Amended and updated notes on section 138 of CGST Act, 2017. Detail discussion on provisions and rules related to compounding of offences.
Chapter XIX (Sections 122–138) of the Central Goods and Services Tax Act, 2017 deals with the provisions related to offences and penalties. Section 138 of CGST 2017 provides for compounding of offences.
Recently, we have discussed in detail section 137 (Offences by companies) of CGST Act 2017. Today, we learn the provisions of section 138 of Central GST Act 2017.
Section 138 of the Central Goods and Services Tax Act, 2017 has been notified by the Ministry of Finance vide Notification No. 9/2017-Central Tax, G.S.R. 658(E), dated 28.06.2017. This notification was come into force from 1st July, 2017 i.e. the commencement date of section 138 is 1-7-2017.
| Name of Act | The Central Goods and Services Tax Act 2017 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Central Board of Indirect Taxes & Customs |
| Governing body | GST Council |
| Number of Chapters | 21 |
| Number of Sections | 174 |
| You are reading: | |
| Chapter No. | XIX |
| Chapter Name | Offences and Penalties |
| Section No. | 138 |
| Section Name | Compounding of offences |
| Updated 2025 Edition | GST Law Book PDF |
Relevant Rules and Forms for GST Section 138:
- Rule 162: Procedure for compounding of offences
- FORM GST CPD – 01: Application for Compounding of Offence
- FORM GST CPD – 02: Order for rejection / allowance of compounding of offence
Section 138 of Central GST – Compounding of offences1
Section 138 of CGST Act 2017 shall come into force on 01.07.2017 vide Notification No. 9/2017-Central Tax, G.S.R. 658(E), dated 28.06.2017.
Section 138(1) of CGST Act
Section 138(1): Any offence under this Act may, either before or after the institution of prosecution, be compounded by the Commissioner on payment, by the person accused of the offence, to the Central Government or the State Government, as the case be, of such compounding amount in such manner as may be prescribed:
Provided that nothing contained in this section shall apply to—
[(a) a person who has been allowed to compound once in respect of any of the offences specified in clauses (a) to (f), (h), (i) and (l) of sub-section (1) of section 132;][1]
[(b) a person who has been allowed to compound once in respect of any offence, other than those in clause (a), under this Act or under the provisions of any State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act or the Integrated Goods and Services Tax Act in respect of supplies of value exceeding one crore rupees;][2]
[(c) a person who has been accused of committing an offence under clause (b) of sub-section (1) of section 132;]2
(d) a person who has been convicted for an offence under this Act by a court;
[(e) a person who has been accused of committing an offence specified in clause (g) or clause (j) or clause (k) of sub-section (1) of section 132;]3 and
(f) any other class of persons or offences as may be prescribed:
Provided further that any compounding allowed under the provisions of this section shall not affect the proceedings, if any, instituted under any other law:
Provided also that compounding shall be allowed only after making payment of tax, interest and penalty involved in such offences.
[1] In section 138, in sub-section (1), in the first proviso, clause (a) and clause (c) substituted by the Finance Act 2023 w.e.f. 1st day of October, 2023 vide Notification No. 28/2023-Central Tax, S.O. 3422(E), dated 31.07.2023.
[2] In section 138, in sub-section (1), in the first proviso, clause (b) and clause (e) omitted by the Finance Act 2023 w.e.f. 1st day of October, 2023 vide Notification No. 28/2023-Central Tax, S.O. 3422(E), dated 31.07.2023.
Section 138(2) of CGST Act
Section 138(2): The amount for compounding of offences under this section shall be such as may be prescribed, subject to the minimum amount not being less than [twenty-five per cent. of the tax involved and the maximum amount not being more than one hundred per cent. of the tax involved][1].
[1] In section 138, in sub-section (2), for the words “ten thousand rupees or fifty per cent. of the tax involved, whichever is higher, and the maximum amount not being less than thirty thousand rupees or one hundred and fifty per cent. of the tax, whichever is higher”, the words “twenty-five per cent. of the tax involved and the maximum amount not being more than one hundred per cent. of the tax involved” substituted by the Finance Act 2023 w.e.f. 1st day of October, 2023 vide Notification No. 28/2023-Central Tax, S.O. 3422(E), dated 31.07.2023.
Section 138(3) of CGST Act
Section 138(3): On payment of such compounding amount as may be determined by the Commissioner, no further proceedings shall be initiated under this Act against the accused person in respect of the same offence and any criminal proceedings, if already initiated in respect of the said offence, shall stand abated.
- Section 138 of CGST Act 2017 shall come into force on 01.07.2017 vide Notification No. 9/2017-Central Tax, G.S.R. 658(E), dated 28.06.2017. ↩︎
Notes on Section 138 of CGST Act
Explanation of CGST Section 138(1)
1. What is Compounding of Offences?
Under the Central Goods and Services Tax (CGST) Act, 2017, compounding refers to a legal process where a person accused of an offence can settle the case by paying a prescribed amount instead of undergoing prosecution. This allows the accused to avoid lengthy court proceedings.
2. Key Provisions of Section 138(1):
- Compounding by the Commissioner:
- The Commissioner has the authority to allow compounding of an offence before or after prosecution has started.
- The accused must pay a compounding amount to the Central Government or the State Government in the prescribed manner.
3. Cases Where Compounding is NOT Allowed:
The law specifies exceptions where compounding is not permitted:
- Repeat Offenders
- A person who has already availed compounding for certain serious offences under Section 132(1) (a) to (f), (h), (i), and (l) cannot seek compounding again.
- These offences typically include tax evasion, fraudulent invoices, fake transactions, and misuse of input tax credit.
- Obstruction of Officers
- If a person is accused under Section 132(1)(b) (obstructing or preventing a tax officer from duty), compounding is not allowed.
- Convicted Persons
- If the accused has already been convicted by a court for any GST offence, compounding is prohibited.
- Other Categories
- The government may specify additional offences or categories of persons who are ineligible for compounding.
4. Additional Provisions:
- Compounding Does Not Affect Other Legal Proceedings:
- Even if an offence is compounded under GST law, it does not prevent proceedings under any other law (e.g., IPC, Money Laundering Act).
- Payment of Dues Before Compounding:
- Before compounding is granted, the accused must first pay all the outstanding tax, interest, and penalty related to the offence.
5. Practical Implications:
- Compounding is beneficial for businesses and individuals as it avoids criminal prosecution.
- However, it is a one-time relief for certain serious offences, and repeat offenders cannot avail it.
- Before opting for compounding, the taxpayer must clear all outstanding tax liabilities.
Explanation of CGST Section 138(2)
1. What Does Section 138(2) State?
Section 138(2) of the Central Goods and Services Tax (CGST) Act, 2017 defines the amount that must be paid for compounding an offence under Section 138(1).
- The minimum compounding amount cannot be less than 25% of the tax involved in the offence.
- The maximum compounding amount cannot exceed 100% of the tax involved in the offence.
- The exact compounding amount is to be prescribed by the government through rules.
2. Key Implications:
- Flexibility in Penalty Amounts: The compounding amount varies between 25% to 100% of the tax evaded or involved in the offence. The actual amount will depend on the severity of the violation and the prescribed rules.
- Avoidance of Criminal Prosecution: If the accused agrees to pay the compounding amount, they can settle the case without facing prosecution in a court of law.
- Encourages Compliance: Since compounding allows offenders to resolve cases without criminal liability, it acts as an incentive for businesses and individuals to comply with tax laws.
3. Example for Better Understanding:
Suppose a taxpayer is caught evading ₹10 lakh in GST.
- Minimum Compounding Amount = ₹2.5 lakh (25% of ₹10 lakh)
- Maximum Compounding Amount = ₹10 lakh (100% of ₹10 lakh)
- The final compounding amount will be decided based on prescribed rules and the discretion of the Commissioner.
Section 138(2) ensures that the penalty for compounding is significant but not excessive. It provides a structured approach where offenders can settle cases while ensuring the government recovers the lost tax revenue.
Explanation of CGST Section 138(3)
1. What Does Section 138(3) State?
Section 138(3) of the Central Goods and Services Tax (CGST) Act, 2017 provides legal protection to an accused person after they have paid the compounding amount as determined by the Commissioner.
- Once the compounding amount is paid, no further proceedings can be initiated under the GST Act for the same offence.
- If any criminal proceedings were already started in court for the offence, they will stand abated (i.e., be legally stopped or dismissed).
2. Key Implications:
- Final Settlement: Payment of the compounding amount acts as a full and final settlement of the offence under the GST Act.
- No Criminal Liability: Any ongoing criminal case related to the same offence is automatically closed (abated), meaning the person will not face prosecution.
- Legal Protection: The accused cannot be charged again for the same offence after compounding is completed.
3. Example for Better Understanding:
Suppose a taxpayer was found guilty of GST evasion of ₹10 lakh and faced criminal prosecution.
- The Commissioner determines a compounding amount of ₹3 lakh (as per prescribed rules).
- Once the taxpayer pays ₹3 lakh,
- No further legal action can be taken against them under GST for this offence.
- If a criminal case was already filed in court, it will be dismissed (abated).
Section 138(3) provides relief to taxpayers who opt for compounding by ensuring they do not face additional legal action or criminal prosecution after settling their dues.