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.