Penalties & Processes under GST Audit – How to Minimise Your Liability

Last Updated at: Jan 15, 2021
The GST law has clearly defined descriptions of offenses and the penalties levied in each scenario. This is important information for all business owners, CAs and Tax Professionals as an inadvertent mistake can cause severe consequences.


On June 3rd 2020, the Honorable Finance Minister announced that businesses with revenue of less than Rs 5 crore would not have to pay late fee, interest or fine.


Audit under GST: corrections should be allowed without additional penalties in the first year. Audit under GST laws is an additional compliance and perhaps the government should restrict audit to certain points.


In our last post, we mentioned the significance of maintaining proper books of accounts and also described the two types of audit processes that may be enforced under the GST Act. And one should ensure proper filing of GST returns. In this article, we describe the steps to minimise your liability, in case you have received a notice from the department or are undergoing scrutiny or investigation by the tax department.

What should you do when incorrect data is revealed is not a result of any fraud or willful misstatement of facts:

While you may follow the best of internal processes, there may be inadvertencies in the data records that may creep in, which may not be revealed by the reconciliation statement. For example, a receipt recorded as 10,000 instead of 1, 00,000 in the books of accounts may not come to your notice unless traced back to the sale memo. This difficulty in identification of correct particulars is furthered enhanced when the business takes place at multiple locations (and books of account maintained at one central location) or when there are hundreds of sale memos, making actual verification of each memo highly impossible.

The best route to follow in this case once the shortfall amount is determined by the tax officer is to promptly pay the same within thirty days, in which case there shall be no penalty. The only surplus amount you may be required to pay is the interest on the shortfall, which can be a maximum of 18 per cent.

However, if the delay is beyond this period, a notice shall be served and the amount of tax along with an interest and a penalty equivalent to ten per cent of tax or ten thousand rupees, whichever is higher will become payable.

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Where the incorrect particulars were furnished without any fraud, or any willful misstatement or suppression of facts to evade tax

This is a fairly complex scenario where you may require legal aid and maybe a consequence of the following:

  • Where tax has not been paid
  • Where the tax paid is in a shortfall
  • Where input tax credit has been wrongly availed
  • Where credit is utilized by fraud
  • Wilful misstatement or suppression of facts, suggested by non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.
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The following steps may be used as guidance, should you receive a show cause notice from the tax department, demanding an explanation:

  1. On the basis of your own ascertainment of such tax or the tax as ascertained by the proper officer, before service of notice of such fraud, you may pay the amount of tax along with interest payable under section 50 ( a maximum of 18 per cent) and a penalty equivalent to 15 per cent. of such tax. It is important to inform the proper officer in writing of such payment, after which no notice will be served for any tax payable in this regard.
  2. The other alternative in this case, after a notice is served with a time period of six months, is paying the entire tax amount mentioned in the notice, along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, after which all proceedings in respect of the said notice shall be deemed to be concluded. However, the tax officer will assess if the amount paid is adequate after a representation is made, and drop the proceedings.
  3. The tax officer has the power to issue an order till five years from the due date of filing return. So, in case you haven’t exhausted the other two alternatives, by default a penalty equivalent to fifty per cent of such tax along with interest within thirty days of communication of the order become payable.

Provision for appeal:

You may also take the recourse of going to the Appellate Authority or Appellate Tribunal within three months from the date of communication of any order. The Appellate Tribunal may modify the amount of tax determined by the proper officer, in which case, the amount of interest and penalty shall stand modified accordingly.

Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.