Understanding Penalty Orders under the Goods and Services Tax (GST) is important for every registered taxpayer in India. Whether you are a business owner, tax consultant, accountant, or GST professional, knowing the rules around penalties helps you avoid mistakes and stay compliant.
GST law includes clear provisions for when penalties can be imposed. These orders are issued when a taxpayer breaks GST rules—such as not registering for GST, claiming wrong Input Tax Credit (ITC), or not filing returns on time. Penalty orders apply when commodities are transported without proper documentation or tax is collected but not paid.
GST penalties are explained in detail in this blog. It covers the legal sections, types of offences, common penalty amounts, steps followed by the department, and what taxpayers should do in response. We’ve also included updated trends and forms used in 2025.
What are Penalty Orders in GST?
When a registered individual violates GST law, the tax agency issues a Penalty Order. The legal document includes the violation, punishment explanation, and amount due. The department passes such orders only after following proper legal steps, including giving the taxpayer a chance to respond through a show cause notice and hearing.
Penalty Orders are used to deal with various types of errors or violations. Some of the common reasons why a penalty may be imposed include:
- Not registering for GST even if the turnover cap has been reached
- Claiming ineligible Input Tax Credit (ITC)
- Not filing GST returns on time
- Hiding or misreporting actual sales (turnover)
- Committing fraud or submitting false details intentionally
Penalty Orders help maintain tax discipline and send a strong message against evasion. They ensure firms follow rules and keep proper records. For serious cases, penalties may include not only fines but also confiscation of goods or prosecution under GST laws.
Legal Framework for Penalties under GST
Relevant Sections in CGST Act
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Section 122: Penalty for specific offences (default, evasion, fraud)
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Section 123: Punishes non-disclosure of information.
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Section 124: Fine for failure to attend summons
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Section 125: General penalty for contravention not covered elsewhere
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Section 126–128: Guiding principles and general reduction in penalties
- Section 129–130: Penalties related to detention/seizure of goods in transit
CGST Rules
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Rule 142: Demand and penalty notification procedures
- Rule 162: Compounding of offenses procedure
Together, these provisions form a comprehensive structure for enforcement and adjudication.
Categories of GST Penalties
Under the Goods and Services Tax (GST) law, there are three main categories of penalties. Each type is applied depending on how serious the offence is and the intention behind the mistake or violation.
1. Monetary Penalty
This is the most common form of penalty. A predetermined sum or percentage of the tax is included. Late GST returns may be penalized daily. Claiming ineligible Input Tax Credit (ITC) can result in a penalty equal to or greater than the amount improperly claimed.
2. Prosecution
This penalty applies in serious or willful violations. If a person repeatedly commits fraud, creates fake invoices, or knowingly avoids tax, legal action may be taken. Prosecution can include imprisonment along with fines. GST criminal provisions apply to these circumstances.
3. Confiscation
If goods are transported without valid documents or are involved in tax evasion, the authorities can seize and confiscate both the goods and the vehicle. Confiscation usually comes along with a financial penalty.
Common Situations That Attract Penalty Orders
- Failure to register under GST (Section 122)
- Issuing invoices without actual supply
- Using ITC without receipt of products
- Transporting goods without proper documents
- Stopping GST officials from inspecting or seizing goods
- Repeated incorrect filings despite notices
- Misreporting of turnover or classification
Forms Used in Penalty Proceedings
| Form | Purpose |
|---|---|
| DRC-01 | Show cause notice for demand or penalty |
| DRC-03 | Intimation of voluntary payment |
| DRC-06 | Reply to show cause notice |
| DRC-07 | Final order for tax, interest and penalty |
| DRC-08 | Rectification of penalty order |
| DRC-09 | Recovery by sale of seized goods |
| MOV-07 | Notice of penalty during transit |
| MOV-09 | Final penalty order for goods in transit |
Step-by-Step Procedure for Issuance of Penalty Order
Step 1: Detection of Offence
An offence under GST is first detected by tax authorities. This may happen during audits, scrutiny of GST returns, departmental inspections, or investigations. Information may also be gathered through data-sharing between departments.
Step 2: Send a Show Cause Notice (SCN)
If the department believes a violation has occurred, they issue a Show Cause Notice in Form DRC-01. This notification describes the claimed default, its legal basis, and the suggested penalty. The taxpayer is given a specific time to respond.
Step 3: Taxpayer’s Response
The taxpayer must reply in Form DRC-06, presenting their explanation, supporting documents, or legal arguments to dispute the claim.
Step 4: Voluntary Payment
If the taxpayer accepts the liability, they may make a voluntary payment of tax, interest, or penalty using Form DRC-03. It may resolve the issue without additional action.
Step 5: Adjudication
If no agreement is reached, the officer conducts a hearing and evaluates all evidence. A final penalty order is then issued in Form DRC-07.
Step 6: Appeal or Recovery
If the taxpayer does not pay the penalty, recovery steps begin. However, they may appeal the decision using Form APL-01 within three months.
Time Limit for Issuance of Penalty Orders
| Type of Case | Time Limit from Date of Offence |
|---|---|
| Non-fraud | 3 years (Section 73) |
| Fraud/Suppression | 5 years (Section 74) |
| Detained goods | Within 7 days of detention (Section 129) |
Timing is crucial for fair adjudication and avoiding excessive litigation.
Penalty Amounts under Various Provisions
Under GST law, the amount of penalty depends on the nature of the violation. Some penalties are fixed, while others are based on the value of tax evaded or goods involved. Key penalty provisions are summarized below:
Section 122 – Common Offences
Section 122 covers a wide range of offences that involve fraud, incorrect invoicing, misuse of Input Tax Credit (ITC), and failure to register.
| Offence Type | Penalty Imposed |
|---|---|
| Supplying goods/services without invoice: | ₹10,000 or tax evasion, whichever is higher. |
| Availing or utilizing fake ITC | ₹10,000 or tax involved, whichever is higher |
| Not paying collected tax to government | 100% of tax amount collected |
| Failure to register despite liability | ₹10,000 or tax amount (higher of the two) |
Section 125 – General Penalty
This section applies to cases where no specific penalty is mentioned elsewhere. The penalty can go up to ₹25,000 per offence.
Section 129 – Goods in Transit Without Documents
When goods are transported without valid e-way bills or documents, authorities can impose steep penalties.
| Situation | Penalty Amount |
|---|---|
| Tax unpaid, owner present | Tax + 100% penalty |
| Tax unpaid, owner absent | Tax + 50% of value of goods (excluding tax) |
These penalty amounts are legally enforced and can have a significant financial impact on businesses if compliance is not maintained.
Key Case Examples (2024–2025)
Example 1: Fake ITC Claim
XYZ Pvt Ltd claimed ₹15 lakh ITC for non-existent supplier invoices. Department issued DRC-01, followed by a hearing. Penalty of 100% (₹15 lakh) was imposed under Section 122 along with interest.
Example 2: Unregistered Business
A courier company operated in Delhi without GST registration despite exceeding turnover limits. Penalty of ₹10,000 was imposed.
Example 3: E-Way Bill Default
Maharashtra detains goods due to expired e-way bill. The Department levied a ₹80,000 penalty under Section 129, which was paid in protest.
Appeal Process Against Penalty Orders
Step 1: Filing the Appeal (Form APL-01)
The taxpayer must file the appeal using Form APL-01 before the Appellate Authority. This should be done within 3 months from the date the penalty order is received.
Step 2: Pre-Deposit Requirement
To register the appeal, the taxpayer must pay 10% of the disputed tax or penalty amount. This is called the pre-deposit and is mandatory for the appeal to be accepted.
Step 3: Review by Appellate Authority
The Appellate Authority reviews the documents, facts, and legal grounds submitted by the taxpayer. It may call for hearings before giving a decision.
Step 4: Filing Further Appeal
If the taxpayer is not satisfied with the first decision, they can file a second appeal with the GST Appellate Tribunal (once functional).
Step 5: High Court and Supreme Court
If needed, further appeals can be made to the High Court and then the Supreme Court for final judgment.
Penalty Trends and 2025 Updates
In 2025, GST enforcement has become stricter across many states. Tax departments are using advanced tools like data analytics, real-time tracking, and e-invoice verification to detect non-compliance faster.
There is a noticeable rise in penalty orders, especially related to mismatched Input Tax Credit (ITC) claims. GST officers are focusing on incorrect vendor data and false invoice networks. E-adjudication modules are also being rolled out, allowing authorities to issue penalty orders online, reducing delays and improving transparency.
Key penalty trends in 2025 include:
- Surge in ITC-related penalty orders due to invoice mismatches
- Real-time alerts integrated with GSTR-2B and e-invoice data
- Cases where PAN-linked fake GSTINs are being targeted
- Penalties imposed even on intermediary platforms under e-commerce provisions
- Introduction of e-adjudication module across multiple states
- Use of analytics and AI for cross-verification of filings
Tips to Avoid Penalty Orders
- File GST returns on or before due dates
- Validate vendors before claiming ITC
- Reconcile purchase registers with GSTR-2B monthly
- Maintain transport documents and e-way bills
- Respond to departmental notices promptly
- Avoid fictitious invoicing and round-tripping
- Subscribe to updates from thegstco. or GST portal to stay informed
FAQs
Q1. What is the meaning of penalty order in GST?
A penalty order is an official document issued by GST authorities to impose monetary penalties for violations of GST provisions.
Q2. Can penalty be waived under GST?
Yes, under Section 126, penalty may be waived for minor breaches or genuine errors without fraudulent intention.
Q3. Is hearing mandatory before penalty?
Yes. A proper show cause notice and personal hearing must be given before any penalty order is finalized.
Q4. What is the Section 125 general penalty?
A general penalty of up to ₹25,000 can be levied if no specific penalty is prescribed for the offence.
Q5. What if I do not pay the penalty?
The GST department will initiate recovery proceedings including bank attachment, garnishee notices, or auction of goods.
Q6. Can I appeal against a penalty order?
Yes. You can appeal using Form APL-01 within 3 months from the date of order along with 10% pre-deposit.
Q7. Where can I get latest updates on GST penalty rules?
Visit the official GST portal or platforms like thegstco. for circulars, and updates.
