By Sandeep Agrawal
Around five years back, the introduction of Goods and Services Tax (GST) came as a transformative move that aimed to digitize the complete process of tax collection and administration. It was implemented to standardize taxation on the supply of goods and services by consolidating around 17 major taxes and 13 cesses. Essentially, the GST was designed to make the taxation processes transparent, simple to monitor and administer, as well as to streamline the registration and compliance filing processes.
The regulatory environment before GST
Before the introduction of GST, indirect taxes were divided into several categories, including multiple central taxes like Central Excise, Service tax, Central Sales Tax, etc., and state-specific taxes like VAT, Entry Taxes, etc. While creating a complex regulatory framework, it also resulted in hefty penalties and dire consequences in cases of non-compliance. For instance, the non compliance with the Central Excise Act led to severe penal provisions, which include monetary and criminal provisos like imprisonment for three to seven years. Simultaneously, the regulators could bring criminal charges if the quantity of goods possessed by a business under schedule II i.e., tobacco, pan masala, rubber tires, etc., exceeds the prescribed limit. Evading tax liability or taking false credit of duty by the assesse were some of the other situations, which could lead to harsh penal provisions. Since a lot of compliances were interconnected, it made compliance obligations complex for businesses.
Criminalization under GST
In terms of tax compliance, Section 122 of Chapter XIX of the CGST Act includes 21 offenses that may directly or indirectly contribute to tax evasion and can result in a penalty equivalent to the amount of tax evaded by the assessee. Another Section on the submission of returns and statistical data specifies maximum penalties of Rs. 5,000 and Rs. 25,000 respectively. Again, Section 132 lists around 11 offenses that might lead to criminal proceedings. Some of them include:
● Intentional delivery of goods or services without an invoice with the intent to evade taxation
● Issuance of an invoice without the delivery of goods or services, resulting in the misuse of input tax credits or tax refunds
● Input tax credit claimed the above-mentioned invoice or false input tax credit claimed without any invoice
● Collects tax but fails to remit it to the government within three months
● Intentionally falsifies or replaces financial data or creates fictitious accounts to evade tax payments
● Any attempt to commit or conceal a crime
In certain instances, an assessee may be subject to imprisonment and a fine proportional to the amount of tax evaded, input tax credit wrongfully claimed, or refund unjustly claimed. If the value exceeds Rs. 5 crore, the sentence may be extended to five years, and if it goes beyond Rs. 2 crore, there is a possibility of a three-year sentence. Also, if the value crosses Rs. 1 crore, imprisonment of one year can be extended.
Rationalised scope of criminalization for non-compliance with the GST Act
While there were minimal or no criminal provisions in some of the pre-GST tax regimes (such as Service tax and VAT) and a greater emphasis on penal provisions, the Central Excise Act outlined stiffer criminal provisions with jail terms ranging from three to seven years and higher penal provisions that could range between 10-50% of the tax evasion amount. Also, these provisions were made applicable to offenses such as owning certain items that exceed the permitted limit, dealing with certain confiscable products, failing to give needed information, etc.
Herein, the GST Act connected the criminal provisions to the assessee’s purpose (i.e. willful or fraudulent evasion of duty) and linked the Jail Term to “Quantum of tax evaded/input tax credit wrongly availed/refund wrongly taken” i.e., greater the value of tax evasion, the longer jail term to be given.
Impact on businesses with the proposed GST decriminalization
After nearly five years of its implementation, the Indian government is planning to start one of the most significant revamps of the GST laws. By creating a clear bifurcation between minor violations and deliberate duty evasion, this initiative is in line with enhancing the ease of doing business for small firms. The proposal is likely to increase the minimum bar for initiating criminal proceedings and also review the current compounding regulations.
As per the proposed changes, the benchmark limit to initiate criminal proceedings will be increased to Rs 20 crore. As of now, the evasion of GST of Rs 5 crore can lead to a five-year jail sentence. The proposal is to potentially decrease the prison sentence in cases where the value of tax evasion does not exceed the mentioned amount. In addition, it is anticipated that the updated laws will eliminate the clause allowing for the attachment of the assessee’s property if tax evasion does not reach the new threshold limitations.
The potential GST decriminalization will treat minor and willful violators differently, reducing instances of hash penalties borne by small enterprises due to minor and unintentional offenses. Over the years, several governmental initiatives have been made in recent years to increase the ease of doing business in India. The initiative to decriminalize laws, rules, and regulations that control economic activity is one of the most prominent.
(Sandeep Agrawal, Co-Founder & Director, TeamLease Regtech. Views are author’s own.)