Understanding the differences, interactions, and relationships between Penalties under Sections 73/74/74A and Section 122(2) of the CGST Act 2017

The CGST Act, 2017, seeks to uphold tax compliance through well-defined penalty structures to address lapses in payment, fraudulent actions, or procedural non-adherence. Understanding the nuances of penalty provisions under Sections 73, 74, 74A, and 122(2) is critical for taxpayers, legal professionals, and tax officials. This article explores the interplay between these sections, addressing whether penalties are interchangeable, correlated, or supplementary while emphasizing their distinct nature. By examining statutory provisions and interrelations, this article clarifies key operational aspects to guide the lawful imposition of penalties within the GST framework.

This article aims to address the following questions:

1. Are the penalties stipulated under Sections 73/74/74A and Section 122(2) identical?
2. Does the proper officer possess the discretion to opt for imposing a penalty under Section 122(2) instead of Sections 73/74/74A?
3. Is there any correlation between the penalties specified under Sections 73/74/74A and Section 122(2)?
4. Does the penalty articulated in Sections 73, 74, and 74A stem from Section 122(2), or is it a separate penalty? Similarly, is the penalty delineated in Section 122(2) distinct from those outlined in Sections 73, 74, and 74A?

Analysis

Section 73 Non-fraud cases (up to FY 2023-24)

Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts.

Under Section 73, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:

• Tax not paid or short paid, or
• erroneously refunded, or
• input tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts.

Section 74 Fraud cases (up to FY 2023-24)

Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts.

Under Section 74, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:

• Tax not paid or short paid, or
• erroneously refunded, or
• input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts.

Section 74A All cases (FY 2024-25 onwards)

Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onwards.

Under Section 74A, the proper officer is authorized to demand and recover tax, interest, and penalty in the following cases:

• Tax not paid or short paid, or
• erroneously refunded, or
• input tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onwards.

Section 122(2) Offences and penalty amounts

Section 122(2) specifies the reasons, i.e., offences for which penalties can be imposed and the amount of penalty that can be levied.

Section 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 utilized:

1. for any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax,
2. for reason of fraud or any wilful misstatement or suppression of facts to evade tax,

In the author’s opinion, the reasons mentioned for imposing penalties under Sections 73/74/74A and Section 122(2) are similar, but the penalties that can be imposed are not the same. There are fundamental differences in the provisions for imposing penalties under Sections 73/74/74A and Section 122(2).

“It is not permissible if a notice is issued under Sections 73/74/74A and a penalty is imposed under Section 122(2) instead of the penalties specified in Sections 73/74/74A.

Key Differences

The differences between Sections 73/74/74A and Section 122(2) are as follows.

Interrelation and Interpretations

It is important to note that the reasons for imposing penalties under Sections 73/74/74A are similar to those mentioned under Section 122(2). However, the penalties under Sections 73/74/74A and Section 122(2) are not supplementary to each other. In other words, it is not permissible if a notice is issued under Sections 73/74/74A and a penalty is imposed under Section 122(2) instead of the penalties specified in Sections 73/74/74A. Nowhere in the entire CGST Act 2017 is it stated that the penalties imposed under Sections 73/74/74A will be derived from Section 122(2) or that they are the same.

Now, a question arises as to why the reasons for imposing penalties under Sections 73/74/74A and Section 122(2) are similar. The reason is that if a registered person commits such offences for which the time limit for demand and recovery of tax under Sections 73/74/74A has expired, then Sections 73/74/74A can’t be invoked, but a penalty can be imposed under the provisions of Section 122(2).

Another question arises: since the term “Proper Officer” is not used in Section 122(2), how will a penalty be imposed under Section 122(2)? I will discuss this matter further in this article.

Section 75(13) — No double penalty

It is important to mention Section 75(13) here, which provides special provisions. Section 75(13) states that where a penalty is imposed under Sections 73/74/74A, no penalty shall be imposed under any other provision for the same act or omission on the same person.

This means that the reasons (act or omission) mentioned under Sections 73/74/74A are also listed elsewhere in the CGST Act. Therefore, Section 75(13) prohibits imposing a penalty under any other provision for the same act or omission if a penalty has already been imposed under Sections 73/74/74A.

These reasons (act or omission) are also listed in Section 122(2). Hence, it is reiterated and essential to consider that if the proper officer imposes a penalty under Sections 73/74/74A, he cannot impose a penalty again under Section 122(2).

Based on the above, it can be stated that the penalties mentioned under Sections 73/74/74A and Section 122(2) might seem similar because the reasons given are the same. However, in reality, they are not the same. The proper officer is not given the authority to choose to impose a penalty under Section 122(2) instead of the penalties specified in Sections 73/74/74A. The penalties mentioned under Sections 73/74/74A and Section 122(2) are not related to each other.

Now the question arises: if the term “Proper Officer” is not mentioned in Section 122(2), is it appropriate to issue a notice and impose a penalty under Section 122(2)? As mentioned earlier, no notice can be issued under Section 122(2).

Role of Section 127

It is now essential to mention Section 127, as without it, we cannot answer these questions.

Section 127 states that where penalties are not covered under Sections 62, 63, 64, 73, 74, 74A, 129, and 130, the proper officer can order penalties after providing an opportunity for a hearing.

Upon reading the above, it becomes clear that Section 127 allows the proper officer to use the power granted under this section to impose penalties if any penalties are not covered by these Sections 62, 63, 64, 73, 74, 74A, 129, and 130 (eight sections). It is important to note that Section 127 uses the term “Proper Officer” and mentions issuing orders, but it does not specify any time limit for issuing these orders. Additionally, Section 127 does not mention imposing any taxes or interest.

Now, let us try to understand what type of penalties are not covered by these eight sections, and for which the proper officer can impose penalties using the power granted under Section 127 after providing a proper hearing opportunity.

When we read Sections 73/74/74A and Section 127 together, the question arises as to what type of penalties are not mentioned under Sections 73/74/74A and can be imposed on a person using the power granted under Section 127. To understand this, we need to refer to the following table.

Worked example — Mr. “R” and wrongly utilised ITC

Suppose Mr. “R” wrongly utilized the Input Tax Credit (ITC) of Rs. 18,000 in his GSTR-3B. In this case, if the proper officer issues a notice under Sections 73/74/74A, Mr. “R” will have to submit a reply/response within the time limit specified in the notice. If Mr. “R” fails to respond within the specified time, then, because Mr. “R” has failed to furnish information called for by an officer, the proper officer can impose a penalty using the powers granted under Section 127, considering the offences under Section 122(1)(xvii). This penalty shall be apart from the penalty that will be levied under Sections 73/74/74A.

“Section 122(1)(xvii) states that failure to furnish information or documents called for by an officer in accordance with the provisions of this Act or the rules made thereunder, or furnishing false information or documents during any proceedings under this Act, is an offence.

It is important to note that the action is initiated under Sections 73/74/74A against Mr. “R” for the demand and recovery of Rs. 18,000. He is to be penalized under Sections 73/74/74A, but the penalty for offence (non-reply to the notice — u/s 122(1)(xvii)) is not covered under Sections 73/74/74A. Therefore, for such penalties, Section 127 provides that where penalties are not covered under Sections 73, 74, and 74A, the proper officer can impose a penalty after providing an opportunity for a hearing.

If we carefully read Section 122(2), we understand that the penalties covered under Sections 73/74/74A for wrongly utilized ITC are also covered under Section 122(2). However, this does not mean that penalties mentioned under Sections 73/74/74A and Section 122(2) can be imposed on the same person for the same act or omission. If a penalty has already been imposed under Sections 73/74/74A, no penalty can be imposed under Section 122(2) for the same act or omission.

Another important point is that Section 75(13) does not mention any other section. However, based on the above, it seems that it only prohibits imposing penalties under Section 122(2).

This means that since wrongly availed ITC is subject to action under Sections 73/74/74A, the penalty will also be proposed and imposed under these sections only. Therefore, if action is initiated under Sections 73/74/74A, no penalty can be imposed under Section 122(2) for the same offence. However, if the person has committed an offence that is covered under Sections 122(1), 122(1A), 122(1B), or 122(3), a penalty can only be imposed using the powers granted under Section 127.

A second illustration — Sections 62, 63 and 64

Let’s try to understand this with another example. We know that Sections 62, 63, and 64 do not mention any penalties for non-compliance. If a person commits an offence under Sections 62, 63, and 64, then action can be taken/completed under these sections, but penalties are not mentioned.

Now, it is important to note that non-compliance should result in penalties. However, since these sections do not mention any penalties, how will penalties be imposed? Section 127 states that where penalties are not covered under Sections 62, 63, and 64, the proper officer can impose penalties after providing an opportunity for a hearing using the powers granted under Section 127. Therefore, since Sections 62, 63, and 64 do not mention any penalties, penalties can be imposed using the powers granted under Section 127.

It is also important to note that Sections 62, 63, and 64 do not mention any penalties because if they did, all the offences and penalties mentioned under Section 122 would have to be written in these sections also. To avoid writing these offences and penalties repeatedly, all penalties were mentioned under Section 122. Therefore, if action is taken under Sections 62, 63, and 64, and penalties need to be imposed, they are all mentioned in one place under Section 122. Section 127 provides that where penalties are not covered under Sections 62, 63, and 64, the proper officer can impose penalties after providing an opportunity for a hearing.

“Sections 73/74/74A and 122(2) can only be invoked for imposing penalties if there is an outstanding tax liability. If a show cause notice has been issued under Sections 73/74/74A without mentioning the penalty, later penalties cannot be imposed under Section 122(2) by exercising powers under Section 127.

It is crucial to understand that Sections 73/74/74A and 122(2) can only be invoked for imposing penalties if there is an outstanding tax liability. If a show cause notice has been issued under Sections 73/74/74A without mentioning the penalty, later penalties cannot be imposed under Section 122(2) by exercising powers under Section 127. The initial lines of Section 122(2) suggest that penalties under this section can only be imposed when there is a tax payable. Since tax recovery has already occurred under Sections 73/74/74A, there is no tax left or payable. Consequently, when no tax is payable, even if an offence falls under Section 122(2), a penalty cannot be imposed by exercising powers under Section 127, citing the absence of a time limit in Section 122(2) of the CGST Act, 2017.

Role of Rule 142

It is also essential to mention CGST Rule 142(1) here. Rule 142(1) mentions 12 sections under which a notice can be issued. Notices can only be issued under those sections where the term “Proper Officer” is mentioned. Out of the 12 sections mentioned in Rule 142(1), I will discuss only three sections: Section 122, Section 125, and Section 127.

A question arises as to why Rule 142(1) mentions issuing notices under Sections 122 and 125, even though the term “Proper Officer” is not used in these sections. On the other hand, the mention of Section 127 is appropriate because the term “Proper Officer” is used in Section 127. The officer, using the powers granted under Section 127, can issue a notice if an offence mentioned in Sections 122 and 125 occurs.

It appears that Sections 122 and 125 should not have been mentioned in Rule 142(1).

A penalty under Section 122(2) cannot be imposed by issuing a notice under Sections 73/74/74A. If such a penalty is imposed using a notice under Sections 73/74/74A, it is invalid. It can be concluded that such an order was passed without issuing a show-cause notice and therefore holds no value.

Conclusion

The penalties listed in Sections 73, 74, 74A, and Section 122(2) of the CGST Act, 2017, serve different yet complementary purposes. The rationale for imposing penalties under Sections 73, 74, and 74A is similar to that under Section 122(2). However, the penalties in Sections 73, 74, 74A, and Section 122(2) are not supplementary. This means that if a notice is issued under Sections 73, 74, or 74A, it is impermissible to impose a penalty under Section 122(2) instead of the penalties specified in Sections 73, 74, or 74A. Moreover, any procedural overlap in the imposition of penalties under Sections 73, 74, 74A, and Section 122(2) would render the notice or order void.