Penalty kick

Whether or not it meets the definition of a “value-added tax”, GST can certainly be called a “technology tax” due to the fact that almost everything in the GST regime will happen online. It would seem that all one really needs to have to obtain a GST Compliance Rating are a good internet connection, constant communication with counterparties and loads of patience.

Face-to-face interactions between tax officers and taxpayers are expected to be minimal as a result of which many believe that corruption would reduce drastically. Usually, rent-seeking is done during tax assessments and negotiations are entered into on the levy of interest and penalties. If the provisions for levy of interest and penalties are reasonable but not negotiable, rent-seeking would reduce.

Section 122 of the CGST law specifies penalties for 21 different types of offences under GST. They cover an eclectic range of possible offences, ranging from issuing any invoice or bill without supply of goods or services or both in violation of the provisions of the Act or the rules made to preventing any officer in discharge of his duties. This would incur a penalty of ₹10,000 or an amount equivalent to the tax evaded or the tax not deducted, whichever is higher.

The amount of ₹10,000 appears reasonable. Giving a choice of a higher amount could spoil the reasonability of the penalty. Let us assume that a taxpayer has committed an offence of not deducting tax to the tune of ₹100,000. The tax officer would like to slap a penalty of ₹100,000 while the taxpayer is aware that ₹10,000 is the minimum. It is at this stage that negotiations normally begin.

Section 126 of the CGST Act elaborates that no officer shall impose any penalty for minor breaches of tax regulations or procedural requirements and, in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence. So, a breach shall be considered a minor one if the amount of tax involved is less than ₹5,000 and an omission or mistake in documentation shall be considered to be easily rectifiable if the same is an error apparent on the face of record.

This section has obviously been drafted with the best of intentions in mind but words such as easily rectifiable and apparent on the face of record can mean different things to different people. his only adds to the present litigation.

The GST Council should think of a different approach to levy penalties in the GST era. The first two years of GST are going to be turbulent for both the taxpayer and the tax officer as they grapple with the nuances of the law. Tax officers should go soft on penalties during this period since taxpayers could unwittingly commit offences which can be considered to be tax evasion.

After the turbulence has settled down, the GST Council should levy penalties of fixed amounts instead of providing an option of linking with the tax avoided. Being a tax-based on technology, the penalty can be collected by electronically directing the taxpayer to use his electronic cash ledger to make the payment. This would further reduce the possibility of human intervention.

Penalty provisions under GST pretty much follow existing tax laws. It is time for the GST Council to get a bit more innovative and develop a carrot and stick approach to levy penalty with limited options. Taxpayers are ustads in getting around the present set of provisions.

The writer is a chartered accountant

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