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GST Compliance

GST Prosecution & Compounding — Sections 132 to 138

GST prosecution is the criminal consequence for serious tax evasion — fake invoicing, non-deposit of collected tax, and evasion above ₹1 crore. Compounding offers an alternative settlement. This guide covers prosecution thresholds, imprisonment terms, arrest powers, and compounding procedure.

Max Prison
5 Years
Cognizable
> ₹5 Cr
Compounding
50-150%
Commissioner
Sanction Req

Prosecution Offences & Imprisonment

OffenceThresholdImprisonmentBailable?
Supply without invoice to evade taxTax evaded > ₹5 croreUp to 5 years + fineNon-bailable
Issue invoice without supply (fake invoices)Tax evaded > ₹5 croreUp to 5 years + fineNon-bailable
Collect GST but fail to deposit (beyond 3 months)Tax > ₹5 croreUp to 5 years + fineNon-bailable
Tax evasion: ₹2 crore to ₹5 crore₹2–5 croreUp to 3 years + fineBailable
Tax evasion: ₹1 crore to ₹2 crore₹1–2 croreUp to 1 year + fineBailable
Obstruction/tampering with evidenceAny amountUp to 6 months + fineBailable

Compounding Rules

Who can compound?

Any person accused of an offence under GST Act. Commissioner must approve. Application filed before filing of complaint in court.

Compounding amount

Minimum: Higher of ₹10,000 or 50% of tax involved. Maximum: Higher of ₹30,000 or 150% of tax involved. GST Council may revise these limits.

Offences NOT compoundable

Tax evasion > ₹5 crore (cognizable, non-bailable). Habitual offender (convicted/compounded previously under CGST). Offences related to fake invoicing exceeding ₹1 crore.

Effect of compounding

No further prosecution for that offence. Amount paid is not refundable. Does not affect assessment/adjudication proceedings separately. Compounding order issued by Commissioner.

Time limit

Application must be filed before the complaint is filed in the court. Once prosecution is launched in court, compounding is at the discretion of the court, not the Commissioner.

Safeguards Against Misuse

Previous sanction required

Prosecution can only be initiated with prior sanction of the Commissioner. Officer below Commissioner rank cannot sanction prosecution. This ensures senior-level review before criminal proceedings.

Monetary threshold

Prosecution is triggered only for tax evasion above ₹1 crore (for imprisonment) and ₹5 crore (for cognizable/non-bailable offences). Minor defaults don't attract criminal prosecution.

Compounding option

Most offences below ₹5 crore can be compounded (settled by paying a sum). This provides an escape route from criminal proceedings for first-time offenders.

Prosecution vs assessment

Prosecution is independent of assessment proceedings. Acquittal in prosecution does not mean the tax demand is dropped (and vice versa). However, the same facts are considered in both proceedings.

Prosecution & Compounding FAQs

When can GST department initiate prosecution?

Prosecution under Section 132 requires: (1) Tax evasion of at least ₹1 crore (for imprisonment liability), (2) Prior sanction of the Commissioner, (3) Offence falling under listed categories (fake invoicing, evasion, non-deposit of collected tax, etc.). For amounts > ₹5 crore, offences are cognizable (arrest without warrant) and non-bailable. For ₹1-5 crore: bailable and non-cognizable.

What is compounding under GST?

Compounding (Section 138) is a settlement mechanism where the accused pays a compounding fee to avoid criminal prosecution. The compounding amount ranges from 50% to 150% of the tax involved (minimum ₹10,000, maximum ₹30,000). Application is filed to the Commissioner. Once compounded, no prosecution for that offence. It is not available for offences > ₹5 crore or repeat offenders.

Can a director/partner be prosecuted under GST?

Yes. Section 137 provides that if an offence is committed by a company, every person who was in charge of and responsible for the conduct of business (directors, partners, officers) is deemed guilty and liable for prosecution. They can be individually prosecuted alongside the company. Defence: proving the offence was committed without their knowledge or they exercised due diligence.

What is the difference between penalty and prosecution?

Penalty is a monetary consequence imposed by the adjudicating authority (civil proceeding) — e.g., ₹10,000 or tax amount under Section 122. Prosecution is a criminal proceeding in court that can result in imprisonment and fine. Both can run simultaneously for the same offence. Penalty proceedings are decided by the GST adjudicating authority; prosecution is decided by the criminal court.

Can arrest be made under GST?

Yes, but only for cognizable offences where tax evasion exceeds ₹5 crore. The Commissioner can authorize arrest under Section 69. The arrested person must be produced before a Magistrate within 24 hours. For non-cognizable offences (₹1-5 crore): no arrest without warrant. Bail is available for non-bailable offences through court application. Several High Courts have granted bail in GST cases.

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