Kerala GST Dept issues Clarification on Manner of Penalty Calculation under IGST Act for SCN issued u/s 73(1)/74(1) KGST Act [Read Order]

The Kerala Goods and Services Tax ( GST ) department has issued a crucial circular clarifying the method for calculating penalties under the Integrated Goods and Services Tax ( IGST ) Act. This clarification pertains to Show Cause Notices ( SCNs ) issued under Section 73(1) or 74(1) of the Kerala GST Act, 2017, read in conjunction with Section 20 of the IGST Act, 2017.

The department clarified that Section 20 (xxv) of the IGST Act, 2017, specifies that provisions related to penalties under the CGST Act and the SGST Act also apply to the IGST Act. Notably, the fourth proviso to Section 20 of the IGST Act clarified that the penalty under the IGST Act should be the sum total of the penalties under the CGST and SGST Acts.

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Thus, it clarified that the penalty under the IGST Act is determined based on the penalties that would be levied under the CGST and SGST Acts. There is no independent penalty provision under the IGST Act itself; it relies on the penalties stipulated in the CGST and SGST Acts.

The department clarified it with an illustration as follows:

For a service attracting 18% rate of tax, the tax levied under CGST is at the rate of 9% and that under SGST is at the rate of 9%. If it becomes an intra-state supply, the penalty to be levied on each Act is 10% as per section 73(9) of the CGST and the SGST Acts. ( i.e., Taxable value x 9% x 10% ). Now, applying these rates to the above clause of the IGST Act

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• Provided also that in cases where the penalty is leviable under the Central Goods and Services Tax Act ( i.e., Taxable value x 9% x 10% ) or the State Goods and Services Tax Act ( i.e., Taxable value x 9% x 10% ), the penalty leviable under this Act shall be the sum total of the said penalties ( (Taxable value x 9% x 10% ) + ( Taxable value x 9% x 10%) )
• Therefore, the penalty is ( CGST (Taxable value x 9% x 10% ) + SGST ( Taxable value x 9% x 10%) ), which is equal to 10% of ( 9% + 9% ), i.e., which is equal to 10% of 18%.
• In short, the ‘penalty’ is ten percent of the tax amount under the IGST Act. Therefore, as per section 20 of IGST Act, it is the penalty amounts that must be added, ( The penalty rates should NOT be added. )

The above scenario can be explained with the following examples ( assume the tax rate is 18% ):

Example 1: An adjudicating authority has decided to confirm a demand under section 73 of the Act for the non-payment of the following taxes:

The adjudicating authority should impose the penalty under the IGST Act in the following manner:

The Department has also provided two additional examples illustrating scenarios where an adjudicating authority has confirmed a demand under Section 73 of the Act. In the first example, the authority confirmed a demand for ineligible Input Tax Credit ( ITC ) utilized by a taxable person. In the second example, the authority confirmed a demand for taxes that were not paid by a taxable person.

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