PENALTIES : TO ERR IS HUMAN – IS GST HUMAN?

Payment of taxes is considered a
civil obligation and breach of such obligation results in penal
consequences.  The nuances of a duly
enacted statute provide the contours under which the taxes need to be
discharged and penal provisions accompany such legislations for its effective
enforcement.  Yet, it is well known that
no statute is enacted with an object to impose penalties. Rather, they are
intended to operate as a deterrent to violating of any provision. Courts have
frequently held that penalty is imposed only in cases of contumacious conduct
by the tax payer. The GST enactment is no different and this resonates from the
Statement of objects and reasons placed before the Parliament while introducing
the Central Goods & Services Tax Bill, 2017:

“…. (i) To make provision for
penalties for contravention of the provisions of the proposed legislation … ”

Practical experiences depict a
contrasting picture. One would have experienced tax administrators (both Centre
and the State) applying the penal provisions mechanically without appreciating
the purpose and instances for which penal provisions are enacted. The following
statements are a common feature in show cause notices and adjudication orders:

“Assessee has intentionally
contravened the provisions of the Act and hence liable for penalty …;
suppressed this information from the revenue with an intention to evade tax
payment….; deliberately avoided the payment of taxes knowing fully well that
the transaction is taxable;….”

Not a single order goes without
imposition of penalty even in cases where the tax demand is under debate at
higher forums. All the tax payers are painted by a single brush leading to
undesirable litigation. Sometimes, administrative authorities do not even
consider it necessary to state that penalty is being imposed and one is
enlightened about the imposition only from the demand notice or computation at
the end of the order. There is a tendency to invoke and adjudicate the penalty
merely by a stroke of a pen, leaving the battle to be fought by the assessee.
Though, Courts have time and again held that penalty is not an ‘additional tax’
rather ‘an addition to the taxes collected’, this starking difference has been
ignored by tax administrators. With this foreward, we have examined the penal
provisions under the CGST law in the subsequent paragraphs:

General Principles of Penalty

Certain principles set down by Courts
while dealing with matters on penalty have been enlisted below:

–    Penal
provisions should be strictly construed without much play. Yet, one should
ensure that the constructions fall within the contours of its Statute.

–    There
has been considerable debate on whether mens–rea is an essential
requirement for imposition of penalty towards civil offences. While it is
certainly clear that mens–rea need not always be proved for
penalty, the statutory provisions should be examined to reconcile this debate:
(a) examine the statutory provisions for any express or implied requirement of
a guilty mind (such as use of the phrases like suppression, concealment, etc.
have an inbuilt requirement of mens-rea to be established); (b) identify
if the penalty has been intended to be a civil offence or a criminal offence
since the requirement of mens rea in civil offences is comparatively
lower than in criminal offences; and (c) once the requirements of the
provisions have been met, there is no discretion with the officer over the
quantum of penalty for such offence or referring back to the presence or
absence of mens-rea

–    The
road to all assessments need not necessarily end with penalty. Though every tax
evasion arises out of non-payment, every non-payment should not be equated with
tax evasion. It has been famously cited that penalty should not be imposed
merely because one has been empowered to do so.

–    The
onus is on Revenue to establish that the circumstances warrant imposition of
penalty. Only when this onus is effectively discharged that the tax payer is
required to defend his/her bonafide. Mere suspicion / surmises cannot form the
ground for penalty. Evidences and actions should be placed on record.

–    Penalty
should be invoked under a specific clause/ provision and expressly stated out
in the notice/ order. The tax payer cannot be left to search for the provision
under which he/she has been penalised (Amrit Foods vs. CCE, UP 2005 190 ELT
433 (SC)).

–    Penalty
invoked under clause (a) cannot be upheld under clause (b). The grounds of
invoking penalty and upholding the same would have to be reconcilable.

–    Penalty
should be commensurate with the tax involved. 

–    Unequals
should not be treated as equals. A mala-fide tax payer and bonafide tax payer
cannot be saddled with same quantum of penalty merely on the ground of non-payment.

–    Penalty
cannot be imposed for a future action on the theory of possibilities.

–    One
cannot be penalised retrospectively, even in retrospective legislations. Penal
provisions prevailing on the date of offence should be applied.

–    If
two reasonable views are possible or in cases of ambiguity, the lineal
construction should be adopted.

Statutorily recognised principles
of penalty (section 126)

The CGST / SGST law for the first
time has penned down certain disciplines for imposition of penalty. These are
principles from settled judicial decisions in the context of penalty:

–   Minor
breaches (Tax effect < Rs. 5000) or omission in documentation without
fraudulent intent should not be subjected to penalty.

–   Penalty
should be commensurate with the degree and severity of breach.

–   Prior
notice and personal hearing should be granted prior to imposing penalty.

–   Order
imposing penalty should be speaking about the nature of breach and the
applicable provision under which the penalty is being imposed.

–   Voluntary
disclosure prior to discovery of breach of law should be dealt with leniency.

However, this section has given
limited applicability only to penal provisions where a fixed quantum or fixed
percentage has not been prescribed i.e. cases where discretion has been
bestowed upon the officer over the quantum of penalty.

Examination of legal provisions –
Scheme of Penalty under the GST law

The GST Law has elaborately spread
the provisions for penalty across various Chapters. Principally, penalties can
be classified into those which are imposed based on findings on the merits of
the issue in the course of adjudication proceedings (sections 73 and 74) and
those penalties which can be imposed by the proper officer independent of the
adjudication proceedings (broadly similar to that followed in Income tax) by
issuing a separate order i.e. once the ingredients of the respective penal
provisions are satisfied (section 127). There is also a third set of penalties
imposable in cases of goods in transit or evasive acts where goods are liable
for confiscation. On a reading of the entire set of penal provisions, there
appears to be a significant amount of overlap between provisions leading to
multiple touch points for an officer to invoke for imposing penalty.

The overall scheme of penalty has
been depicted in the following chart. In simplistic terms, section 127 r/w
section 73, 74 and 129/130 has carved out three broad pillars on the basis of
which penalty can be imposed.

General understanding of key
terminologies

Prior to examining the above scheme in detail, it is important to
examine the meaning of some terms used in these sections, to be applied
contextually under respective facts and circumstances only:

A)      Adjudication related
penalties (section 73 and 74)

Under the erstwhile scheme, penalty
(u/s 11AC of the Central Excise Act and 78 of the Finance Act) and extended
period of limitation emanated from a common trigger point i.e. fraud,
suppression, etc (prior to amendment by Finance Act, 2015). In cases where
extended period of limitation was dropped, penalty could not be imposed even in
respect of the normal period. In a particular case penalty was dropped even
though extended period of limitation was invoked against the assessee[1]. This
position was altered by Finance Act, 2015 where penalty was imposed even in
respect of cases not involving fraud, suppression, etc albeit at lower scale.
The amendment prescribed various scales of penalty for short payment depending
on the reasons for such non-payment. The GST law has toed the line prevalent
after the 2015 amendment and delinked both the concepts resulting in penalty
being imposable even for bonafide acts.

Section 73 (normal period
assessments) and 74 (extended period assessments) are parallel to the
adjudication provisions of section 73 of the Finance Act, 1994 and section 11A
of the Central Excise Act, 1944. The said provisions empower the proper officer
to initiate adjudication proceedings in cases of short payment/ non-payment,
irregular input tax credit and erroneous refund. During the course of such
proceedings, the proper officer would have an opportunity conclude on the
reasons for non-compliance by the tax payer and classify the cases on the basis
of intent.

The penalty would be imposed in the
order issued under the said section depending on the stage at which the tax
payer makes the payment of the taxes demanded. The important take aways from a
reading of the said provisions are:

1)  Penalties
provided under the said section are absolute without much discretion being
granted to the proper officer on the quantum of penalty.

2)  There
is no provision parallel to the erstwhile section 80 of the Finance act, 1994
wherein officers were granted powers to waive the penalty if ‘reasonable cause’
is shown by the tax payer.

3)  Penalties
are directly linked to the alleged revenue loss to the respective Government.

4)  Imposition
of penalties under these section are subject to an outer time limit of 3-5
years from the relevant date (due date of filing the annual return).

B)  Non-adjudication related
penalties (section 122 to section 128)

Chapter XIX of the CGST/ SGST law –
‘Offences and penalties’ is a code for imposition of penalties in specific
cases. The said penal provisions u/s. 122 to 128 have been structured to lay
down the triggers for penalty in enlisted cases including detention and
confiscations. Under section 127, these penal provisions would apply only where
the proceedings of sections 62, 63, 64, 73, 74, 129 and 130 do not impose
penalty. The said provisions are as follows:

Section 122(1) – Specific Penalties

This section provides for 21
instances when penalty can be imposed on the tax payer. On a reading of certain
clauses, it appears that the law makers have targeted the issues at a micro
level in many cases.  The section 122(1)
can be divided into two sub-parts for a better understanding:

–   Part A : Enlists the
triggers for penalty; and

–   Part B : Prescribes the
penalty for the enlisted circumstances as follows:

Ad-hoc penalty : 10,000 being the
bare minimum penalty;

(OR)

Proportionate penalty : 100%
penalty to tax evaded; tax not deducted/ collected; short-collected
or not paid; input tax credit availed or passed on or distributed
irregularly or refund claimed fraudulently whichever is higher.

A clause by clause analysis of
section 122(1) has been tabulated below. In the table the author has
categorised the possible reasons underlying a non-compliance into – (a)
clerical errors generally considered as bonafide; (b) interpretative in view of
ambiguity in law and deemed as bonafide; and (c) evasive where it is
intentional.

The following observations emerge
from the above tabulation of examples:

1)  Prima-facie,
the clauses seem to address all types of non-compliance and not just tax
evasion

2)  Evasive
action is omnipresent in every clause, either impliedly or expressly

3)  Interpretative
or clerical non-compliance seems to be missing in cases where phrases such as
fraudulent, tampering, falsification, etc are present

4)  The
chapter title and section title use the phrase ‘Penalty for certain offences’
indicating that the section is addressing unacceptable defaults or defaults
having the ingredient of a gross violation which is non-curable resulting in
revenue law

5)  In
certain cases, proportionate penalty on the basis of ‘tax evaded’ would not be
ascertainable resulting in a situation where there is no comparative to the
adhoc penalty of Rs. 10,000. This throws up two alternative theories:

(a) Section
122 only addresses actions involving tax evasion and not every non payment
(such interpretative / clerical cases); or

(b) Section
122 addresses both cases, but in cases where there is no evasive action, the
penalty imposable for any default is limited to Rs. 10,000

The questions emerging from the
above table are:

Q1 – Whether 21 clauses are
mutually exclusive to each other?

Section 122(1) contains cases which
could fall under more than one clause eg. supply without invoice (clause (i))
and suppression of turnover (clause (xv)). An assessee could be penalised under
either of the clauses – for example transport of goods without invoice would
trigger both clause (i) and (xiv). Though clauses are overlapping, the tax
payer can be imposed with penalty only under one of the clauses for the same offence.

Q2 – Does the prescription of
adhoc and proportionate penalty apply to each of the clauses or only to
specific clauses? In other words, does penalty proportionate to tax evasion, etc. apply to all cases of tax evasion
(express or implied) or only to cases where the clauses specifically use the
phrase ‘tax evaded’.

The provisions of section 122(1)
targets actions which are evasive impliedly and expressly. One argument could
be that the proportionate penalty applies only to cases where tax evasion is
specifically expressed in the clause (such as (x), (xv), etc.). Similar
phrases accompanying the proportionate penalty such as tax short deduction/
collection, input tax credit irregularly availed, refund fraudulently availed
are directly relatable to specific clauses. Since accompanying phrases are
directly relatable to a specific clause(s), the prescription of proportionate
penalty on tax evasion should also apply to specific clauses only.

However, the other argument would
be that once tax evasion has been established, proportionate penalty can be
imposed on the tax evaded irrespective of there being an express prescription
of tax evasion in the clause. Tax evasion is inbuilt in the manner in which the
clauses are worded (such as (i)). The above table depicts that every clause
seems to capture an evasive act even though the term tax evaded has not been
expressly spelt out. The intent of this provision is to address cases of tax
evasion with rigorous penalty equalling the amount of tax evaded. This is the
only way full force may be given to
section 122(1), else the said provision may become a toothless tiger. 

Q3 – If the ingredients of tax
evasion have limited applicability, what would be the comparative figure to Rs.
10,000 in cases where the 100% penalty does not apply ?

For eg, if a tax payer issues an
incorrect invoice of Rs. 100,000 taxable @ 18% citing a wrong place of supply,
would one have to compare Rs. 10,000/- and Rs. 18,000 for imposition of penalty
or one can claim that there being no tax evasion, penalty of only Rs. 10,000/-
can be imposed? The answer to this question is dependent on the tax position
adopted on the scope of section 122(1). In cases where the scope of section
122(1) is considered as only addressing ‘offences’ and not all tax
non-compliance, no penalty can be imposed for clerical/ interpretative reasons
as cited in the above case. But where a stand is taken the section 122(1)
extends beyond cases of tax evasion, then a purposive effect to this stand can
be given as follows:

This chart implies that in non-tax
evasion cases, in the absence of a comparative figure, one should consider the
same as zero and then make a comparison leading to the inevitable conclusion
that Rs. 10,000/- would be the applicable penalty. Therefore, in case of a
wrong place of supply, the tax payer may be subjected to a maximum penalty of
only Rs. 10,000/-.  This is the only
possible interpretation where penalty for substantive and procedural defaults
can be given effect to.

In summary, the reasonable
interpretation of section 122(1) would be it primarily addresses cases of tax
evasion / tax non-deduction etc. and every clause addresses cases of tax
evasion either expressly or impliedly. Hence, equal penalty can be imposed on
the tax payer irrespective of which clause the case falls under. Section 122(1)
does not have any applicability over procedural/ non-evasive defaults. But if
one were to still extend this provision to procedural defaults, the penalty
imposable would only be Rs. 10,000/-.

Section 122(2) – Tax liability/ refund related penalties

Section 122(2) – This section
provides for two levels of penalty depending on the reasons for non-payment.
The said section has recognised that mens-rea/ state of mind would
establish the gravity of the offence and hence the quantum of penalty. Unlike
section 122(1), the law makers have targeted the non-payment at a macro level
purely on the test of whether there is a short payment of tax to the exchequer
and have not listed down actions resulting in such short payment:

Section 122(2) provides some
inferences as to interpretation of section 122(1) as well as 122(2):

1)  Section
122(2) captures all cases of non-payment of tax and imposes a basic penalty of
10% of tax due which can jump to 100% in fraud cases.

2)  Though
section 122(2) does not use the term ‘intent to evade’, it is implied by use of
the phrases – fraud, wilful misstatement, suppression, etc.: tax evasion
is always malafide and one cannot evade taxes without having the
intention to do so.

3)  Use
of the expression ‘tax due’ in section 122(2) and tax evaded in section 122(1)
clearly establish the distinct domains that each of the clauses address.

4)  Section
122(2) is general in its scope and presence of specific clauses in section
122(1) may exclude them outside the scope of section 122(2).

5)  Proportionate
penalty u/s. 122(1) is at the same scale as that applicable to fraudulent
actions specified u/s. 122(2)(b). By this interpretation, the first theory over
section 122(1) is strengthened. The legislature would not have in its wisdom
treated non payment for clerical errors at par with those due to evasive acts
u/s. 122(1). It has therefore provided a reduced penalty of 10% or Rs. 10000
only to cases where the penalty is not on account of fraud, etc. and
section 122(1) does not extend its scope over clerical / interpretative
defaults.

Reconciling section 73/74 and
section 122(2)

Section 122(2) seems to be a close
replica of the penal provisions contained in section 73 and 74. Legal
provisions should not be out rightly held to be surplusage. The possible
reconciliation of this overlapping could be:

a.  Section
122(2) provides an outer boundary / parameters under which penalty can be
imposed and section 73/74 operate within this confine.

b. Section
73(1) states that penalty would be imposed ‘under the provisions of this Act’,
possibly hinting at section 122(2). Section 73 and 74 grant concessions in
cases of early tax payment along with interest and penalty promoting dispute
resolutions and amicable settlement between the tax payer and the Government.

c.  Section
127 which seems to be creating two separate branches is only a surrogate
section. Its role seems to empower the officer to play catch-up by imposing
penalty even if the same has not been imposed under adjudication proceedings;
this section by itself does not make section 122(2) mutually exclusive to
section 73/74.

Section 122(3) – Other Penalties

Section 122(3), provides for
ancillary circumstances or connected persons where penalty of Rs. 25,000 can be
imposed:

–    Transporters,
employees, tax professionals, chartered accountants, purchaser of goods, tax
officials, etc. accompanying the assessee, who aid or abet an offence
could also be saddled with a penalty.

–    Any
person who acquires or receives goods or services with knowledge that such
receipt is in contravention of provisions of the Act (for eg. procuring a
taxable services/ goods from an unregistered person for more than 20 lakhs in
aggregate in a financial year).

–    Failure
to appear or issue invoice or account such invoice in book of accounts.

Section 122(3) also validates the
position that clerical actions which results in tax dues cannot be covered in
section 122(1) since clerical defaults have a fixed penalty of Rs. 25,000 only.

Section 125 – Miscellaneous penalty not specific elsewhere

Penalty of Rs. 25,000 in cases
where no penalty has been prescribed for a contravention of the act or the
rules.

Section 129 – Penalties in case of detention, seizure of goods in
transit

The GST law provides for imposition
of penalties for movement of goods which are in contravention of the statutory
provisions. The said provisions are non-obstante in nature. Two levels
of penalties are prescribed herein:

(a) Owner
comes forward for payment of tax and penalty: Penalty of 100% of the tax
payable or 2% of value of exempted goods or Rs. 25,000 whichever is less.

(b)        Owner
does not come forward for payment of tax and penalty : Penalty of 50% of
taxable value of goods or
5% of value of exempted goods or Rs. 25,000 whichever is less.

Two primary ingredients are
required for invoking penalty under this section –(a) the goods should in
transit and are intercepted by the proper officer u/s. 68; and (b) the proper
officer should come to a conclusion that the movement of goods is in
contravention of the provisions of the Act.

It may be important to note that
this section is qua the goods under question and not the transaction
i.e. this section applies equally to transactions having the character of
‘supply of goods’ or ‘supply of services’ in terms of Schedule II to the law as
long as there are goods in movement, for eg. a works contractor engaged in
supply of services (exempted/ taxable) attempting movement of goods would still
fall under this section for production of delivery challan and e-way bills. The
possible areas of contravention could be:

Generally, the term ‘contravention’
is used in cases where severity of non-compliance is relatively high compared
to a procedural non compliance. For example, a person raising the e-way bill
fails to update the correct vehicle number on account of clerical reasons and a
person consciously conceals revealing details of the vehicle number ensure
multiple trucks use the same e-way bill. While both have failed to comply with
the law in letter, rationally the degree of the offence and the penalty should
be higher in the case of the latter rather than the former. The law cannot
treat unequals as equals. Given the quantum of penalty, it appears that this
section is only towards addressing revenue loss and not procedural/ clerical
defaults. Applying this intent, a person complying with the law but erring in
reporting the vehicle number should not be saddled with penalties of the
magnitude as prescribed in the section. 

Further, the terms ‘detention’ or
‘seizure’ when used on conjunction imply severe cases of non-compliance. As
tabulated earlier, detention followed by seizure forcefully restricts the right
of possession of goods from its original owner. It breaches the right in rem
over the goods of its owner. In a welfare state, this is usually done where the
gravity of the offence is high and not otherwise. One can take a stand that
this section can be applied only to substantive offences where the owner of the
goods has escaped payment of taxes.

However, very recently, the Madhya
Pradesh High Court in Gati Kintetsu Express Pvt Ltd vs. CCT of MP
(2018-TIOL-68-HC-MP-GST) held that Part B of e-way bill is mandatory
and non-compliance of this requirement is amenable to penalty u/s. 129 of the
CGST/ SGST law. The court incorrectly distinguished an earlier favourable order
in VSL Alloys (India) Pvt Ltd vs. State of UP (2018) 67 NTN DX 1
which held that penalty cannot be imposed in case where Part-B of the eway bill
was
not completed.

This section also imposes penalties
on exempted goods with reference to its value upto a maximum of Rs. 25,000.
Impliedly, it equates the offence with a procedural violation since they do not
have any tax revenue impact. But ‘exempted goods’ should not be equated with
exempted supplies. The term exempted goods should be understood on a standalone
basis de-hors whether the transaction under question is enjoying any
benefit under Notification 12/2017-Central Tax (Rate). 

Section 130 – Confiscation of goods/ conveyance

Section 130 are penal provisions
invoked as a consequence of either an inspection or interception activitiy. The
instances where this section can be invoked are enlisted below:

1) Undertakes
supply or receipt of goods in contravention of any legal provision with
malafide intent to evade tax – for eg. clandestine removal of goods from
premises or even receipt of goods by the fraudulent buyer.

2) Fails
to account for the goods which are liable for tax – unaccounted sales.

3) Supplies
goods without having any registration or even applying for the same.

4) Contravention
of any provision with intent of evasion of payment of tax.

5) Conveyances
used for illegal activities with connivance of the owner of such conveyance.

The provisions impose penalty or
fine (also called redemption fine) in lieu of confiscation (i.e. for release of
goods). However, in no case will the aggregate of penalty and fine be less than
the market value of goods. In case of confiscation of conveyance along with the
goods, the quantum of fine in respect of the conveyance would be equal to the
tax payable on the goods under transportation. This section applies without
prejudice to the imposition of tax, interest and penalties.

In summary, the possible comparatives between the three pillars
can be tabulated below:

In a self-assessment scheme, the
onus of accurate tax computations, reporting and payments lie on the tax payer.
In an era where disclosures are of paramount importance, the tax payer is
expected to disclose as much detail as possible to its officers and establish
its bona fide before courts in subsequent proceedings. Ideally, disclosure to
the officer exercising administrative jurisdiction over the tax payer would be
regarded as sufficient proof of bona fide.

On the other side, tax
administrators should appreciate that unlike taxes, penalty provisions should
be studied on a factual basis rather by a strait jacket formula. Any
subjectivity would deliver adversarial results and everyone expects that the
current order undergoes a shift under the GST law.