Section 137 of GST Act: Offences by companies

Explanation of CGST Section 137(1)

Under Section 137(1) of the Central Goods and Services Tax (CGST) Act, 2017, if an offence is committed by a company, then both:

1. The company itself, and
2. Every person who was in charge of and responsible for the company’s business at the time of the offence

shall be deemed guilty of the offence and can be prosecuted and punished accordingly.

Key Points

• The liability extends not only to the company as a legal entity but also to individuals responsible for decision-making and business operations at the time of the offence.
• The term “every person in charge” includes directors, managers, officers, and other key decision-makers.
• Such persons cannot escape liability simply by claiming that the offence was committed by the company alone.

Exceptions & Defense

However, an individual can avoid liability if they can prove that:

1. The offence was committed without their knowledge, or
2. They had exercised due diligence to prevent the offence.

This provision ensures accountability and discourages fraudulent or negligent activities in GST compliance and taxation matters.

Explanation of CGST Section 137(2)

Section 137(2) of the Central Goods and Services Tax (CGST) Act, 2017 expands the scope of liability when an offence is committed by a company. It specifically targets key personnel of the company if their actions contributed to the offence.

Key Provisions

• If an offence is committed by a company, and it is proved that the offence was committed with the consent, connivance, or due to negligence of any:
  • Director
  • Manager
  • Secretary
  • Other officer of the company

then such individuals shall also be deemed guilty of the offence and can be prosecuted and punished accordingly.

Key Terms Explained

1. Consent – If a key officer knowingly allowed the offence to happen.
2. Connivance – If the officer was actively involved in or helped commit the offence.
3. Negligence – If the officer failed to take necessary precautions to prevent the offence.

Difference Between Section 137(1) and 137(2)

• Section 137(1): Makes the company and the person in charge of the company’s business liable by default unless they prove lack of knowledge or due diligence.
• Section 137(2): Specifically holds directors, managers, and officers accountable if they were directly involved in or negligently allowed the offence.

Section 137(2) ensures personal accountability of high-ranking officials in cases where corporate offences occur due to their direct involvement or negligence. This provision aims to prevent misuse of corporate structures for tax evasion or fraudulent activities under GST law.

Explanation of CGST Section 137(3)

Section 137(3) of the Central Goods and Services Tax (CGST) Act, 2017 extends liability for GST-related offences to specific individuals when the offence is committed by entities other than a company, such as:

1. Partnership Firms
2. Limited Liability Partnerships (LLPs)
3. Hindu Undivided Families (HUFs)
4. Trusts

Key Provisions

• If any of the above entities commits an offence under the CGST Act, the following individuals shall be deemed guilty and can be prosecuted and punished accordingly:
  • For a Partnership Firm or LLP → Partners
  • For a HUF → Karta (head of the family)
  • For a Trust → Managing Trustee
• The provision ensures accountability by making the individuals responsible for managing the entity’s affairs liable for GST violations.

Application of Section 137(2) (Mutatis Mutandis)

• The phrase “mutatis mutandis” means that Section 137(2) will apply with necessary modifications to these individuals.
• This means that if the offence was committed with the consent, connivance, or due to negligence of a partner, Karta, or trustee, they will be personally liable for prosecution and punishment.
• However, they can avoid liability if they prove:
  1. The offence was committed without their knowledge, or
  2. They exercised due diligence to prevent it.

Section 137(3) ensures that not only companies but also partnerships, LLPs, HUFs, and trusts are held accountable for GST offences. The individuals responsible for managing these entities—partners, Kartas, and trustees—can face legal consequences if they are involved in, consent to, or negligently allow GST violations.

Explanation of CGST Section 137(4)

Section 137(4) of the Central Goods and Services Tax (CGST) Act, 2017 provides a defense mechanism for individuals who may otherwise be held liable under Section 137(1), 137(2), or 137(3).

Key Provisions

• Any person who is deemed guilty under Section 137 (such as a director, manager, partner, Karta, or trustee) shall not be punished if they can prove either of the following:
  1. Lack of Knowledge – The offence was committed without their knowledge, meaning they were unaware of the wrongful act.
  2. Due Diligence – They had taken all reasonable precautions to prevent the offence but it still occurred.

Purpose of This Provision

• Ensures that innocent individuals are not wrongfully punished.
• Recognizes that in large organizations and businesses, it is possible that not all key persons are directly involved in every decision or action.
• Encourages business leaders to implement strong compliance mechanisms to avoid GST violations.

Burden of Proof

• The burden of proof lies on the individual claiming innocence.
• They must provide sufficient evidence (such as records, compliance measures, or communication) to show that they were unaware of the offence or had taken reasonable steps to prevent it.

Section 137(4) acts as a safeguard against unfair liability by ensuring that only those who were aware of, consented to, or were negligent in preventing GST violations are punished. It promotes fair enforcement of the CGST Act while protecting responsible individuals who genuinely tried to comply with the law.

Explanation of under CGST Section 137

This explanation provides clarity on key terms used in Section 137 of the Central Goods and Services Tax (CGST) Act, 2017 to ensure proper interpretation and application.

Key Definitions:

1. “Company”
   • The term “company” is not limited to just registered companies under the Companies Act.
   • It includes:
     • Body corporates (e.g., Private Limited, Public Limited companies)
     • Firms (including Partnership Firms and LLPs)
     • Other associations of individuals (such as trusts, societies, or other unregistered business entities).
   • This broad definition ensures that not only corporations but also partnerships and other business structures fall under the liability provisions of Section 137.
2. “Director” in relation to a firm
   • In the case of a firm, the term “director” refers to a partner.
   • This means that in a partnership firm, partners will be treated the same way as directors in a company for the purpose of GST offences.
   • If a partnership firm violates the CGST Act, its partners will be held accountable, just like a director would be in a corporate entity.

Purpose of These Definitions

• These definitions expand the scope of liability under Section 137 beyond just companies to include firms and associations of individuals.
• It ensures that partners in firms cannot escape liability by arguing that they are not “directors” in the traditional sense.
• The intent is to hold key decision-makers accountable for GST compliance, regardless of the business structure.

The explanation under Section 137 clarifies that:

• All types of business entities (companies, partnerships, LLPs, and associations) are covered.
• Partners in a firm are treated equally liable as directors in a company for GST violations.
• This ensures uniform accountability across different business structures under GST law.