GST Council removes arrest power, raises prosecution threshold to ₹5 crore: What changes for taxpayers

The GST Council has approved a series of changes to enforcement provisions, including the removal of the power of arrest under GST, a higher threshold for prosecution and a lower general penalty, as the government moves towards a more proportionate approach to tax compliance.

The 57th GST Council meeting decided to remove the power of arrest under GST. At the same time, the threshold for prosecution will be increased from ₹1 crore to ₹5 crore, significantly raising the level at which a taxpayer could face prosecution.

The Council also decided to reduce the general penalty from ₹25,000 to ₹10,000. The general penalty applies in cases where no specific penalty is prescribed under the GST law.

Under the revised approach, a taxpayer who files a return late, makes a mistake or falls behind on a payment will face recovery of the tax, applicable interest and a proportionate penalty, rather than additional punitive action beyond that.

The changes reflect the Council’s broader attempt to shift GST enforcement towards detection and proportionate action, rather than relying primarily on deterrence.

The government said this approach has become possible because the GST system has evolved considerably since the law was introduced. The system can now match information reported by sellers and buyers invoice by invoice and use network analysis to identify potentially fake input tax credit.

The Council said this allows enforcement to focus on identifying irregularities where they arise instead of relying on broad-based intervention.

MUST READ: No UPI MDR discussion at GST Council meet; rates unchanged, ITC protection among key takeaways

What changes for taxpayers?

No GST arrest power: The power of arrest under GST is being removed, changing one of the more stringent enforcement provisions available to tax authorities.

Higher prosecution threshold: The threshold for prosecution will rise from ₹1 crore to ₹5 crore. This means cases involving amounts below ₹5 crore will no longer meet the threshold for prosecution under the revised provision.

Lower general penalty: The general penalty will be reduced from ₹25,000 to ₹10,000, providing relief in cases where no specific penalty has been prescribed.

Tax and interest still payable: The changes do not mean taxpayers are exempt from their underlying tax obligations. A taxpayer who files late, makes an error or delays payment will continue to face tax recovery, interest and a proportionate penalty.

Greater reliance on technology: Invoice-level matching and network analysis will allow authorities to identify suspicious transactions and fake credit more precisely.

The enforcement changes come alongside wider GST compliance reforms announced at the meeting, including faster refunds, automated registration and measures to protect genuine taxpayers from losing input tax credit because of supplier defaults.

The Council has also decided that GST rates will not be changed at the meeting, with rate matters to be reviewed separately once a year.

Overall, the enforcement reforms seek to distinguish between genuine compliance errors and serious tax evasion, while giving taxpayers greater certainty over the consequences of non-compliance.

ALSO READ: GST Council shields genuine taxpayers from ITC loss; small e-commerce sellers get interstate relief