MAY 31, 2024

By K Raji Reddy, IRS, Assistant Director, NACIN, Hyderabad

THE Constitution was amended by way of the Constitution (101st Amendment) Act, 2016 to pave the way for GST law. We are all aware that CGST Act, 2017 and IGST Act, 2017 are passed by the Parliament while SGST Acts, 2017 for various States are passed by the respective State Assemblies as per the powers conferred on them under Article 246A of the Constitution.

2. The provisions of CGST Act, 2017 and SGST Act, 2017 would cater to the requirements of goods and services tax administration in case of supplies within a State. On the other hand, the IGST Act, 2017 caters to the requirement of the tax administration involving inter-state supplies of goods and services.

3. To avoid repetition of provisions envisaged in the CGST Act, 2017 in the IGST Act 2017, the law makers have provided for the administration of the same through Section 20 of the IGST Act, 2017. Provisions relating to twenty-five topics including miscellaneous provisions of the CGST law have been made applicable to IGST law, mutatis mutandis through the said provision in the IGST Act, 2017. The five provisos to Section 20 of the IGST Act, 2017 specify the manner in which the CGST provisions are made applicable to implement the IGST Act.

4. Various stake holders have interpreted the fourth proviso to Section 20 of IGST Act, 2017 regarding penalties in case of inter-state supplies of goods and services in conflicting and confusing ways which has led to this attempt to analyze and interpret the same in this article.

5. The Section 20 of IGST Act, 2017 along with its five provisos is extracted below for ready reference.

"Subject to the provisions of this Act and the rules made thereunder, the provisions of Central Goods and Services Tax Act relating to,--

(i) scope of supply;

(ii) composite supply and mixed supply;

(iii) time and value of supply;

(iv) input tax credit;

(v) registration;

(vi) tax invoice, credit and debit notes;

(vii) accounts and records;

(viii) returns, other than late fee;

(ix) payment of tax;

(x) tax deduction at source;

(xi) collection of tax at source;

(xii) assessment;

(xiii) refunds;

(xiv) audit;

(xv) inspection, search, seizure and arrest;

(xvi) demands and recovery;

(xvii) liability to pay in certain cases;

(xviii) advance ruling;

(xix) appeals and revision;

(xx) presumption as to documents;

(xxi) offences and penalties;

(xxii) job work;

(xxiii) electronic commerce;

(xxiv) transitional provisions; and

(xxv) miscellaneous provisions including the provisions relating to the imposition of interest and penalty,

shall, mutatis mutandis, apply, so far as may be, in relation to integrated tax as they apply in relation to central tax as if they are enacted under this Act:

Provided that in the case of tax deducted at source, the deductor shall deduct tax at the rate of two per cent from the payment made or credited to the supplier:

Provided further that in the case of tax collected at source, the operator shall collect tax at such rate not exceeding two per cent, as may be notified on the recommendations of the Council, of the net value of taxable supplies:

Provided also that for the purposes of this Act, the value of a supply shall include any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier:

Provided also that in cases where the penalty is leviable under the Central Goods and Services Tax Act and the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act, the penalty leviable under this Act shall be the sum total of the said penalties.

Provided also that where the appeal is to be filed before the Appellate Authority or the Appellate Tribunal, the maximum amount payable shall be fifty crore rupees and one hundred crore rupees respectively.''.

6. As the focus is on understanding how to interpret the fourth proviso to Section 20 of IGST Act, 2017, the same is extracted and reproduced again as here under.

"Provided also that in cases where the penalty is leviable under CGST Act and SGST Act, the penalty leviable under this Act shall be the sum total of the said penalties".

7. As we are trying to understand how to impose penalty under IGST law as per fourth proviso to Section 20 of IGST Act, 2017, let us examine penalties under two provisions of CGST Act, 2017:

One under Section 125 of CGST Act, 2017, a provision on general penalty with a clear idea that similar provision exists under SGST Act, 2017 also, and

Another one under Section 73(9) read with Section 122(2)(a) of the CGST Act, 2017.

The provisions are extracted below for ease of reference.

Section 125 - General penalty

"Any person, who contravenes any of the provisions of this Act or any rules made thereunder for which no penalty is separately provided for in this Act, shall be liable to a penalty which may extend to twenty-five thousand rupees".

8. Thus, if a maximum general penalty imposable under Section 125 of CGST Act, 2017 and Section 125 of SGST Act, 2017 is up to Rs 25,000/- each, where no separate penalty is provided for under the said laws, then the maximum general penalty imposable for violations only of IGST Act, 2017 would be Rs. 50,000/- which is the sum total of the said penalties under CGST Act, 2017 and SGST Act, 2017.

9. As the provision talks of the penalty which may extend to twenty-five thousand rupees, the adjudicating authority has a discretion to impose a penalty lower than Rs. 25,000/- each under the CGST/SGST Act 2017 depending on the gravity of the violations and the general penalty always need not be exactly Rs 25,000/- each under CGST/SGST Act, 2017 and Rs 50,000/- under IGST Act, 2017.

10. The provisions of Section 73(9) and Section 122(2)(a) of the CGST Act, 2017 are extracted here under for ready reference.

"73(9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order".

"122(2) Any registered person who supplies any goods or services or both on which any tax has not been paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilised,

(a) for any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be liable to a penalty of ten thousand rupees or ten per cent. of the tax due from such person, whichever is higher;"

11. As stated above, when it comes to imposing penalty due to short payment of tax as per fourth proviso to Section 20 of IGST Act, 2017, it is mandatory to quantify the penalty under IGST law as a sum total of the penalties imposable under Section 73(9) of the CGST, 2017 and Section 73(9) of the SGST Act, 2017. Of course, these provisions are not standalone provisions on penalty but would depend on Section 122(2)(a) of CGST/SGST Act, 2017 to decide how much penalty is imposable.

12. We all know that GST rates for some goods would be 9% CGST and 9% SGST, while IGST rate for the same goods would be 18%. That means, value of supply of goods and services remain the same while the CGST and SGST components and rates would be half of the IGST component and rate.

13. Now let us take a case of short payment of tax due to undervaluation of supply of textile machinery worth Rs 1.05 Cr. The undervaluation is owing to non-inclusion of job work charges of Rs 5 lakhs incurred by the recipient of textile machinery in the taxable value. The job work charges are paid to the job worker by the recipient of the machinery on behalf of the supplier on the latter's instructions. Such payment by the recipient of goods would attract the valuation provisions of Section 15(2)(b) of CGST Act, 2017. Let us assume that the machinery supplier is located in State A and the recipient is located in State B and there are no intra-state supplies in the period during which short payment of tax was noticed. Legally speaking, the amount of job work charges would be a cost to the supplier and thus need to form part of transaction value of goods supplied on which GST at 18% is payable.

14. In the case of the supply of textile machinery, let us assume that there is no suppression of facts to the department as job work related information was given to the department. In such a situation, IGST should have been paid on Rs 1.05 Cr but tax was paid only on Rs 1 Cr by the supplier in State A resulting in short payment of tax on Rs 5 lakhs. As the job work charges escaped self-assessment by the supplier of textile machinery, it is incumbent on the jurisdictional proper officer to issue show cause notice to the supplier under Section 73 of the CGST Act, 2017, demanding IGST of Rs 90,000/- on 5 lakhs at 18% GST rate along with interest and applicable penalty. Then 10% of penalty under Section 73(9) of CGST Act, 2017 read with Section 122(2)(a) ibid would Rs.9000 but a careful perusal of the fourth proviso to Section 20 of IGST Act, 2017 would give a different penalty amount which is explained in the following paras.

15. Assuming that the job work carried out on the machinery is for Rs 5 lakhs is in case of an intra-state supply to understand the intention behind the fourth proviso, then CGST demand would have been Rs 45,000/- at CGST rate 9% and SGST of Rs.45,000/- at SGST rate 9% for the same supply value of Rs 5 lakhs. Then the penalty imposable under Section 73(9) of CGST Act, 2017 and Section 73(9) of SGST Act, 2017 would be equal to 10% of the tax demanded or Rs.10,000 whichever is higher under both the laws. Therefore, the penalty imposable in the above situation is Rs.10000 each under CGST Act, 2017 and SGST Act, 2017 and not Rs 4500 each under the said two laws.

16. To work out how much penalty is imposable under IGST law as per the said fourth proviso to Section 20 of IGST Act, 2017 read with Section 73(9) of CGST Act, 2017, it is a statutory requirement under the said fourth proviso to add up the penalties that are leviable under CGST Act, 2017 and SGST Act, 2017. Therefore, IGST of Rs 90,000/- needs to be read as total of Rs 45,000/- CGST and Rs 45,000/- SGST for the limited purpose of arriving at the penalties leviable under CGST/SGST Act, 2017. For the said short payment of CGST component, penalty under Section 73(9) of the CGST Act, 2017 would be Rs.10000/- and not Rs.4,500/- being 10% of the tax short paid. Similarly, Rs 10,000/- penalty is leviable under SGST Act, 2017.

17. Therefore, as per the said fourth proviso, which is the subject matter of discussion, a penalty of Rs 20,000/- is imposable being the sum total of penalty leviable of Rs 10,000/- each under both CGST Act, 2017 and SGST Act,2 017 and not Rs 9000/- being 10% of short paid IGST of Rs 90,000/-.

18. A careful perusal of the other provisos to Section 20 of IGST Act, 2017 would help understand the intent of the legislature. The provisos prescribe the double the amounts paid under CGST law in case of inter-state supplies, relating to tax deduction at source, tax collection at source and the maximum amount of tax to be paid before filing appeals. Such prescription also supports the view that penalties under IGST law would be twice that of the penalties levied under CGST law.

19. The upshot of the above discussion is that where 10% penalty imposable is more than Rs 20,000/- in case of IGST short payment and more than Rs 10,000/- in case of short payment of CGST and SGST, then one can straightaway calculate 10% of the IGST, CGST, CGST short paid and determine the same under Section 73(9) of CGST/SGST Act, 2017. In other words, minimum penalty leviable in case of short payment of tax is Rs 10,000/- each under CGST Act, 2017 and SGST Act, 2017 while the minimum penalty imposable under IGST Act, 2017 is Rs 20,000/-. It may be noted that there is no minimum general penalty prescribed under Section 125 of CGST/SGST Act, 2017 though the maximum general penalty is prescribed as Rs.25,000/- under the said laws. Likewise, maximum general penalty imposable for IGST law contraventions is Rs 50,000/- with no minimum penalty prescribed.

20. However, there is a school of thought which believes that the debated fourth proviso to Section 20 of IGST Act, 2017 would be applicable only in case when penal provisions are invoked in the show cause notice for above violations resulting in short payment of tax in case of both intra-state supplies and inter-state supplies and that the said proviso would not apply if there are violations resulting in short payment of tax under IGST law alone. They opine that penal provisions under CGST law as mentioned at Section 20(xxi) of IGST Act, 2017 alone would be applicable if the tax short payment is attributable only to inter-state supplies.

21. Of course, I am not prepared to subscribe to their understanding. The penalties under CGST/SGST Act, 2017 would be applicable in case of contraventions of intra-state supplies and the penalties are leviable as per fourth proviso to Section 20 of IGST Act, 2017 as explained above in case of contraventions of inter-state supplies, whether or not the two kinds of supplies exist in the demand.

(The views expressed are strictly personal.)