(1)(b) and (c)

Outcome:

Directors in judicial custody for 45 days, then bail granted
Company paid ₹18 crore tax + ₹10 crore interest
Applied for compounding - granted on payment of ₹25 crore (approx 140% of tax)
Total financial hit: ₹53 crore
But avoided jail sentence and criminal conviction
Business continued (though reputation damaged)

Lessons:

Large-scale fake invoices attract immediate prosecution
Compounding available but very expensive
Total cost far exceeds tax evaded
Not worth the risk

Case Study 2: E-way Bill Violation

Facts:

Transporter carrying electronics worth ₹25 lakh
E-way bill generated but validity expired (goods delayed in transit)
Truck intercepted by GST officers

Proceedings:

Detention: Goods and truck detained u/s 129
Notice: Form GST MOV-07 issued demanding tax + penalty
Calculation:
- Tax: 18% of ₹25 lakh = ₹4.5 lakh
- Penalty: Min(100% of tax = ₹4.5 lakh, ₹25,000) = ₹25,000
- Total: ₹4.75 lakh

Outcome:

Owner immediately paid ₹4.75 lakh
Goods and truck released same day
No further proceedings

Lessons:

E-way bill compliance critical
Even minor violations attract immediate penalty
Quick payment secures release
Penalty capped at ₹25,000 under Section 129 (beneficial)

Case Study 3: Wrong ITC Claim (Bonafide Mistake)

Facts:

M/s ABC Traders claimed ITC of ₹50 lakh
Some suppliers turned out to be non-existent/fake
ABC had genuine belief suppliers were real, had verified documents
Total wrong ITC: ₹12 lakh

Proceedings:

SCN issued proposing reversal of ₹12 lakh ITC + penalty u/s 122
No prosecution (amount below ₹2 crore threshold)

Defense:

Proved bonafide belief - had verified GSTIN, obtained documents
Demonstrated due diligence
Immediately reversed ITC upon detection
Paid interest voluntarily

Outcome:

ITC reversal: ₹12 lakh (mandatory)
Interest: ₹1.5 lakh
Penalty: Waived by Adjudicating Authority considering bonafide belief and due diligence
Total: ₹13.5 lakh (instead of ₹25.5 lakh with penalty)

Lessons:

Bonafide belief and due diligence are valid defenses
Prompt action reduces liability
Voluntary compliance viewed favorably
Penalty can be waived if no intent proven

Latest Amendments & Updates (2024-2026)

Recent Developments in GST Prosecution & Penalty

1. CBIC Instructions on Arrest (Circular dated Oct 2024)
Arrest as Last Resort: Clear instructions that arrest should be exceptional, not routine
Commissioner's Personal Satisfaction: Must be satisfied personally, cannot delegate
Documented Reasons: Reasons for arrest must be recorded in writing
Cooperating Persons: If person cooperating, arrest generally avoided


2. Amendment to Compounding Thresholds (2025)
Earlier different thresholds for different offences
Now unified: Compounding available if tax involved ≤ ₹5 crore (for all offences)
Makes compounding more accessible


3. E-way Bill Penalty Rationalization (2025)
Earlier penalty under Section 129 was 100% or 200% of tax with high amounts
Now clearly capped at ₹25,000 maximum
Reduces burden on transporters for minor lapses


4. Faceless Penalty Proceedings (Pilot - 2026)
Introduced in select zones
Penalty proceedings conducted electronically without face-to-face interaction
Aims to reduce harassment and bring transparency
Expected nationwide rollout by 2027


5. Supreme Court Judgments
On Arrest: SC criticized routine arrests, held that arrest should be proportionate to offence
On Sanction: Reiterated that Commissioner's sanction u/s 132(5) is mandatory, without it prosecution invalid
On Compounding: Held that compounding doesn't amount to admission of guilt


6. Increased Prosecution Activity (2025-26)
Department more active in large fake invoice cases
Special drives against GST fraudsters
Coordination with police/ED/CBI in major cases
Several high-profile convictions obtained

Compliance Tips to Avoid Penalties & Prosecution

Best Practices for GST Compliance

1. Invoice & Documentation

Issue proper tax invoices for all supplies
Ensure invoice details accurate (GSTIN, HSN, amount, tax, etc.)
Never issue invoice without actual supply
Keep all supporting documents (LR, delivery challan, etc.)
Maintain proper books of accounts

2. ITC Claims

Verify supplier's GSTIN before availing ITC
Check if supplier filed returns (GSTR-1/GSTR-3B)
Avail only eligible ITC (check blocked credit list)
Don't claim ITC on fake/suspicious invoices
Reconcile ITC claimed vs. available in GSTR-2B/2A

3. E-way Bill Compliance

Generate e-way bill for all applicable movements
Ensure validity period sufficient for transit
Extend validity if goods delayed
Carry physical/digital copy during transport
Match e-way bill details with actual goods

4. Timely Payments

Pay collected GST to government within due dates
Never use collected GST for business purposes
File returns on time
Pay self-assessed tax immediately
Don't delay beyond 3 months (triggers Section 132 prosecution)

5. Supplier Verification

Verify supplier's existence (visit premises if large transactions)
Check supplier's track record
Obtain valid documents
Be wary of suppliers offering abnormally low prices
Avoid "accommodation entries"

6. Response to Notices

Respond to all GST notices promptly
Never ignore notices
Provide complete, accurate information
Cooperate with investigations
Engage professional help if serious issues

7. Voluntary Disclosure

If error discovered, self-disclose immediately
Pay tax + interest voluntarily
File revised return if needed
Shows good faith, reduces penalties
Better than being detected later

8. Professional Guidance

Consult CA/tax expert for complex transactions
Get advisory opinions in writing
Attend GST training programs
Stay updated on latest GST updates
Don't rely on hearsay or incomplete knowledge

9. Internal Controls

Implement strong internal controls
Segregate duties (purchase, accounts, tax filing)
Regular internal audits
Review ITC claims before filing returns
Train employees on GST compliance

10. Record Maintenance

Maintain all records as per Section 35-36 requirements
Keep for minimum 6 years (72 months)
Maintain both physical and digital copies
Organize systematically for easy retrieval
Back up digital records regularly

⚠️ Red Flags That Attract Scrutiny

Department Targets These Scenarios:

Sudden spike in turnover or ITC claims
ITC > Output tax consistently (refund cases)
Transactions with suppliers known for fake invoices
Mismatches in GSTR-1 vs GSTR-3B
Late filing or non-filing of returns
Registered at residential addresses (for large businesses)
Multiple registrations, frequent cancellations
Cash transactions exceeding limits
Export claims without proper documentation
Suppliers/customers from different states without business logic

If Any Red Flag Applies:

Proactively prepare explanations and documents
Ensure all compliance aspects covered
Get professional advisory
Expect scrutiny and be ready

Frequently Asked Questions (FAQs) - GST Prosecution & Penalty

Q1. What is the difference between penalty and prosecution under GST?

Penalty is a monetary fine imposed for violations (Sections 122, 125, 129, 130) - purely financial consequence. Prosecution is criminal proceeding under Section 132 that can result in imprisonment up to 5 years plus fine. Penalty applies to all violations; prosecution only for serious offences where tax/ITC/refund involved exceeds ₹2 crore or for specific offences like obstruction, tampering records.

Q2. What is the penalty for issuing fake invoices under GST?

Under Section 122(1)(ii), penalty for issuing invoice without actual supply is ₹10,000 OR tax amount involved, whichever is HIGHER. Additionally, if tax involved exceeds ₹2 crore, prosecution under Section 132(1)(b) with imprisonment up to 5 years can be initiated. If amount exceeds ₹5 crore, it becomes cognizable and non-bailable offence.

Q3. When can GST officer arrest a person?

Under Section 69, Commissioner or authorized officer can arrest if person committed offence under Section 132 where tax/ITC/refund exceeds ₹5 crore (for cognizable offences). Arrest requires proper authorization, person must be informed of grounds, and must be produced before Magistrate within 24 hours. Recent CBIC instructions emphasize arrest should be last resort, not routine.

Q4. What is penalty under Section 129 for goods detained in transit?

Under Section 129, for goods moved without proper documents/e-way bill:

If owner pays: 100% applicable tax + penalty equal to Min(100% of tax OR ₹25,000)
If transporter pays (owner absent): 100% tax + penalty equal to Min(200% of tax OR ₹25,000)

Key point: Penalty is capped at maximum ₹25,000 regardless of tax amount, making it relatively lenient for high-value goods.

Q5. What is compounding of offences under GST?

Compounding (Section 138) is a mechanism to settle prosecution by paying compounding amount, thereby avoiding imprisonment and criminal record. Compounding amount ranges from 50%-150% of tax (if applied before prosecution complaint filed) or 100%-200% of tax (after complaint filed). Available for most offences except repeat offenders or where amount exceeds ₹5 crore. Compounding doesn't waive tax, interest, or penalty - only provides relief from criminal prosecution.

Q6. Is penalty under Section 122 mandatory or can it be waived?

Penalty under Section 122 is not automatic. Adjudicating Authority has discretion to reduce or waive penalty if person proves that:

Acted with bonafide belief and no intent to evade tax
Exercised due diligence in compliance
Violation was inadvertent/technical
Cooperated fully and paid dues promptly

Courts have held that penalty is not automatic for every violation - must consider circumstances and intent.

Q7. What happens if e-way bill expires during transit?

If e-way bill validity expires during transit, goods can be detained under Section 129. Officer will demand applicable tax + penalty (capped at ₹25,000). To avoid this:

Extend e-way bill validity BEFORE expiry (can extend up to 8 hours before expiry online)
Plan transit route and timing carefully
For long distances, use Part-B extension option

If detained, pay immediately for quick release. Extended validity is better defense than expired e-way bill with explanation.

Q8. Can both CGST and SGST authorities prosecute for same offence?

No, only ONE authority (CGST OR SGST) can prosecute for same offence to avoid double jeopardy. Section 132 read with Section 6 (Administration) provides that jurisdiction is determined administratively - typically 50:50 sharing but for prosecution, coordination required to ensure single proceeding. If both file complaints, it can be challenged as violation of principle against double jeopardy.

Q9. What is the time limit for filing prosecution complaint under GST?

Under Section 132(5), no prosecution can be initiated for offences under GST Act (other than in special circumstances) after expiry of limitation period prescribed for issuance of Show Cause Notice (SCN) under Section 73/74:

Normal cases: Within 3 years from due date of annual return
Fraud/suppression cases: Within 5 years from due date of annual return

Once this period expires, prosecution cannot be initiated (though SCN for tax/penalty can still be issued if within separate limitation).

Q10. Can I be prosecuted even after paying tax, interest, and penalty?

Generally NO, if you pay tax + interest + penalty BEFORE prosecution complaint is filed in court. Section 132(4) provides protection - no prosecution can be initiated if all dues (tax + interest + penalty under Section 73/74) paid before filing of complaint. However, once complaint filed in court, payment doesn't automatically stop prosecution (though court may consider as mitigating factor). This is strong incentive for voluntary compliance.

Q11. What is penalty for non-filing of GST returns?

Under Section 47 (Late Fees):

₹50 per day of delay (₹25 CGST + ₹25 SGST)
Maximum: ₹10,000 (₹5,000 CGST + ₹5,000 SGST)
Nil return: ₹20 per day (₹10 CGST + ₹10 SGST), max ₹2,000

Additionally, under Section 125 general penalty may be imposed. If non-filing is deliberate to evade tax, can attract penalty under Section 122 and potentially prosecution if amount substantial.

Q12. Can penalty be imposed without issuing Show Cause Notice?

No, penalty cannot be imposed without proper Show Cause Notice (SCN) and opportunity of hearing. Principles of natural justice mandate:

Proper SCN specifying grounds and quantum
Reasonable time to respond (minimum 30 days typically)
Personal hearing if requested
Consideration of reply and evidence
Reasoned order

Penalty imposed without SCN or hearing is legally invalid and can be challenged.

Q13. What is penalty for collecting GST but not depositing to government?

If person collects GST from customers but fails to deposit to government beyond 3 months from due date:

Penalty: Under Section 122(1)(iii) - ₹10,000 or tax amount, whichever higher
Prosecution: Section 132(1)(d) - if tax exceeds ₹2 crore, imprisonment up to 5 years + fine
Interest: 18% p.a. on delayed payment

This is serious offence as involves collected tax (public money), hence stringent provisions. Department prioritizes such cases for prosecution.

Q14. Can directors of company be personally prosecuted for company's GST offence?

Yes, under Section 132(2), if offence committed by company, every person who was in-charge of and responsible for conduct of business at time of offence is deemed guilty and liable for prosecution. This includes:

Directors (executive and non-executive)
Managing Director
Manager
Secretary
Key managerial persons

Defense: Person can prove offence committed without his knowledge OR he exercised all due diligence to prevent offence. With consent/connivance provision makes personally liable directors even more vulnerable.

Q15. What is penalty for obstructing GST officer?

Obstruction of GST officer attracts:

Penalty: Section 122(3) - ₹25,000
Prosecution: Section 132(1)(f) - Imprisonment up to 5 years + fine

Important: This offence is ALWAYS prosecutable regardless of amount - no ₹2 crore threshold. Includes:

Not allowing officer to inspect premises
Refusing to produce documents
Physically blocking entry
Threatening officer
Giving false information

Best practice: Always cooperate with officers, but also know your rights.

Q16. Can compounding application be rejected?

Yes, Commissioner has discretion to reject compounding application if:

Offence is non-compoundable (repeat offender, amount > ₹5 crore)
Application incomplete or documents insufficient
Offence too serious/aggravated circumstances
Person not cooperating in investigation
Outstanding tax/penalty not paid

If rejected, person cannot apply again for same offence. Decision discretionary but must be reasonable. Can challenge rejection through writ petition if arbitrary.

Q17. What is penalty for wrong Input Tax Credit claim?

Wrong ITC claim attracts:

ITC Reversal: Mandatory reversal of wrong ITC
Interest: 18% p.a. from date of availment to reversal
Penalty: Section 122(1)(iv) - ₹10,000 or ITC amount, whichever higher
Prosecution: If ITC exceeds ₹2 crore AND fraudulent - Section 132(1)(c) - up to 5 years imprisonment

However, if bonafide mistake with due diligence, penalty can be waived. Key is proving lack of intent to evade tax.

Q18. Is Commissioner's sanction mandatory for prosecution?

Yes, absolutely mandatory. Section 132(5) requires prior sanction of Commissioner (or Additional/Joint Commissioner specifically empowered) before filing prosecution complaint. Without sanction, prosecution is legally invalid and court will dismiss complaint. This is important safeguard against frivolous prosecutions. Sanction order must be in writing with application of mind - mechanical sanction can be challenged.

Q19. Can goods be confiscated permanently under GST?

Yes, under Section 130, goods can be confiscated if:

Supplied without invoice or false invoice
Not accounted in books to evade tax
Being concealed
Owner not traceable

However, person has option to pay "redemption fine" (up to market value of goods) to get goods back instead of confiscation. For conveyance (vehicle), fine is ₹2 lakh (goods carriage) or ₹1 lakh (passenger). Most cases, redemption fine option given rather than permanent confiscation.

Q20. What if I disagree with penalty order?

If you disagree with penalty order, you have right to appeal:

First Appeal: To Appellate Authority (Commissioner Appeals) within 3 months
Second Appeal: To GST Appellate Tribunal (if formed) / High Court
Pre-deposit: 10% of disputed penalty must be paid for filing appeal
Stay of Penalty: Can apply for stay of balance amount pending appeal

Appeal must be filed within limitation period - delay can be condoned if sufficient cause shown. Don't ignore penalty orders - challenge if unjustified.

Q21. How long does prosecution case take?

GST prosecution cases typically take 3-7 years from complaint to final judgment (varies widely). Timeline:

Investigation: 6 months - 2 years
Filing of complaint: After sanction (2-6 months)
Court proceedings: 2-5 years (depends on court workload, evidence, witnesses)
Trial: Multiple hearings over months/years
Judgment: After completion of trial
Appeals: If convicted, can appeal (adds 2-5 more years)

Compounding can settle within 6-12 months, avoiding lengthy court battle.

Q22. Can I be arrested at time of search?

Generally no. Arrest under Section 69 requires:

Commissioner's specific authorization
Offence threshold met (typically ₹5 crore for arrest)
Written grounds for arrest

During search under Section 67, officers conduct search and seizure but arrest is separate action requiring higher authorization. However, if during search, extremely serious offence discovered (large fake invoice racket, destruction of evidence), officers may seek urgent arrest authorization. Best practice: Cooperate during search, engage lawyer immediately, don't give self-incriminating statements.

Q23. What is penalty for transporting goods without invoice?

Under Section 129, transporting goods without proper invoice/documents attracts:

Tax: 100% of applicable GST
Penalty: Min(100% of tax OR ₹25,000) if owner pays
Penalty: Min(200% of tax OR ₹25,000) if transporter pays (owner absent)

Additionally, under Section 122(1)(ix), penalty of ₹10,000 or tax amount (whichever higher). If habitual/organized evasion, Section 130 confiscation proceedings can be initiated. Best defense: Always carry proper invoice and e-way bill during transport.

Q24. Can penalty be imposed in addition to interest?

Yes, penalty and interest are independent:

Interest (Section 50): Compensatory - 18% p.a. on tax delayed/short-paid - ALWAYS payable
Penalty (Sections 122/125): Punitive - for violation of law - payable if violation proven

Payment of interest doesn't absolve from penalty. However, if penalty proceedings initiated, voluntary payment of tax + interest before proceedings concluded may help in reducing/waiving penalty. Both together ensure deterrence and compensation to exchequer.

Q25. What precautions should I take when buying goods to avoid ITC issues?

Due diligence checklist for ITC protection:

Verify Supplier GSTIN: Check on GST portal if active
Physical Verification: Visit supplier premises for large transactions
Check Filing Status: Verify if supplier filing returns regularly
Proper Documents: Obtain valid invoice with all details
Payment Through Banking: Pay through bank (not cash above limits)
Actual Delivery: Ensure goods actually received (LR, delivery challan)
Reasonable Price: Be wary of abnormally low prices
GSTR-2B Reconciliation: Check if supplier uploaded invoice in his GSTR-1
Track Record: Deal with reputed suppliers
Documentation: Keep complete audit trail

If supplier later found fake, your due diligence evidence can protect from penalty/prosecution.

Conclusion

GST prosecution and penalty provisions are among the most stringent in India's tax regime, reflecting the government's zero-tolerance approach towards tax evasion and fraud. Understanding these provisions is not just about avoiding punishment - it's about building a culture of compliance that protects your business, reputation, and freedom. The framework distinguishes clearly between minor lapses (attracting only monetary penalties) and serious offences (inviting both hefty fines and imprisonment), with the ₹2 crore and ₹5 crore thresholds serving as critical demarcations for prosecution and arrest respectively.

The key takeaway is that prevention is far better than cure. Investing in robust GST compliance systems, maintaining accurate records, verifying suppliers diligently, and seeking professional guidance for complex transactions costs far less than the financial and personal devastation that prosecution can bring. The examples and case studies in this guide demonstrate that the total cost of non-compliance - including tax, interest, penalties, compounding amounts, legal fees, and reputational damage - can easily exceed 3-4 times the tax initially sought to be evaded, making tax evasion an economically irrational decision apart from being legally and morally wrong.

For those who find themselves facing penalty or prosecution proceedings, remember that the law provides several defenses and remedies. The compounding mechanism under Section 138 offers a pragmatic exit route for first-time offenders willing to pay settlement amounts, while provisions like Section 132(4) incentivize voluntary compliance by protecting those who pay all dues before prosecution complaints are filed. Additionally, demonstrating bonafide belief, due diligence, and absence of intent can help in reducing or waiving penalties even when technical violations have occurred.

As GST enforcement mechanisms become increasingly sophisticated with data analytics, artificial intelligence, and inter-departmental coordination, the old strategies of evasion have become virtually impossible. The department's ability to match invoices across multiple returns, track goods movement through e-way bills, and identify suspicious patterns through risk analytics means that violations are likely to be detected sooner or later. Moreover, with the government's focus on curbing fake invoice rackets and organized GST fraud, enforcement actions have intensified significantly in recent years, with numerous high-profile arrests and prosecutions sending strong deterrent signals.

However, it's equally important to remember that GST authorities are not adversaries for honest taxpayers. The provisions are designed to catch and punish deliberate fraudsters, not to harass genuine businesses facing inadvertent compliance challenges. If you cooperate with investigations, respond to notices promptly, pay dues voluntarily when errors are discovered, and demonstrate good faith throughout, the system generally shows reasonableness. The recent CBIC instructions emphasizing that arrests should be exceptional rather than routine, and the availability of compounding for most offences, reflect this balanced approach.

Looking ahead to 2026-27 and beyond, expect continued focus on technology-enabled enforcement with initiatives like faceless penalty proceedings, automated risk assessment, and integrated enforcement with other agencies like Income Tax, Enforcement Directorate, and CBI for major cases. At the same time, genuine compliance facilitation measures like advisory services, educational programs, and dispute resolution mechanisms will also expand. The message is clear: Comply voluntarily and the system supports you; evade deliberately and face severe consequences.

Finally, if you're a business owner, director, or tax professional, make GST compliance a non-negotiable priority. Implement strong internal controls, conduct regular compliance audits, train your team on GST do's and don'ts, stay updated on latest amendments and circulars, and don't hesitate to seek professional help when in doubt. The cost of professional advice is negligible compared to the catastrophic consequences of prosecution. Remember that in GST, like in life, honesty is not just the best policy - it's the only sustainable policy.

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Disclaimer: This guide is for informational and educational purposes only and should not be construed as legal advice. GST laws, rules, and enforcement practices are subject to frequent changes. Penalty and prosecution provisions should be understood in context of latest amendments, circulars, and judicial pronouncements. Always consult qualified chartered accountants, tax practitioners, or legal professionals for advice specific to your situation. The information provided is based on law and practices as of February 2026.

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