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

Proposed GST Penalty Relief for MSMEs

The 57th GST Council meeting has recommended changes to the goods and services tax demand and penalty framework that could reduce the cost of tax disputes for micro, small and medium enterprises. The Federation of Indian Micro and Small & Medium Enterprises, or FISME, has said these proposals may limit proceedings over minor disputes and make penalties more proportionate. The reforms are slated to take effect from April 1, 2027, subject to formal legislative amendments and notifications.

What the changes involve

The proposals include a minimum threshold of Rs 10,000 for issuing notices, applied to the aggregate tax amount across relevant tax heads and cess, while excluding interest and penalties. A demand of exactly Rs 10,000 would meet this threshold. The maximum general penalty under Section 125 is proposed to be reduced from Rs 25,000 to Rs 10,000. Other recommendations cover lowering the general penalty, raising the prosecution threshold, and modifying arrest and notice provisions. Demand proceedings for older periods fall under Sections 73 and 74 of the CGST Act, while Section 74A applies from financial year 2024-25.

Why it matters for MSMEs

FISME has observed that contesting even small tax demands can cost more in professional fees and management time than the amount in dispute, which pushes businesses to pay up simply to avoid prolonged proceedings and uncertainty. A meaningful threshold for small demands could therefore prevent cases where the administrative and professional cost of recovery exceeds the disputed sum. For non-fraud cases, proportionate penalties and timely settlement options could curb unnecessary escalation and let businesses concentrate on operations. FISME has cautioned, however, that reclassifying a penalty as a charge will not lower the amount payable unless the underlying financial liability is reduced as well.

What to watch next

The actual impact will hinge on the final amendments and how ta…