Section 122 of GST Act: Penalties for Tax Evasion and Willful Offenses

Table of contents:

• Overview of Section 122 of the GST Act
• Some facts around Section 122
• Offenses Covered Under Section 122
• Penalties Under Section 122
• Latest Changes and Notifications
• Implications of Non-Compliance
• Role of GST Professionals
• Tips to Avoid Penalties
• Real-Life Examples or Case Studies
• Conclusion

When it comes to the Goods and Services Tax (GST) in India, compliance forms the backbone of a fair and transparent taxation system. While GST aims to simplify indirect taxes, ensuring adherence to its provisions is critical for maintaining the system’s integrity. Section 122 of the GST Act plays a vital role in this effort by defining penalties for non-compliance, focusing on curbing tax evasion, fraudulent invoicing, and misuse of Input Tax Credit (ITC).

This guide dives into Section 122, exploring its key provisions, penalties, and actionable steps to help businesses—especially MSMEs—stay GST-compliant and avoid unnecessary financial risks.

An Overview to Section 122 of CGST Act

Section 122 outlines penalties for individuals and businesses that violate GST laws. It serves two primary purposes:

1. To deter taxpayers from engaging in unlawful activities like tax evasion or ITC misuse.
2. To protect the integrity of the GST system by ensuring that all transactions are accounted for transparently.

For MSMEs, this section is particularly relevant because non-compliance can result in significant financial penalties and operational disruptions.

Must Read: GST Act 2017: Sections, Chapters, and Rules under CGST/IGST/SGST/UTST

Facts:

1. As per GSTN reports, over ₹10,000 crore in penalties were imposed during the financial year 2022-23. A significant portion of these penalties was due to tax evasion, invoice mismatches, and ITC misuse, falling under Section 122.
2. Nearly 30% of registered taxpayers faced some form of penalty during 2022, primarily because of procedural lapses like late GST filings and incomplete ITC reconciliation.
3. The GST Council noted an alarming increase in fake invoicing scams, with over ₹700 crore worth of fraudulent ITC claims unearthed in Delhi alone during 2022. These cases often lead to severe penalties under Section 122.
4. Many MSMEs were fined for failing to deposit collected GST, a common issue for businesses with cash flow challenges. Approximately 50,000 small businesses faced penalties under GST provisions in the last financial year.
5. GSTN data highlights a 25% rise in penalties related to e-way bill violations, where businesses failed to generate proper documentation for goods transport.

List of Offenses Under Section 122 of GST Act

The following actions are considered offenses under this section:

• Issuing invoices without actual supplies: Fake invoicing to claim fraudulent Input Tax Credit (ITC).
• Supplying goods/services without proper invoices: Failure to document transactions as per GST rules.
• Misuse of ITC: Claiming credit without receiving goods or services.
• Non-payment of collected GST: Not depositing GST within three months of collection.
• Obstruction of GST officers: Preventing officials from carrying out inspections or audits.
• Failure to deduct or pay TDS/TCS: Not adhering to GST’s tax deduction at source requirements.
• Transporting goods without valid documents: Evasion by transporting goods without a bill or e-way bill.

These offenses are taken seriously by tax authorities, and penalties are imposed to deter businesses from engaging in such violations.

List of Penalties Under Section 122 of CGST Act

The penalties under Section 122 are designed to reflect the severity of the offense. Here’s a table summarising the key penalties:

These penalties are cumulative, meaning that multiple offenses can lead to higher financial repercussions.

Must Read: Section 73 of CGST Act: Detailing Tax Recovery Without Fraud

Why MSMEs Should Pay Attention to Section 122

For MSMEs, compliance can sometimes feel burdensome, but the costs of non-compliance are much higher. Tax penalties can:

• Reduce profit margins significantly.
• Disrupt cash flow due to sudden penalty payments.
• Tarnish the company’s reputation, making it difficult to secure loans or attract investors.
• In severe cases, non-compliance can lead to business disruptions, such as the cancellation of GST registration.

Staying compliant ensures your business remains operational and trustworthy in the competitive market.

Latest Amendments and Updates

The GST Council keeps organizing the meeting on ongoing challenges and has introduced many amendments in the past. We have covered some of the recent amendments separately and these meetings also cover stricter measures to curb tax evasion and compliance related to Section 122 of the GST Act.

Key updates include:

• Higher scrutiny of ITC claims
• E-invoicing enforcement to avoid fake invoicing
• Increased inspections of transporters and warehouse keepers involved in aiding tax evasion.

Staying updated with these changes can help businesses avoid penalties.

Must Read: Full Timeline of GST Council Meetings: Role, Agenda and Outcomes

Role of GST Professionals

GST professionals are crucial for businesses, especially in managing the intricacies of Section 122 of the GST Act, which outlines penalties for non-compliance. Their expertise ensures businesses stay compliant, avoid errors, and address legal challenges effectively. Here’s how they contribute:

• Ensuring GST Compliance: GST professionals handle timely filing of returns like GSTR-1 and GSTR-3B, reconcile Input Tax Credit (ITC) claims, and ensure GST-compliant invoicing to prevent violations.
• Preventing Penalties: They conduct audits to identify compliance gaps, train staff on GST rules like e-invoicing, and offer advice on managing complexities such as reverse charge mechanisms.
• Managing Legal Challenges: In case of penalties, GST professionals represent businesses during audits, draft responses to show-cause notices, and file appeals to contest fines.
• Supporting MSMEs: They reduce the GST burden for MSMEs, allowing them to focus on their core business operations.

Engaging GST professionals is no longer optional. Their expertise ensures compliance, minimises financial risks, and safeguards reputations, making them indispensable in today’s GST-driven landscape.

Tips for Staying Compliant with Section 122

Avoiding penalties is simpler than it seems. Businesses can follow these steps:

• Ensure accurate invoicing: Use GST-compliant software to generate invoices.
• File returns on time: Regularly update your GST filings to avoid late fees.
• Verify supplier compliance: Match ITC claims with supplier data to prevent mismatches.
• Adopt technology: Automate processes using tools like Tally or ClearTax to minimise human errors.
• Educate your team: Train employees on GST rules and updates.

By following these practices, businesses can minimise risks and focus on growth.

Must Read:  GST advantages and disadvantages: Impact on small businesses in India

Real-World Cases of Penalties Under Section 122

Real-life examples offer valuable lessons:

1. Fake Invoicing Network in Delhi
   Authorities unearthed a ₹700 crore scam involving false invoices and ITC claims. The companies involved faced massive penalties, and some directors were arrested.
2. Non-compliance by MSMEs in Maharashtra
   A group of small businesses failed to deposit collected GST, leading to fines and cancellation of GST registrations.

These incidents underscore the need for vigilance and adherence to GST norms.

Conclusion

Section 122 of the GST Act is a cornerstone of India’s tax compliance framework. For businesses, especially MSMEs, staying compliant isn’t just about avoiding penalties—it’s about ensuring long-term growth and credibility.

By following the tips shared in this guide, adopting the latest tools, and staying informed about updates, businesses can confidently navigate the GST landscape.

Remember: Tax compliance is an investment in your business’s future. Take proactive steps today to avoid costly mistakes tomorrow.

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Author: Anirban Sinha

A product manager with a writer’s heart, Anirban leverages his 6 years of experience to empower MSMEs in the business and technology sectors. His time at Tata nexarc honed his skills in crafting informative content tailored to MSME needs. Whether wielding words for business or developing innovative products for both Tata Nexarc and MSMEs, his passion for clear communication and a deep understanding of their challenges shine through.