Bombay High Court: Section 122(1A) CGST Act Applies Only to Taxable Persons

• While the tax department has invoked Section 122(1A) of the CGST Act to impose penalties for past transactions, the Supreme Court has stayed its retrospective application for assessment years 2017 to 2020 and clarified its limited applicability to 'taxable persons'.
• Section 122(1A) empowers the department to impose penalties on any person who retains the benefit of transactions covered under specified clauses of Section 122(1).
• The retrospective application of Section 122(1A) has raised concerns about fairness and compliance, leading to significant court rulings, including a Supreme Court stay on its retrospective application for past assessment years and clarifications on its scope.

The tax department's actions have been challenged in various courts, raising questions about the scope and applicability of Section 122(1A).

In a development that has significant implications for businesses and individuals in India, the tax department is invoking Section 122(1A) of the CGST Act to impose penalties on partners, directors, employees, and others for past transactions. This provision was inserted into the statute book with effect from January 1, 2021. While the department has invoked it to retrospectively penalize individuals and entities for actions taken before its enactment, the Supreme Court has stayed the recovery of such penalties and ruled against its retrospective application for assessment years 2017 to 2020. The tax department's actions have been challenged in various courts, raising questions about the scope and applicability of Section 122(1A).

Section 122(1) of the CGST Act provides for the imposition of penalties on taxable persons for various offences and contraventions. The provision was amended in January 2021, with a new sub-section (1A) inserted that empowers the department to impose penalties on any person who retains the benefit of transactions covered under specified clauses of Section 122(1). This means that individuals and entities can be held liable for past transactions if they have benefited from them, though the Supreme Court has ruled against its retrospective application for assessment years 2017 to 2020, and the Bombay High Court has clarified that it applies only to 'taxable persons' who retained the benefit and at whose instance the transaction was conducted. The insertion of Section 122(1A) was a significant development in the GST law, and its retrospective application has raised concerns about fairness and compliance.

The retrospective application of Section 122(1A) has far-reaching implications for businesses and individuals in India. Directors and employees may be exposed to penalties for past transactions, which could have significant financial consequences, though recent court rulings, including by the Supreme Court, have limited the retrospective application of Section 122(1A) and clarified that employees cannot be personally penalized unless they are 'taxable persons' who retained the benefit and at whose instance the transaction was conducted. Lawyers should be aware of this provision and advise their clients on the potential implications of its retrospective application. The tax department's actions also highlight the need for clarity and consistency in the GST law, particularly with regard to the scope and applicability of Section 122(1A).

Lawyers should watch for the potential retrospective application of Section 122(1A) CGST Act, which could expose directors and employees to penalties for past transactions, and advise clients on the implications of this provision.

Source: Original reporting via The Hindu BusinessLine