GST reforms: Arrest powers, prosecution threshold, penalty changed; what happens to those already facing proceedings?

The GST Council on Thursday, October 8, cleared a major set of changes to GST (goods and services tax) administration, including higher prosecution threshold, lower general penalty and curbs on arrest powers for tax officers.

These reforms, scheduled to come into force on 1 April 2027, aim to reduce the compliance burden on businesses. They follow the broader GST reforms introduced last year, when rates were mostly cut and tax slabs rationalised.

What changes for businesses?

Here’s the list of compliance-related changes that would largely impact businesses from next financial year onwards:

• Arrest powers scrapped: GST officers’ arrest powers for routine non-compliance will be removed, with verification shifting from discretionary officer-led checks to system-driven risk rules.
• Minimum punishment removed: Courts will have the discretion to decide whether to impose a fine, imprisonment or both.
• General penalty reduced: The maximum general penalty, applicable where no specific penalty is prescribed, will be cut from ₹25,000 to ₹10,000.
• Prosecution threshold raised: The minimum amount for criminal prosecution will increase fivefold, from ₹1 crore to ₹5 crore.
• Relief in pending litigation: A ₹10,000 minimum threshold will apply to show-cause notices under Sections 73, 74 and 74A, including pending cases.
• ITC protection for genuine buyers: Eligible buyers will be protected from losing input tax credit (ITC) solely because an upstream supplier defaults.

What about businesses already facing prosecution?

However, these changes raise an important question about whether businesses already facing prosecution or other enforcement action under the existing provisions will benefit from the revised rules.

“As a general principle, amendments to penal and procedural provisions apply prospectively, unless the amending statute expressly provides otherwise,” Kunal Savani, Partner at Cyril Amarchand Mangaldas told Livemint.

This means cases that are already initiated under the existing provisions would, absent express retrospective applicability, continue to be governed by the law as it stood at the time of the alleged offence.

“Where the amended provisions are beneficial to the accused, such as higher prosecution thresholds or removal of mandatory minimum sentences, courts may, relying on the principle of beneficial construction and constitutional safeguards, extend the benefit of such amendments to pending proceedings,” he noted.

Meanwhile, another expert said that there is a possibility of government applying these reforms on a retrospective basis.

“The Council has not given any such clarification so far. However, considering the intention behind these changes, the government may apply them retrospectively,” said Karan Sarawagi, Advocate at Bombay High Court.

Will the reforms weaken anti-evasion checks?

Another key question relates to how the government will ensure that the changes do no weaken action against deliberate defaults.

Commenting on this, Sarawagi said that prosecution has not been done away with; only arrest powers for GST officers have been removed, meaning officers can no longer make pre-emptive arrests under the new provisions, addressing concerns over the alleged misuse of these powers.

“The taxman will continue to retain powers to suspend or cancel registration, block fraudulent ITC, attach property & bank accounts and recover tax, interest and penalty. Further, with the growing use of AI and data analytics, the department can now detect illicit and fraudulent activities far more quickly, so checks and balances remain firmly in place. The changes only aim to ease the business environment and prevent misuse of powers,” he explained.