The implementation of the Goods and Services Tax (GST) five years ago was a game changer that intended to automate the whole tax collecting and administration process. It was put in place to unify taxing on the supply of goods and services by combining 17 principal taxes and 13 cesses. The GST was primarily intended to make taxes systems more transparent, easier to monitor and manage and expedite the registration and compliance reporting processes.
The regulatory framework before the implementation of GST
Before the introduction of GST, indirect taxes were classified into various categories, including several central taxes such as Central Excise, Service Tax, Central Sales Tax, and so on, as well as state-specific taxes such as VAT, Entry Taxes, and so on. While establishing a complicated regulatory system, also resulted in high penalties and catastrophic repercussions for noncompliance. For example, noncompliance with the Central Excise Act resulted in severe punitive measures, including monetary and criminal penalties such as incarceration for three to seven years. Simultaneously, regulators may file criminal charges if a business’s possession of goods listed in Schedule II, such as tobacco, pan masala, rubber tires, and so on, exceeds the prescribed limit. Other situations that could result in harsh penalties included the assessee evading tax liability or taking false credit for duty. Because many compliances were interrelated, firms’ compliance duties became complicated.
Under GST, criminalization is prohibited.
In terms of tax compliance, Section 122 of Chapter XIX of the CGST Act lists 21 offenses that may contribute to tax evasion directly or indirectly and can result in a penalty equal to the amount of tax evaded by the assessee. Another section on return and statistical data submission specify maximum penalties of Rs. 5,000 and Rs. 25,000, respectively. Again, Section 132 lists approximately 11 offenses that may result in criminal proceedings. Among them are the following:
- Intentional distribution of goods or services without an invoice to avoid paying taxes
- Issuing an invoice without delivering goods or services, resulting in the misapplication of input tax credits or tax refunds
- Input tax credit claimed on the above-mentioned invoice or fraudulent input tax credit claimed on an unrelated invoice
- Tax is collected but not remitted to the government within three months.
- Falsifies or alters financial data on purpose, or establishes fictional accounts to avoid paying taxes
- Any criminal attempt to commit or hide a crime
In some cases, an assessee may face imprisonment and a punishment proportionate to the amount of tax avoided, input tax credit incorrectly claimed, or refund incorrectly claimed. If the value surpasses Rs. 5 crores, the penalty may be increased to five years, and if it exceeds Rs. 2 crores, the term may be reduced to three years. In addition, if the value exceeds Rs. 1 crore, the one-year sentence can be extended.
The scope of criminality for noncompliance with the GST Act has been rationalized.
While some pre-GST tax regimes (such as Service tax and VAT) had minimal or no criminal provisions 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. These laws were also made applicable to offenses such as possessing certain things over the permissible limit, dealing with certain confiscable products, neglecting to provide the necessary information, and so on.
The GST Act connected the criminal provisions to the assessee’s purpose (i.e. willful or fraudulent duty evasion) and linked the Jail Term to “Quantum of tax evaded/input tax credit wrongly availed/refund wrongly taken,” i.e., the greater the value of tax evasion, the longer the jail term to be given.
Impact of planned GST decriminalization on enterprises
The Indian government intends to begin one of the most significant revisions to the GST laws after nearly five years of implementation. This initiative is in line with improving the ease of doing business for small businesses by distinguishing between minor violations and deliberate duty evasion. The proposal is likely to raise the minimum threshold for starting criminal proceedings and to review the current compounding regulations.
According to the proposed modifications, the threshold for initiating criminal proceedings would be raised to Rs 20 crore. Currently, evasion of Rs 5 crore in GST might result in a five-year prison term. The proposal is to reduce the prison sentence in cases where the value of tax evasion does not exceed the specified amount. Furthermore, the updated laws are expected to remove the provision allowing for the attachment of the assessee’s property if tax evasion does not exceed the new threshold limitations.
The potential GST decriminalization will differentiate between minor and willful violators, reducing the number of hash penalties borne by small businesses for minor and unintentional offenses. Several government initiatives have been launched in recent years to improve the ease of doing business in India. One of the most visible is the effort to decriminalize laws, rules, and regulations that govern economic activity.