GST Penalties May Be Treated As Charges, Offering Tax Relief To Businesses

New Delhi, Nov 10 (KNN) The government is considering changes to the treatment of penalties in non-fraud-related Goods and Services Tax (GST) cases to provide relief to businesses and reduce their compliance burden.

Under the proposed framework, penalties imposed on taxpayers who settle their tax dues and interest within the prescribed timeframe may be classified as charges rather than penalties, potentially allowing businesses to claim them as business expenses while computing income tax liability.

The proposed reclassification could also help businesses avoid adverse implications during credit assessments by banks, as penalty entries in financial statements may indicate compliance deficiencies.

Proposed Changes To Reduce GST Penalties

According to the proposed provisions, taxpayers in non-fraud cases would be required to pay the applicable tax and interest within 30 days of receiving an order.

For cases covered under Section 74A, the payment window is reportedly 60 days. Those complying within the stipulated period may benefit from a reduction in the penalty rate from 10 per cent to 5 per cent.

The proposed relief would not extend to cases involving fraud, wilful misstatement or tax evasion.

Tax expert and Chartered Accountant Dharmendra Srivastava said the GST Council had agreed at its previous meeting to recognise such penalties as charges. A proposal is expected to be introduced during Parliament's Winter Session.

The changes will take effect after approval by Parliament and the respective state legislatures.

Reclassification May Improve Business Tax Treatment

Under the existing income tax framework, penalties imposed for violations of law are generally not allowed as deductions while computing taxable income.

The proposed reclassification could enable businesses to record these payments as expenses in their profit and loss accounts, subject to applicable tax provisions.

Company law expert and Company Secretary Vaibhav Agnihotri said banks assess businesses based on their balance sheets and profit and loss statements. Classifying an amount as a charge instead of a penalty could help avoid negative signals during credit assessments.

Relief To Be Linked To Timely Tax Payments

However, eligibility for income tax deductions would depend on the applicable tax provisions, and the proposed benefit would be conditional on compliance with the prescribed payment deadlines.

Businesses failing to deposit the applicable tax and interest within the stipulated period would not qualify for the reduced penalty rate under the proposed framework.

(KNN Bureau)