Proposed GST Penalty Changes Could Make Tax Disputes Less Costly for MSMEs: FISME

New Delhi, Nov 9 (KNN) Changes to GST demand and penalty provisions proposed during the 57th GST Council meeting could ease the compliance burden on micro, small and medium enterprises (MSMEs) by limiting proceedings over minor tax disputes and ensuring more proportionate penalties, according to the Federation of Indian Micro and Small & Medium Enterprises (FISME).

The reforms recommended at the 57th GST Council meeting, including reducing the general penalty, raising the prosecution threshold and modifying arrest and notice provisions, are scheduled to take effect from April 1, 2027, subject to formal legislative enactments and notifications.

The industry body highlighted that contesting even small tax demands can involve professional fees and management time exceeding the disputed amount, prompting businesses to pay disputed dues simply to avoid prolonged proceedings and uncertainty.

Proposed Changes to Demand and Penalty Provisions

Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act govern demand proceedings for older tax periods, while Section 74A applies from financial year 2024-25.

Under the proposed changes, a minimum threshold of Rs 10,000 for issuing notices would apply to the aggregate tax amount across relevant tax heads and cess, excluding interest and penalties. A demand of exactly Rs 10,000 would meet the threshold.

The changes also seek to reduce the maximum general penalty under Section 125 from Rs 25,000 to Rs 10,000.

Lower Dispute Costs Could Improve Compliance

FISME said a meaningful threshold for small demands could help avoid proceedings where the administrative and professional costs of recovery exceed the amount in dispute.

For non-fraud cases, proportionate penalties and timely settlement opportunities could also reduce unnecessary escalation and allow businesses to focus on operations.

However, the federation noted that merely changing the classification of a penalty into a charge would not reduce the amount payable unless the underlying financial liability is also lowered.

MSME Impact Remains Unquantified

No reliable estimate of the number of MSMEs or tax cases that could benefit from the proposed changes is available, FISME said.

Assessing the potential reach would require data on notices and pending cases by disputed amount, distinct Permanent Account Number (PAN) and MSME status. The number of cases cannot automatically be treated as the number of affected enterprises, as a single business may face multiple proceedings, it added.

The actual impact will depend on the final amendments and their implementation by tax authorities.

FISME suggested that comparing the tax amount involved in a small dispute with the professional fees and management time required to contest it could help establish whether the proposed thresholds meaningfully reduce tax administration costs for small businesses.

(KNN Bureau)