GST Personal Penalty on Directors & Partners: Section 122 & 137
📌 Quick Answer
Under Section 122(1A) of the CGST Act, GST officers can impose personal monetary penalty on directors, managing directors, partners, and officers who were in charge of and responsible for the business at the time of contravention. The penalty can be up to the tax evaded or ₹25,000, whichever is higher. Separately, Section 137 provides for criminal prosecution of company officers for offences committed with their consent or attributable to their negligence. At Virtual Auditor, we defend individuals against personal GST penalties by establishing that the statutory conditions for personal liability are not satisfied — in particular, that the individual was not “in charge of” the business or had no knowledge of the contravention.
📖 Definition — Section 122(1A) CGST Act: Where any taxable person who is a company commits a contravention under Section 122(1), every person who at the time of contravention was in charge of and was responsible to the company for the conduct of its business shall be liable to penalty. This extends to directors, managing directors, partners of firms, and officers of LLPs. The provision mirrors the vicarious liability framework of Section 141 of the Negotiable Instruments Act and Section 278B of the Income Tax Act.
📖 Definition — Section 137 CGST Act: Where an offence under the CGST Act is committed by a company, every person who at the time of the offence was in charge of the company shall be deemed guilty of the offence and shall be liable to prosecution. If the offence is committed with the consent or connivance of, or is attributable to negligence of, any director, manager, secretary, or officer, that person shall also be deemed guilty. Prosecution under Section 137 is criminal in nature and can result in imprisonment.
Scope of Personal Liability Under Section 122
Section 122(1) lists 21 categories of offences that attract penalties on the taxable person (the company or firm). With the insertion of sub-section (1A) effective 01 January 2022, the penalty net extends to individuals associated with the entity. The statutory framework operates at two levels.
Level 1: Penalty on the Taxable Person — Section 122(1)
The company or firm is the primary penalty target. The penalty quantum depends on the nature of the offence:
| Offence Category | Section | Penalty |
|---|---|---|
| Supply without invoice or with false invoice | 122(1)(i) & (ii) | Tax evaded or ₹10,000, whichever is higher |
| Collects tax but does not deposit with Government | 122(1)(iii) | Tax evaded or ₹10,000, whichever is higher |
| Avails ITC without actual receipt of goods/services | 122(1)(iv) | Tax evaded or ₹10,000, whichever is higher |
| Obtains refund by fraud | 122(1)(viii) | Tax evaded or ₹10,000, whichever is higher |
| Issues invoice or document using another person’s GSTIN | 122(1)(xii) | ₹25,000 |
| Fails to furnish information or furnishes false information | 122(1)(xv) | ₹25,000 |
| Obstructs or prevents officer from discharging duties | 122(1)(xvi) | ₹25,000 |
Level 2: Personal Penalty on Directors/Partners — Section 122(1A) and (1B)
Section 122(1A) applies when the taxable person is a company. Section 122(1B) applies when the taxable person is a partnership firm or LLP. The structure follows the well-established vicarious liability model:
- Primary liability: Every person who was in charge of and responsible for the conduct of the business at the time of contravention — this typically covers the managing director, CEO, CFO, or designated partner
- Extended liability: If the contravention is committed with the consent or connivance of, or is attributable to negligence of, any director, partner, or officer — that specific person is also liable
- Quantum: Penalty up to the tax evaded or ₹25,000, whichever is higher — this is a personal liability, not recoverable from the company
Section 137: Criminal Prosecution of Officers
Section 137 escalates the consequences beyond monetary penalty to criminal prosecution. The structure mirrors Section 122(1A) but the consequence is imprisonment and fine, not just monetary penalty.
When Does Section 137 Apply?
Section 137 is triggered when the company commits an offence under the CGST Act. The offences punishable with imprisonment are listed in Section 132(1):
- Supply without invoice with intent to evade tax — Section 132(1)(a)
- Issues invoice without supply of goods/services — Section 132(1)(b)
- Avails ITC using invoice without actual supply — Section 132(1)(c)
- Collects any amount as tax but fails to deposit — Section 132(1)(d)
- Evades tax, fraudulently obtains refund — Section 132(1)(e) & (f)
- Falsifies or destroys financial records — Section 132(1)(g) & (h)
- Obstructs or prevents any officer — Section 132(1)(l)
The punishment depends on the quantum of tax evaded:
| Tax Evaded | Imprisonment | Nature |
|---|---|---|
| Exceeding ₹5 Crore | Up to 5 years + fine | Cognisable and non-bailable |
| ₹2 Crore to ₹5 Crore | Up to 3 years + fine | Non-cognisable and bailable |
| ₹1 Crore to ₹2 Crore | Up to 1 year + fine | Non-cognisable and bailable |
Interaction with Companies Act, 2013
Section 137 of the CGST Act must be read with the director’s duties framework under the Companies Act, 2013. Section 166 of the Companies Act prescribes duties of directors including the duty to act in good faith and exercise due diligence. A director who has fulfilled these duties and had no involvement in the GST contravention has a strong defence against Section 137 prosecution.
Additionally, Section 149(12) of the Companies Act provides that an independent director or a non-executive director (not being a promoter or key managerial personnel) shall be held liable only in respect of acts of omission or commission which had occurred with their knowledge, attributable through board processes, and with their consent or connivance or where they had not acted diligently.
Defence Strategies for Personal Penalty
Defence 1: Not “In Charge Of” the Business
The statutory condition requires that the person was “in charge of and was responsible to the company for the conduct of its business.” This is a factual determination. Evidence that negates this condition:
- Board resolution designating specific directors for GST compliance — if the penalised director is not the designated person
- No signing authority on GST returns (GSTR-1, GSTR-3B) — the authorised signatory is the primary responsible person
- No role in the finance, accounts, or tax department — a director overseeing manufacturing or HR may have no involvement in GST compliance
- Resignation prior to the date of contravention — verified through MCA records (DIR-12 filing)
- Non-executive or independent director status — with no role in day-to-day management
Defence 2: No Knowledge or Consent
For extended liability (where the offence is attributable to negligence or committed with consent/connivance), the defence is that the person had no knowledge of the contravention. Evidence includes:
- Board minutes showing the person voted against the decision or was absent
- Delegation of GST compliance to a qualified professional (CA or tax consultant)
- Internal audit reports showing the person raised compliance concerns
- Absence of personal benefit from the tax evasion
Defence 3: Procedural Deficiencies
The adjudication order imposing personal penalty must comply with principles of natural justice:
- Separate show cause notice to the individual — a notice only to the company is insufficient to impose personal penalty
- Opportunity of personal hearing to the individual
- Speaking order with specific findings on how the individual was “in charge of” the business
- If the order merely states “being director, you are liable” without factual findings, it is a non-speaking order liable to be set aside on appeal
💡 Practitioner Insight — CA V. Viswanathan (IBBI/RV/03/2019/12333)
In our experience, a significant number of personal penalty orders fail at the appellate stage because the adjudicating officer does not establish the nexus between the individual and the contravention. The order simply recites the statutory language — “being a director, was in charge of the business” — without any factual finding on the person’s actual role, designation, signing authority, or involvement in the offending transaction. When we file the Section 107 appeal, we produce the company’s board resolution, the authorised signatory list from the GST portal, the organisation chart, and the delegation matrix. In most cases, this evidence is sufficient to discharge the personal liability of non-executive and non-operational directors. For the designated compliance officer, the defence shifts to demonstrating absence of mens rea — the offence was not committed with their knowledge or consent but was a systemic error or a subordinate’s omission.
Compounding of Offences — Section 138
Section 138 permits compounding of offences under Section 132, subject to conditions. Compounding means the offender pays a compounding fee and the prosecution is dropped. Key parameters:
- Compounding amount: Minimum of ₹10,000 or 50% of the tax involved, whichever is higher. Maximum of ₹30,000 or 150% of the tax, whichever is higher
- Who can apply: The accused person (director/partner) or the company
- When: At any time after the offence is compounded but before the prosecution is launched, or during the pendency of prosecution
- Exclusions: Compounding not available if the person has been previously compounded for the same offence, or if the tax evaded exceeds ₹5 Crore
Practical Compliance: Protecting Directors and Partners
Preventive Measures
- Board resolution: Pass a specific resolution designating the person responsible for GST compliance. File this with the GST authorities as part of the registration record
- Authorised signatory: Ensure only the designated compliance officer is the authorised signatory on the GST portal. Other directors should not have signing access unless necessary
- Internal controls: Establish a documented GST compliance checklist reviewed monthly. Maintain records of review in board minutes
- Professional oversight: Engage a qualified CA for GST compliance review. The engagement letter should specify the scope of review and the professional’s responsibility
- D&O insurance: Consider Directors and Officers liability insurance that covers regulatory penalties including GST personal penalties
When a Notice is Received
- Verify whether the notice is issued to the company or to you personally — the reply strategy differs
- Check the date of contravention against your date of appointment and resignation as director
- Collect evidence of your actual role — board resolutions, designation, department oversight, signing authority
- Do not ignore the notice or miss the hearing date — non-appearance results in an ex-parte order
- Engage a specialist for reply drafting — the reply to a personal penalty SCN requires specific legal arguments distinct from the company’s reply
📋 Summary
Personal penalty on directors and partners under Section 122(1A)/(1B) is a relatively new provision (effective 01-01-2022) that significantly expands individual exposure in GST matters. The penalty is personal — not recoverable from the company — and can reach up to the entire tax evaded. Section 137 adds criminal prosecution risk with potential imprisonment. The defence hinges on establishing that the individual was not “in charge of” the business or had no knowledge/consent of the contravention. Preventive documentation — board resolutions, delegation matrices, and compliance records — is the most effective protection. At Virtual Auditor, we represent individuals facing personal GST penalties across adjudication, appellate, and tribunal stages.
Frequently Asked Questions
Can GST officers impose personal penalty on directors of a company?
Yes. Section 122(1A) of the CGST Act (effective 01-01-2022) empowers officers to impose personal penalty on every person who was in charge of and responsible for the conduct of the company’s business at the time of contravention. The penalty extends up to the tax evaded or ₹25,000, whichever is higher. This is a personal liability — the company cannot pay it on the director’s behalf without tax implications.
What is the difference between Section 122 and Section 137 of the CGST Act?
Section 122 deals with monetary penalties imposed through adjudication proceedings — it is a civil proceeding. Section 137 deals with criminal prosecution of company officers — the consequence is imprisonment and fine. Both can run simultaneously for the same contravention. A Section 122 penalty order does not require proof beyond reasonable doubt; Section 137 prosecution does.
Can a sleeping director be penalised under GST Section 122?
The penalty applies to persons “in charge of and responsible for” the business. A director with no operational role, no signing authority on GST returns, and no involvement in the specific transaction can argue that they were not in charge of the business. This defence is well-established under analogous provisions (Section 141 of the NI Act, Section 278B of the IT Act). However, the burden of proving this defence lies on the director.
What offences under GST can lead to prosecution of directors?
Section 132(1) lists offences punishable with imprisonment — these include supply without invoice, invoice without supply, fraudulent ITC availment, collecting tax but not depositing it, fraudulent refund, and destruction of evidence. These offences, when committed by a company, can lead to prosecution of directors under Section 137. Prosecution requires prior sanction of the Commissioner under Section 132(6).
How to appeal against personal penalty under GST Section 122?
The individual can file a first appeal under Section 107 before the Appellate Authority within 3 months (extendable by 1 month). Pre-deposit of 10% of the disputed penalty is required. Further appeal lies to the GST Appellate Tribunal under Section 112 (pre-deposit: 20% of the remaining penalty after Section 107). A writ petition under Article 226 is available if the order is without jurisdiction or violates natural justice principles. Contact us for a case assessment: Book a Consultation.
Is there a monetary threshold for GST prosecution of directors?
Yes. Prosecution under Section 132 requires that the tax evaded exceeds ₹2 Crore (after the amendment effective 01-10-2023, threshold increased from ₹1 Crore to ₹2 Crore). For offences involving tax evasion exceeding ₹5 Crore, the offence is cognisable and non-bailable with imprisonment up to 5 years. Below ₹2 Crore, only monetary penalty under Section 122 applies — no prosecution.
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