Learn About Various GST Penalties and How to Avoid Paying Penalties

Are you a new business trying to get around GST compliances and worried of not making mistakes. This article details out the various pitfalls to avoid as a new business.

The Goods and Services Tax (GST) is a transformative tax regime in India, streamlining indirect taxation and reducing tax burden for businesses. However, non-compliance with GST regulations can lead to significant penalties, which can hurt the businesses financially. Understanding the various GST penalties, their causes, and strategies to avoid them is crucial for businesses aiming to stay compliant. This blog explores the types of GST penalties, provides real-world penalty calculation examples, and offers actionable tips to avoid paying penalties under the GST framework, with insights on how Tax Ease, a leading GST compliance software, can help.

What Are GST Penalties?

GST penalties are financial or legal consequences imposed by the GST authorities for non-compliance with the provisions of the GST Act. These penalties are designed to enforce discipline among taxpayers and ensure adherence to GST regulations. Penalties can arise due to late filings, incorrect invoicing, failure to register, tax evasion, or other violations. The Central Goods and Services Tax (CGST) Act, 2017, and corresponding state laws outline the specific penalties for various offenses. For crisp overview of penalties, kindly keep reading. (for detailed laws, follow the link on GST portal)

Penalties under GST can range from nominal fines for minor infractions to hefty amounts for serious violations like fraud or tax evasion. Tools like Tax Ease can simplify compliance, reducing the risk of penalties by automating filings and ensuring accuracy.

Types of GST Penalties

The GST Act categorizes penalties based on the nature of the offense. Below are the most common types of GST penalties businesses may encounter:

Penalty for Late Filing of GST Returns

Failing to file GST returns on time is one of the most common reasons for penalties. The GST portal mandates timely submission of returns like GSTR-1, GSTR-3B, and others.

Penalty Amount:

• A late fee of ₹50 per day (₹25 CGST + ₹25 SGST) for regular taxpayers, capped at ₹5,000 per return.
• For taxpayers under the composition scheme, the penalty is ₹20 per day (₹10 CGST + ₹10 SGST), capped at ₹5,000.

Example:

• Suppose a business misses the GSTR-3B filing deadline by 15 days.
• Penalty: ₹50/day × 15 days = ₹7,500 (₹375 CGST + ₹375 SGST).
• If delayed further, the maximum penalty would be ₹5,000.

Tax Ease can help avoid this penalty by sending automated reminders and streamlining the filing process, ensuring timely submissions.

Penalty for Non-Registration Under GST

Businesses with an annual turnover exceeding the GST registration threshold (₹20 lakh for services, ₹40 lakh for goods in most states) must register under GST. Failure to do so attracts penalties.

Penalty Amount:

• 10% of the tax due or ₹10,000, whichever is higher.

Example:

• A business with a taxable supply of ₹10 lakh fails to register and owes ₹1,80,000 in GST (at 18% tax rate).
• Penalty: 10% of ₹1,80,000 = ₹18,000.
• Since tax due ₹18,000 is higher, the penalty imposed is ₹18,000.

Tax Ease offers a compliance checklist that alerts businesses to register when their turnover nears the threshold, preventing such penalties.

Penalty for Incorrect Invoicing

Issuing incorrect or incomplete GST invoices (e.g., missing mandatory details like GSTIN, HSN code, or place of supply) can lead to penalties.

Penalty Amount:

• Up to ₹10,000 for minor errors or ₹25,000 for major discrepancies per invoice.

Example:

• A retailer issues 10 invoices without mentioning the HSN code.
• Penalty: ₹10,000 × 10 invoices = ₹1,00,000 (in extreme cases).

Penalty for Tax Evasion or Fraud

Deliberate attempts to evade GST, such as under-reporting sales, claiming false input tax credit (ITC), or issuing fake invoices, attract severe penalties.

Penalty Amount:

• 100% of the tax evaded or ₹10,000, whichever is higher, along with potential prosecution for willful default.

Example:

• A business under-reports sales worth ₹10 lakh, evading ₹1.8 lakh in GST (18% rate).
• Penalty: 100% of ₹1.8 lakh = ₹1.8 lakh.

Penalty for Failure to Issue E-Way Bill

An e-way bill is mandatory for transporting goods worth over ₹50,000. Failure to generate or carry a valid e-way bill can result in penalties.

Penalty Amount:

• ₹10,000 or the tax amount sought to be evaded, whichever is higher, along with possible detention of goods.

Example:

• A consignment worth ₹5 lakh (GST ₹90,000 at 18%) is transported without an e-way bill.
• Penalty: ₹90,000 (tax amount) or ₹10,000, whichever is higher, i.e., ₹90,000.

General Penalty for Other Violations

For miscellaneous violations not explicitly covered under the GST Act, a general penalty applies.

Penalty Amount:

• Up to ₹25,000 per offense.

Why Do GST Penalties Matter?

GST penalties can significantly impact a business’s finances and reputation. Small businesses, in particular, may struggle to absorb these costs, while repeated violations can lead to scrutiny from GST authorities, audits, or even legal action. Additionally, penalties can disrupt cash flow, especially when combined with interest on delayed tax payments (18% per annum). By using tools like Tax Ease, businesses can prioritize compliance and avoid unnecessary financial strain.

How to Avoid GST Penalties

Avoiding GST penalties requires proactive measures and adherence to GST regulations. Here are practical tips to stay compliant and minimize the risk of penalties, with Tax Ease as a key enabler:

Timely Filing of GST Returns

1. Set Reminders: Use a dedicated person for tax filing can be expensive. One may use an intelligent tool, such as Tax Ease’s automated reminders to track GST return deadlines (e.g., 20th of the month for GSTR-3B).
2. Automate Processes: Tax Ease automates return filing, ensuring accuracy and timeliness.

Ensure Accurate GST Registration

1. Check Threshold Limits: Use invoicing tools to keep track of your business's turnover. When a business uses Tax Ease for invoicing, the tool monitors turnover and alerts businesses when GST registration is required.
2. Voluntary Registration: It is also prudent to perform a voluntary GST registration of your business which can bring discipline to the business. It will also create a financial footprint in tax systems for you to avail bank credit by showing the longevity of business.

Maintain Proper Invoicing Practices

1. Use Standard Invoice Formats: Always use standardized invoice formats that include all the required information such as GSTIN, HSN/SAC codes, and detailed tax breakdowns. Tax Ease’s invoicing module is very intelligent and ensures invoices include all mandatory details like GSTIN, HSN/SAC codes, and tax breakup.
2. Regular Audits: If you are not using a tool, ensure that a qualified chartered accountant does regular audits to ensure that your business is GST compliant.

Comply with E-Way Bill Requirements

1. Generate E-Way Bills Promptly:Always generate e-way bills before transporting goods that exceed the threshold limits to remain compliant. Use tools that integrates with the GST portal to generate e-way bills for all applicable transactions. (Coming soon in Tax Ease)
2. Train Staff: Educate employees on e-way bill rules using Tax Ease’s compliance guides.
3. Example: A logistics firm uses Tax Ease to ensure valid e-way bills, avoiding a ₹36,000 penalty on a ₹2 lakh consignment.

Avoid Tax Evasion

1. Transparent Reporting: Make sure you report all your sales, purchases, and ITC claims transparently in your GST returns.
2. Hire Professionals: It’s wise to consult a tax professional who can review your records and provide compliance advice

Leverage Technology for Compliance

1. GST Software:Use a GST software to streamline tasks like return filing, invoicing, and e-way bill generation. Tax Ease streamlines compliance tasks like return filing, invoicing, and e-way bill generation.
2. Regular Updates: - Stay updated with the latest GST law changes to prevent costly mistakes due to outdated practices.

Conduct Regular GST Audits

1. Internal Audits: Schedule quarterly internal audits to detect and resolve discrepancies early.
2. Professional Audits: Bring in a professional auditor periodically to perform a deep review and flag hidden compliance gaps.

Real-World Impact of GST Penalties

Consider the case of a medium-sized retailer in Mumbai with an annual turnover of ₹2 crore. The business missed filing GSTR-3B for three months due to oversight, incurring a penalty of:

• ₹50/day × 90 days = ₹4,500 (capped at ₹5,000 per return).
• Total for three returns: ₹15,000.

Additionally, the retailer issued 100 invoices without proper HSN codes, leading to a penalty of:

• ₹10,000 × 100 invoices = ₹10,00,000.

By utilizing the services of a tax filing consultant or implementing a tool such as Tax Ease, the retailer could have avoided these penalties, saving ₹10,15,000.

Conclusion

Navigating the GST landscape can be challenging, but understanding GST penalties and adopting proactive compliance measures can save businesses from financial and legal troubles. By filing GST returns on time, maintaining accurate invoices, generating e-way bills, and leveraging technology like Tax Ease, businesses can avoid penalties and ensure smooth operations. The penalty calculation examples provided highlight the financial impact of non-compliance, underscoring the importance of staying vigilant.

Pro Tip: Use Tax Ease to automate your GST compliance, track deadlines, and avoid costly penalties effortlessly!

Stay informed, stay compliant, and keep your business penalty-free! For more GST tips and updates, visit the GST portal or consult a GST expert today.