Section 138 of the Central Goods and Services Tax Act, 2017 deals with the compounding of offences under GST. Compounding provides a statutory mechanism through which certain offences under the CGST Act may be settled by payment of a prescribed compounding amount, subject to the conditions and restrictions laid down in the Act and the CGST Rules.
The provision is part of Chapter XIX – Offences and Penalties and comes after Section 137, which deals with offences by companies. Section 138 is therefore concerned with the consequences and resolution of offences that can result in prosecution under the GST law.
Under the current law, an eligible offence may be compounded either before or after prosecution has been instituted. However, compounding is not available in every case. Section 138 specifically excludes certain persons and offences, and the tax, interest and penalty involved in the offence must be paid before compounding can be allowed.
The statutory framework was significantly changed by the Finance Act, 2023, with the amendments to Section 138 becoming effective from 1 October 2023. The amendment reduced the statutory compounding range from the earlier framework to a minimum of 25% and a maximum of 100% of the tax involved and also changed several categories of offences for which compounding is unavailable.
What Is Section 138 of the CGST Act?
Section 138 provides the legal mechanism for compounding offences committed under the CGST Act.
In simple terms, compounding allows an eligible accused person to resolve the prosecution-related consequences of a GST offence by paying the prescribed compounding amount, after satisfying the statutory requirements.
The provision has three main parts:
- Section 138(1) – eligibility, restrictions and basic conditions for compounding;
- Section 138(2) – statutory limits for the compounding amount; and
- Section 138(3) – effect of payment of the compounding amount.
The detailed procedure is prescribed under Rule 162 of the CGST Rules, 2017.
What Does Compounding of an Offence Mean?
Compounding is a statutory mechanism for resolving an offence without continuing criminal prosecution for the same offence after the prescribed conditions have been fulfilled.
Under Section 138(1), an offence may be compounded either:
- before prosecution is instituted; or
- after prosecution has been instituted.
The person accused of the offence must pay the prescribed compounding amount to the Central Government or the State Government, as applicable, in the prescribed manner.
Therefore, compounding is different from simply paying GST dues.
A taxpayer may have to deal separately with:
- tax;
- interest;
- penalty; and
- compounding amount.
Section 138 specifically requires payment of the tax, interest and penalty involved before compounding can be allowed.
Why Is Section 138 Important?
Certain offences under Section 132 can result in criminal prosecution and imprisonment, depending on the offence and the amount involved.
Section 138 provides an additional statutory mechanism for eligible cases so that prosecution for the same offence can be resolved through compounding.
This is particularly important because the law distinguishes between ordinary tax dues and offences that may attract prosecution.
The purpose of compounding is therefore not simply to reduce a tax demand. It provides a mechanism for dealing with the prosecution consequences of an eligible offence after the statutory conditions are satisfied.
Section 138(1) – Basic Rule for Compounding
Section 138(1) states that any offence under the CGST Act may, either before or after institution of prosecution, be compounded by the Commissioner on payment of the prescribed compounding amount by the person accused of the offence.
However, this general rule is immediately subject to specific exclusions.
Therefore, it would be incorrect to say that every offence under the CGST Act can automatically be compounded.
The taxpayer must first determine:
- whether the offence is eligible;
- whether any exclusion applies;
- whether tax, interest and penalty have been paid;
- what compounding amount is applicable under Rule 162; and
- whether the Commissioner accepts the application.
Offences and Persons Excluded from Compounding
The first proviso to Section 138(1) contains important restrictions.
Under the current provision, compounding does not apply to the following categories.
A Person Who Has Already Been Allowed to Compound Certain Offences
Section 138(1)(a) covers a person who has already been allowed to compound once in respect of offences specified in clauses (a) to (f), (h), (i) and (l) of Section 132(1).
This means that a person who has already received the benefit of compounding for one of these specified offences cannot simply obtain the same compounding benefit again in relation to another offence covered by this restriction.
The restriction is therefore particularly important for repeat offenders.
Fake Invoice Offence Under Section 132(1)(b)
Section 138(1)(c) specifically excludes a person who has been accused of committing an offence under Section 132(1)(b).
Section 132(1)(b) concerns issuing an invoice or bill without the supply of goods or services, where the conduct leads to wrongful availment or utilisation of input tax credit or refund of tax.
Therefore, the current law does not provide the normal compounding route for a person accused of the specified fake-invoice offence under Section 132(1)(b).
This is an important change from the earlier statutory framework.
Person Already Convicted by a Court
Section 138(1)(d) excludes a person who has already been convicted for an offence under the CGST Act by a court.
This is logical because compounding is intended to operate before the matter reaches the point where the person has already been convicted for the offence.
Therefore, a person cannot treat Section 138 as a mechanism for reversing an existing court conviction.
Other Classes Prescribed by the Rules
Section 138(1)(f) also provides that compounding will not apply to any other class of persons or offences as may be prescribed.
This gives the rule-making framework the ability to prescribe additional restrictions where authorised by the Act.
Compounding Does Not Affect Proceedings Under Other Laws
The second proviso to Section 138(1) contains another important condition.
It provides that any compounding allowed under Section 138 does not affect proceedings, if any, instituted under any other law.
Therefore, GST compounding should not be understood as a universal settlement of every possible legal consequence arising from the same conduct.
For example, if the same conduct gives rise to proceedings under another applicable law, Section 138 does not automatically terminate those proceedings.
The protection provided by Section 138 is connected with the offence and proceedings covered by the CGST Act.
Payment of Tax, Interest and Penalty Is Mandatory
The third proviso to Section 138(1) states that compounding shall be allowed only after payment of the tax, interest and penalty involved in the offence.
This is one of the most important practical requirements.
The compounding amount is therefore not a substitute for the underlying GST dues.
A person seeking compounding must first satisfy the requirement relating to:
- tax;
- interest; and
- penalty.
Only after these amounts have been paid can the compounding application be allowed under the statutory framework.
Compounding Amount Is Separate From Tax, Interest and Penalty
It is useful to distinguish the different amounts involved.
| Amount | Purpose |
|---|---|
| Tax | GST liability involved in the offence |
| Interest | Interest applicable under GST law |
| Penalty | Penalty payable in relation to the offence |
| Compounding amount | Amount payable for compounding the eligible offence |
Section 138 specifically requires payment of tax, interest and penalty before compounding is allowed. The compounding amount is therefore an additional statutory payment and should not be confused with the underlying tax liability.
Section 138(2) – Compounding Amount
Section 138(2) provides the statutory boundaries for the compounding amount.
Under the current provision:
- the minimum compounding amount cannot be less than 25% of the tax involved; and
- the maximum compounding amount cannot be more than 100% of the tax involved.
These are statutory limits.
They do not mean that every eligible offence is automatically compounded at 25% or that every case can be compounded at 100%.
The actual amount is determined in accordance with the prescribed rules, particularly Rule 162(3A).
Important Change From 1 October 2023
Before the 2023 amendment, Section 138(2) provided a substantially different range involving:
- a minimum based on ₹10,000 or 50% of tax involved, whichever was higher; and
- a maximum based on ₹30,000 or 150% of tax involved, whichever was higher.
The Finance Act, 2023 replaced this framework with the current statutory range of 25% to 100% of the tax involved, effective from 1 October 2023.
This change is important when studying older GST materials because older articles may still quote the pre-October 2023 limits.
Rule 162 – Procedure for Compounding
Section 138 establishes the legal right and framework for compounding, while Rule 162 of the CGST Rules provides the procedural mechanism.
An applicant may apply for compounding either before or after prosecution has been instituted.
The application is made to the Commissioner in FORM GST CPD-01.
The Commissioner then calls for a report from the concerned officer regarding:
- the particulars provided in the application; and
- other information considered relevant for examining the application.
FORM GST CPD-01
FORM GST CPD-01 is the prescribed application for compounding an offence.
The applicant uses this form to request compounding from the Commissioner.
The application should contain accurate information about the offence and the relevant proceedings because Rule 162 requires the Commissioner to consider the facts of the case and the applicant’s disclosure.
Report From the Concerned Officer
After receiving the application, the Commissioner calls for a report from the concerned officer.
The purpose is to enable the Commissioner to examine the application with reference to the factual and procedural background of the case.
The report may assist in determining:
- the nature of the offence;
- the tax involved;
- the relevant proceedings;
- payments already made;
- other relevant facts; and
- the appropriate compounding amount.
Full and True Disclosure of Facts
Rule 162 requires the Commissioner, while considering the application, to be satisfied that the applicant has made a full and true disclosure of the facts relating to the case.
The Commissioner may then allow the application, specify the compounding amount and grant immunity from prosecution, or reject the application.
The requirement of full and true disclosure is important because compounding is a statutory settlement mechanism and depends on an accurate understanding of the offence.
Removal of the “Co-operated” Requirement
An earlier version of Rule 162(3) required the Commissioner to be satisfied that the applicant had co-operated in the proceedings and had made full and true disclosure.
Notification No. 38/2023-Central Tax omitted the words relating to cooperation, with the amendment effective from 1 October 2023.
The current focus under Rule 162(3) is therefore on the application and the applicant’s full and true disclosure of facts relating to the case.
FORM GST CPD-02
Where the Commissioner allows the compounding application, the order is issued in FORM GST CPD-02.
The order indicates the compounding amount and grants immunity from prosecution in accordance with Rule 162.
If the application is rejected, the applicant must be given an opportunity of being heard and the grounds for rejection must be recorded.
Opportunity of Being Heard
Rule 162 provides an important procedural safeguard.
The application cannot be decided under Rule 162(3) without:
- giving the applicant an opportunity of being heard; and
- recording the grounds of rejection where the application is rejected.
Therefore, the Commissioner cannot simply reject an application without following the prescribed procedure.
Compounding Application Must Be Supported by Payment of Tax, Interest and Penalty
Rule 162 further provides that the application cannot be allowed unless the tax, interest and penalty liable to be paid have been paid in the case for which the application is made.
This reinforces the requirement already contained in Section 138(1).
The taxpayer therefore needs to settle the underlying GST liabilities before the compounding benefit can be granted.
Payment of Compounding Amount Within 30 Days
After the Commissioner passes the order under Rule 162(3), the applicant must pay the compounding amount ordered by the Commissioner within 30 days from receipt of the order and furnish proof of payment to the Commissioner.
The process is therefore not complete merely because the application has been approved.
The applicant must also make the payment within the prescribed period.
Failure to Pay the Compounding Amount
Rule 162 provides a significant consequence if the applicant does not pay the compounding amount within the prescribed 30-day period.
The order made under Rule 162(3) becomes vitiated and void.
Therefore, obtaining an order allowing compounding is not enough. The applicant must comply with the payment requirement.
Immunity From Prosecution
Where the Commissioner allows compounding under Rule 162, the order grants immunity from prosecution in accordance with the prescribed procedure.
This is closely connected with Section 138(3), under which payment of the determined compounding amount results in no further proceedings under the CGST Act for the same offence and causes an already instituted criminal proceeding for that offence to stand abated.
Withdrawal of Immunity
The immunity granted during compounding proceedings is not unconditional.
Rule 162 provides that the Commissioner may withdraw the immunity if the person is found to have:
- concealed any material particulars; or
- given false evidence
during the compounding proceedings.
After withdrawal of immunity, the person may be tried for the offence for which immunity had been granted or for another offence appearing to have been committed in connection with the compounding proceedings.
The law then applies as if the immunity had never been granted.
Rule 162(3A) – How the Compounding Amount Is Determined
The current rules contain a specific offence-wise mechanism under Rule 162(3A).
The Commissioner determines the compounding amount under Rule 162(3) according to the prescribed table. This mechanism was inserted with effect from 1 October 2023 through Notification No. 38/2023-Central Tax.
The table distinguishes offences according to the relevant clause of Section 132(1) and the punishment applicable under Section 132(1)(i) or (ii).
Offences Under Section 132(1)(a), (c), (d) and (e)
For offences under Section 132(1)(a), (c), (d) and (e), the prescribed range is:
- where punishable under Section 132(1)(i): minimum 50% and up to 75% of the relevant amount; and
- where punishable under Section 132(1)(ii): minimum 40% and up to 60% of the relevant amount.
The relevant amount may be the tax evaded, ITC wrongly availed or utilised, or refund wrongly taken, depending on the offence.
Offences Under Section 132(1)(f), (h) and (i)
For offences under Section 132(1)(f), (h) and (i), Rule 162(3A) prescribes a compounding amount equivalent to 25% of the relevant tax amount in the specified circumstances.
Attempt or Abetment
For an attempt to commit or abetment of offences covered by Section 132(1)(a), (c) to (f), and (h) and (i), the compounding amount is 25% of the relevant amount of tax evaded, ITC wrongly availed or utilised, or refund wrongly taken, as applicable.
Multiple Categories
If an offence falls under more than one category in the Rule 162(3A) table, the compounding amount is determined according to the category for which the higher compounding amount has been prescribed.
Understanding “Tax Involved” for Compounding
Section 138(2) refers to the “tax involved.”
In the context of the offences covered by Rule 162(3A), the relevant amount may depend on the nature of the offence.
For example, the rule refers to:
- tax evaded;
- input tax credit wrongly availed or utilised; and
- refund wrongly taken.
Therefore, the compounding amount should not be calculated merely by looking at the total turnover of the business.
The applicable offence and the relevant amount under Rule 162 must first be identified.
Example of Compounding Amount
Suppose an eligible offence involves tax evasion of ₹10 lakh and falls into a category where Rule 162(3A) prescribes a compounding range of 50% to 75%.
The applicable compounding amount may therefore fall within:
- minimum: ₹5 lakh; and
- maximum: ₹7.5 lakh,
subject to the Commissioner’s determination under the applicable rule.
This is only an illustration of the statutory calculation mechanism. The actual amount depends on the specific offence, applicable punishment category and facts of the case.
Section 138(3) – Effect of Payment
Section 138(3) provides the principal legal consequence of successful compounding.
Once the compounding amount determined by the Commissioner is paid:
- no further proceedings shall be initiated under the CGST Act against the accused person in respect of the same offence; and
- if criminal proceedings have already been instituted for that offence, those proceedings shall stand abated.
This is the central benefit of compounding.
What Does “Proceedings Shall Stand Abated” Mean?
If prosecution for the same offence has already been instituted and the offence is successfully compounded, Section 138(3) provides that the criminal proceedings for that offence shall stand abated.
Therefore, successful compounding can bring the GST prosecution to an end for the same offence, subject to the statutory framework.
However, this should not be interpreted as wiping out proceedings under unrelated laws because Section 138(1) expressly states that compounding does not affect proceedings instituted under any other law.
Section 138 Is Different From Payment of Tax
A common misunderstanding is that paying the tax automatically closes a prosecution.
That is not the effect of Section 138.
The provision separately requires:
- payment of tax;
- payment of interest;
- payment of penalty; and
- payment of the compounding amount determined under the applicable rules.
Only after the statutory requirements for compounding are satisfied does Section 138(3) provide the consequence of ending further proceedings under the CGST Act for the same offence.
Section 138 and Section 132
Section 132 is the main provision dealing with punishment for certain GST offences.
Section 138, on the other hand, provides the mechanism for compounding eligible offences.
The relationship can be understood as:
Section 132 → identifies punishable offences and penalties
Section 138 → provides a mechanism for compounding eligible offences
The eligibility for compounding therefore requires examination of the particular offence under Section 132 and the exclusions under Section 138.
Section 138 and Fake Invoices
Fake-invoice cases require particular attention.
Section 132(1)(b) covers issuing invoices or bills without supply where the conduct leads to wrongful availment or utilisation of ITC or refund.
The current Section 138(1)(c) specifically excludes a person accused of the Section 132(1)(b) offence from the compounding mechanism.
Therefore, older articles stating that all Section 132 offences can be compounded should not be relied upon without checking the current law.
👉 Read More → Section 140 – Transitional arrangements for input tax credit
Section 138 and Prosecution Thresholds
Section 132 determines which offences can result in prosecution and the punishment applicable to them.
The current Section 132 provides different punishment levels based on the amount of tax evaded, ITC wrongly availed or utilised, or refund wrongly taken.
For example, Section 132(1)(i) applies where the relevant amount exceeds ₹5 crore, while Section 132(1)(ii) applies where the amount exceeds ₹2 crore but does not exceed ₹5 crore.
These punishment categories are relevant because Rule 162(3A) uses the punishment classification under Section 132(1)(i) and (ii) for determining the compounding amount.
Section 138 and Companies
Section 137 deals with offences by companies and identifies circumstances in which persons responsible for the conduct of the company’s business may be deemed guilty.
Section 138 can then become relevant to the compounding of an eligible offence.
Therefore, companies and their responsible officers should examine the exact offence, the person accused, and whether any Section 138 exclusion applies.
Compounding eligibility is not determined merely by the fact that the offence relates to a company.
Section 138 and Directors
Where an offence has been attributed to a company and an individual director or officer is proceeded against under Section 137, the individual’s position must be examined separately in relation to the offence and any application for compounding.
The availability of compounding depends on the statutory conditions and exclusions and is not automatic merely because the company has paid its tax dues.
Section 138 and LLPs, Firms, HUFs and Trusts
Section 137 also contains provisions concerning taxable persons that are:
- partnership firms;
- Limited Liability Partnerships;
- Hindu Undivided Families; and
- trusts.
The relevant partner, karta or managing trustee may be deemed guilty in the circumstances specified in Section 137.
If compounding is considered, the precise person accused and the offence involved must therefore be examined along with Section 138.
Practical Procedure for Compounding an Eligible GST Offence
The process can broadly be understood as follows:
Step 1 – Identify the Offence
Determine the exact offence under Section 132.
Step 2 – Check Section 138 Eligibility
Check whether any exclusion under Section 138 applies.
Step 3 – Pay Tax, Interest and Penalty
The tax, interest and penalty involved in the offence must be paid before compounding can be allowed.
Step 4 – File FORM GST CPD-01
Submit the compounding application to the Commissioner.
Step 5 – Examination by the Commissioner
The Commissioner calls for a report from the concerned officer and examines the application.
Step 6 – Full and True Disclosure
The applicant must make a full and true disclosure of the facts relating to the case.
Step 7 – Hearing
The applicant must be given an opportunity of being heard before the application is decided.
Step 8 – Order in FORM GST CPD-02
The Commissioner may allow or reject the application in accordance with Rule 162.
Step 9 – Pay the Compounding Amount
If approved, the applicant must pay the ordered amount within 30 days of receipt of the order.
Step 10 – Effect of Successful Compounding
After payment, Section 138(3) provides that no further proceedings under the CGST Act can be initiated for the same offence and any criminal proceedings already instituted for that offence stand abated.
What If the Compounding Application Is Rejected?
A rejection under Rule 162 must follow the prescribed procedure.
The applicant must be given an opportunity of being heard, and the grounds for rejection must be recorded.
The rejection of a compounding application does not mean that the taxpayer’s underlying tax liability disappears. The applicable tax, interest, penalty and prosecution provisions continue to operate according to law.
What If the Applicant Does Not Pay the Compounding Amount?
If the Commissioner allows compounding but the applicant does not pay the ordered compounding amount within the prescribed 30-day period, Rule 162 provides that the order becomes vitiated and void.
Therefore, timely payment is essential after approval.
What If the Applicant Conceals Facts?
Rule 162 specifically provides for withdrawal of immunity where the Commissioner is satisfied that the person concealed material particulars or gave false evidence during the compounding proceedings.
This means that the applicant must maintain complete honesty throughout the compounding process.
Compounding should not be treated as an opportunity to conceal information in order to obtain immunity.
Is Compounding Automatic?
No.
Section 138 provides a legal mechanism for compounding, but an eligible person must still follow the prescribed procedure.
The Commissioner examines the application, obtains the required report, considers the facts, ensures that the statutory conditions are satisfied and determines the compounding amount under Rule 162.
Therefore, simply filing an application does not automatically result in compounding.
Is 25% the Fixed Compounding Amount?
No.
The current Section 138(2) establishes a statutory minimum of 25% and maximum of 100% of the tax involved. However, Rule 162(3A) contains offence-specific percentages and ranges.
For some offences, the applicable range is 50% to 75% or 40% to 60%, while specified other offences have a 25% amount.
Therefore, saying that every offence can be compounded simply by paying 25% of tax would be incorrect.
Is 100% the Compounding Amount in Every Case?
No.
One hundred per cent is the statutory maximum under Section 138(2), not a mandatory amount for every case.
The actual amount must be determined under Rule 162, depending on the offence and the applicable punishment category.
Difference Between Penalty and Compounding Amount
Penalty and compounding amount have different purposes.
A penalty is imposed under the applicable GST provisions for the contravention or offence.
A compounding amount is paid under Section 138 to compound an eligible offence and obtain the statutory consequences associated with compounding.
Section 138 expressly requires the tax, interest and penalty involved in the offence to be paid before compounding is allowed. Therefore, the compounding amount does not simply replace the penalty.
Difference Between Compounding and Prosecution
| Basis | Compounding | Prosecution |
|---|---|---|
| Nature | Statutory mechanism for resolving eligible offence | Criminal proceedings for GST offence |
| Timing | May be before or after prosecution is instituted | Proceedings before court |
| Authority | Commissioner under Section 138 | Court |
| Payment | Compounding amount plus underlying tax, interest and penalty requirements | Criminal case proceeds according to law |
| Result after successful compounding | Further CGST proceedings for same offence cease and existing prosecution stands abated | Court determines the prosecution |
| Eligibility | Subject to Section 138 exclusions | Depends on applicable offence and prosecution provisions |
Difference Between Compounding and Waiver
Compounding should also be distinguished from a waiver.
A waiver generally concerns relief from a specified amount or liability where the law provides such power.
Compounding under Section 138 is concerned with an offence and prosecution.
The person must satisfy the statutory requirements and pay the prescribed compounding amount.
Therefore, compounding does not mean that all GST dues have been waived.
Difference Between Compounding and Settlement of Tax Demand
Payment of a GST demand and compounding of an offence are separate concepts.
A taxpayer may pay a tax demand without necessarily having a prosecution-related issue.
Conversely, where an eligible offence has resulted in prosecution proceedings, Section 138 provides a separate mechanism for compounding.
This is why Section 138 specifically requires payment of tax, interest and penalty before compounding is allowed.
Practical Example – Eligible Offence
Suppose a taxpayer is accused of an offence that falls within an eligible category under Section 132 and Section 138.
Assume:
- tax involved = ₹10 lakh;
- interest and penalty are determined separately; and
- the taxpayer pays the tax, interest and penalty.
The taxpayer may apply for compounding using FORM GST CPD-01.
If the Commissioner allows the application and determines the compounding amount according to Rule 162, the taxpayer must pay that amount within the prescribed 30-day period.
After payment, Section 138(3) provides the statutory consequence that no further proceedings under the CGST Act can be initiated for the same offence and any criminal proceedings already instituted for that offence stand abated.
Practical Example – Fake Invoice Case
Suppose a person is accused of issuing invoices without actual supply in a manner covered by Section 132(1)(b).
Section 138(1)(c) specifically excludes a person accused of this offence from the compounding mechanism.
Therefore, the person cannot simply apply for compounding under Section 138 in the same manner as an eligible offence.
This demonstrates why the first step in any compounding analysis is identifying the precise Section 132 offence.
Practical Example – Previous Compounding
Suppose a person has already been allowed to compound an offence falling within the categories specified in Section 138(1)(a).
If the same person later seeks compounding for another offence covered by the restriction, Section 138(1)(a) may prevent the person from obtaining compounding again.
Practical Example – Conviction Already Recorded
Suppose a court has already convicted a person for an offence under the CGST Act.
Section 138(1)(d) excludes a person who has been convicted by a court from the compounding mechanism.
Therefore, compounding is not a mechanism for undoing an existing GST conviction.
Important Compliance Points Under Section 138
Businesses and professionals dealing with GST prosecution matters should carefully verify:
- the exact offence under Section 132;
- whether the offence is eligible for compounding;
- whether the person has previously received compounding;
- whether the offence is specifically excluded;
- whether the person has already been convicted;
- tax payment status;
- interest payment status;
- penalty payment status;
- the applicable Rule 162 category;
- the prescribed compounding amount;
- the CPD-01 application;
- the CPD-02 order;
- the 30-day payment requirement; and
- the accuracy and completeness of disclosures.
Key Takeaways of Section 138
Section 138 can be summarised through the following important points:
- Section 138 deals with compounding of offences under the CGST Act.
- An eligible offence may be compounded before or after prosecution is instituted.
- The Commissioner is the authority for compounding under Section 138.
- The person accused of the offence must pay the prescribed compounding amount.
- Compounding is subject to statutory exclusions.
- A person who has already been allowed to compound certain specified offences cannot obtain compounding again in the circumstances covered by Section 138(1)(a).
- A person accused of the Section 132(1)(b) fake-invoice offence is excluded from compounding.
- A person already convicted for an offence under the CGST Act by a court is excluded.
- Compounding under GST does not affect proceedings under another law.
- Tax, interest and penalty involved in the offence must be paid before compounding can be allowed.
- Section 138(2) currently provides a statutory compounding range of 25% to 100% of the tax involved.
- The actual amount is determined under the prescribed rules.
- Rule 162 provides the detailed procedure.
- The application is made in FORM GST CPD-01.
- The Commissioner may issue an order in FORM GST CPD-02.
- The applicant must make a full and true disclosure of facts relating to the case.
- The applicant must be given an opportunity of being heard before rejection.
- The compounding amount must generally be paid within 30 days of receipt of the order.
- Failure to pay the compounding amount within the prescribed period makes the compounding order void under Rule 162.
- Successful compounding results in no further proceedings under the CGST Act for the same offence.
- Criminal proceedings already instituted for the same offence stand abated after payment of the determined compounding amount.
- Immunity granted during compounding can be withdrawn if material particulars are concealed or false evidence is given.
- Rule 162(3A) provides offence-specific mechanisms for determining the compounding amount.
- The current Section 138 framework should be distinguished from the older pre-1 October 2023 provisions.
Conclusion
Section 138 of the CGST Act provides a statutory mechanism for compounding eligible GST offences. It allows a person accused of an eligible offence to seek compounding either before or after prosecution has been instituted, subject to the conditions prescribed by the Act and Rules.
The provision is not available for every GST offence. The current law specifically excludes, among other categories, a person who has already been allowed to compound certain specified offences, a person accused of the Section 132(1)(b) offence relating to issuing invoices without supply, and a person already convicted for an offence under the CGST Act by a court.
Another important condition is that tax, interest and penalty involved in the offence must be paid before compounding is allowed. The compounding amount is separate from these amounts and is determined according to the prescribed mechanism.
Following the Finance Act, 2023 amendments effective from 1 October 2023, Section 138(2) now provides a statutory range of 25% to 100% of the tax involved. Rule 162(3A) further provides offence-specific percentages and ranges for determining the amount in an individual case.
Rule 162 provides the practical procedure, including FORM GST CPD-01, examination by the Commissioner, full and true disclosure of facts, opportunity of hearing, FORM GST CPD-02 and payment of the determined compounding amount within the prescribed period.
The most important consequence of successful compounding is contained in Section 138(3): after payment of the compounding amount determined by the Commissioner, no further proceedings can be initiated under the CGST Act against the accused person for the same offence, and criminal proceedings already instituted for that offence stand abated. However, proceedings under any other law are not automatically affected.
Therefore, Section 138 should be understood as a prosecution-related statutory mechanism, not as a general waiver of GST tax, interest or penalty. A taxpayer considering compounding must first identify the exact offence, check the statutory exclusions, settle the underlying tax, interest and penalty, and then follow the procedure prescribed under Rule 162.
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