General disciplines related to penalty (Section 126)

(1) No officer under this Act 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.

Explanation.– For the purpose of this sub-section––

(a)  a breach shall be considered a ‘minor breach’ if the amount of tax involved is less than five thousand rupees;

(b)  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.

(2) The penalty imposed under this Act shall depend on the facts and circumstances of each case and shall be commensurate with the degree and severity of the breach.

Section 126 of CGST Act, 2017, stipulates the principles for levy of penalty and general discipline to be observed by the tax authorities while levying penalty.  The general guidelines to be followed while imposing penalties are as under:

• Substantial penalties shall not be imposed for minor breaches of tax regulations or procedural requirements.
• No penalty in respect of any omission or mistake in documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence shall be greater than necessary to serve merely as a warning.
• The penalty imposed shall depend on the facts and circumstances of the case and shall commensurate with the degree and severity of the breach.

Minor Breach

Sub-section (1) provides that no tax authority can levy any penalty for minor breach or procedural requirements.

Such cases may be:

1. Minor breach of tax regulations
2. Breach of procedural requirements
3. Omission of mistake which can be easily rectified
4. Mistakes and omissions without fraudulent intent or gross negligence.

What is a minor breach?

Explanation to sub-section (1) provides that a breach shall be considered as a minor breach if the amount of tax involved is less than Rs. 5000.

In other words, a breach involving Rs. 5000 or above will be considered as a major breach to which sub-section (1) will not apply.

What is rectifiable mistake?

Sub-section (1) covers both the types of breaches i.e., any omission or any mistake in any documentation.

Omitting any compliance or omitting to do a particular act in the specified manner is also a mistake and is considered as a minor mistake provided the following three conditions are fulfilled :

1. It is made without fraudulent intent or
2. It does not result from gross negligence
3. Such mistake should be an error apparent on the face of record.

Another condition which qualifies a mistake as a minor mistake is that it should be easily rectifiable, i.e., being capable of being rectified.

Further, such rectification is qualified by the word ‘easily’. What is meant by easily has not been specified but would depend upon circumstances of each case.

Quantum of penalty

While the quantum of imposition of penalty by proper officer has not been specified, sub-section (2) provides that penalty imposed shall depend on following two factors:

1. The facts and circumstances of each case
2. Degree and severity of the breach

The penalty as aforesaid should be commensurate with the above.

However, sub-section (6) specifically provides that penalty under section 126 of CGST Act, 2017 shall not be levied where penalty is already fixed in the law either as a fixed sum or as a fixed percentage.

Voluntary Disclosure of Non-compliance

In terms of section 126(5) of CGST Act, 2017, where a person voluntarily discloses to a tax authority the circumstances of a breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the tax authority, the tax authority may consider this fact as a potential mitigating factor when quantifying a penalty for that person.

It may be noted that in such a case, following two conditions should be satisfied :

1. The disclosure of breach should be voluntarily by the taxpayer
2. It should be disclosed (before it is discovered by the officer)

No penalty without adjudication

Sub-sections (3) and (4) deals with determination of penalty and the manner of levy of penalty. Accordingly, following points should be borne in mind:

1. The proper officer cannot impose penalty on any person suo-moto.
2. The proper officer shall follow principles of natural justice and opportunity of being heard must be given.
3. The order of penalty should specify the nature of breach for which penalty is being imposed.

No penalty in specified cases

According to sub-section (6), section 126 shall not apply to following cases :

1. Where penalty is a fixed sum specified in any section
2. Where penalty is specified as a fixed percentage in any section.

Thus, in the case of section 73 and 74, since fixed percentage or amount has been specified, the provisions of section 126 shall not apply while levying penalty under section 73 and 74 of CGST Act, 2017.