GST Penalty Changes 2026: ₹10,000 Limit & Other New Rules

Overview

GST penalties are imposed when taxpayers fail to comply with applicable GST provisions, such as incorrect tax reporting, certain return-related defaults or other violations. However, not every GST mistake involves fraud or intentional tax evasion.

To simplify tax administration and reduce unnecessary litigation, the GST Council recommended several changes to penalty, notice and prosecution provisions in its 57th meeting.

These reforms are part of the broader GST changes announced in October 2026. For an overview of registration, refunds, Input Tax Credit and other decisions, read our detailed article on the 57th GST Council Meeting 2026: Key Decisions, New Rules & Changes.

What Are the New GST Penalty Rules in 2026?

The Council recommended changes to Sections 69, 73, 74, 74A, 125 and 132 of the CGST Act, 2017.

Note: The ₹10,000 penalty reduction applies specifically to the general penalty under Section 125. It does not mean every GST penalty will be limited to ₹10,000.

General GST Penalty Reduced from ₹25,000 to ₹10,000

The GST Council recommended amending Section 125 of the CGST Act, 2017, which deals with general penalties.

Section 125 applies when a person violates a GST provision for which no separate penalty is specifically prescribed.

Under the existing provision, the maximum general penalty is ₹25,000. The Council recommended reducing it to ₹10,000.

Example: Suppose a business commits a procedural violation covered by Section 125.

• Existing maximum general penalty: ₹25,000
• Proposed maximum general penalty: ₹10,000

The proposed amendment reduces the maximum possible general penalty by ₹15,000.

However, penalties for offences covered under separate provisions, such as fraudulent ITC claims or specified tax defaults, must be determined under the applicable sections.

No GST Show Cause Notice for Tax Amounts Below ₹10,000

The Council recommended introducing a minimum tax-demand threshold of ₹10,000 for issuing show cause notices under Sections 73, 74 and 74A.

Under the proposed provisions:

• No show cause notice would be issued where the total tax amount involved is below ₹10,000.
• The threshold would be calculated using the combined amount under CGST, SGST/UTGST, IGST and applicable cess.
• Interest, late fees and penalties would not be included when calculating the ₹10,000 threshold.
• Wrongly availed or utilised ITC amounts would also be considered when determining the threshold.

Example: How the ₹10,000 Threshold Works

The Ministry of Finance clarified on 9 October 2026 that a tax amount of exactly ₹10,000 satisfies the proposed minimum threshold.

What Happens to Pending GST Notices Below ₹10,000?

The Council also recommended transitional relief for certain pending notices and appeals involving amounts below ₹10,000.

Once the relevant provision takes effect, qualifying pending proceedings would be decided as though the new threshold had applied when the notice was originally issued.

Important: This proposal does not exempt businesses from paying tax amounts below ₹10,000. It concerns specified demand-notice proceedings, not the underlying tax liability.

Reduced 5% GST Penalty for Non-fraud Cases

The GST Council recommended reducing penalties in eligible cases that do not involve fraud, wilful misstatement or suppression of facts.

Under the proposal, a taxpayer who pays the outstanding tax and applicable interest within the prescribed period after an adjudication order may qualify for a reduced penalty of 5%.

The recommended deadlines are:

• Section 73: Payment within 30 days of the adjudication order.
• Section 74A: Payment within 60 days of the adjudication order for eligible non-fraud cases.

The Council also recommended removing the minimum penalty requirement of ₹10,000 in non-fraud cases.

Example: Calculation of the Proposed 5% Penalty

Assume a taxpayer has an eligible non-fraud GST demand of ₹1,00,000.

If the taxpayer pays the tax, interest and applicable reduced penalty within the prescribed period, the proposed relief may be available.

The exact benefit will depend on the relevant section, tax period and final legal provisions.

Difference Between Sections 73, 74 and 74A Under GST

Understanding these sections is important because penalties and proceedings differ depending on the nature of the default and the relevant financial year.

The proposed 5% reduced penalty applies to eligible non-fraud cases under Sections 73 and 74A, subject to the specified payment conditions.

Cases involving fraud or deliberate tax evasion are treated differently and are not automatically eligible for the same penalty relief.

GST Prosecution Threshold Increased from ₹1 Crore to ₹5 Crore

The GST Council recommended increasin the monetary threshold for prosecution under Section 132 of the CGST Act.

GST prosecution refers to criminal proceedings initiated for specified offences, such as certain fraudulent tax or Input Tax Credit activities.

The Council proposed raising the headline threshold from ₹1 crore to ₹5 crore to reduce criminal proceedings involving smaller amounts.

Under the proposed framework, prosecution for qualifying offences may be initiated where the amount involved exceeds ₹5 crore.

However, the current law contains offence-specific conditions and exceptions. The proposed ₹5 crore threshold should therefore be read with the final amended provisions.

GST Arrest Powers Proposed to Be Removed

One of the most significant recommendations is the proposed removal of Section 69 of the CGST Act, 2017, which provides GST-specific arrest powers.

Under the existing provisions, authorised GST officers may arrest individuals for certain offences, subject to prescribed conditions.

The Council recommended withdrawing these powers.

The Ministry of Finance clarified that, following the proposed amendment, persons would not be arrested under the GST law. However, prosecution for qualifying offences could still be initiated before a competent court.

Does Removal of GST Arrest Powers Mean No Criminal Punishment?

No, arrest and prosecution are different legal processes.

Removing the GST-specific power of arrest would not automatically eliminate criminal prosecution or punishment for offences that remain punishable under Section 132.

Courts could still decide cases and impose punishment according to the applicable amended law.

New GST Imprisonment and Punishment Rules

The GST Council also recommended rationalising imprisonment terms for specified GST offences.

According to the Ministry of Finance FAQs issued on 9 October 2026, the proposed punishment structure is:

Removal of Mandatory Minimum Imprisonment

The Council recommended removing the minimum imprisonment requirement of six months under Section 132(3).

It also proposed giving courts the discretion to impose imprisonment, a fine or both.

This means imprisonment would not automatically be mandatory merely because a person is convicted of a qualifying GST offence. The court would determine the appropriate punishment under the applicable law.

Which GST Offences Are Proposed to Be Removed or Narrowed?

The Council recommended changes to several offences under Section 132(1).

Clause (c): Fraudulent ITC

The provision would be narrowed to cover fraudulent availment of ITC without receiving goods or services, or without an invoice or bill.

Clause (e): Tax Evasion

The Council proposed removing the words relating to tax evasion so the clause would focus on fraudulently obtaining refunds.

Clause (h): Dealing with Goods

Broad wording concerning other dealings with goods would be removed, retaining the specifically listed activities.

Clause (i): Supply of Services

The Council recommended omitting this offence relating to specified dealings in services supplied in contravention of the GST law.

These changes are intended to clarify which activities may attract criminal prosecution.

GST Penalty Payment to Be Treated as a 'Charge' in Specified Cases

The Council recommended a change in terminology for certain amounts payable when taxpayers voluntarily settle tax disputes.

Under the proposal, an amount currently described as a penalty would instead be treated as a charge in specified voluntary-payment situations.

The Ministry of Finance clarified that:

• The change in terminology would not reduce or increase the amount payable.
• The taxpayer would still need to pay the applicable tax, interest and prescribed charge.
• The amount would be deposited under the 'Others' payment head according to the prescribed mechanism.

This proposal concerns the legal treatment and terminology of specified payments rather than a general waiver of penalties.

Changes to GST Notices, Adjudication and Appeals

The Council also recommended guidelines for tax authorities to improve the quality of GST notices and dispute resolution.

The proposed guidelines would address:

• Clear and properly supported show cause notices.
• Timely issuance of demand notices and adjudication orders.
• Appropriate use of allegations involving fraud or suppression of facts.
• Opportunities for personal hearings.
• Compliance with the principles of natural justice.

Appeal Pre-deposit Limit for Penalty-only Cases

The Council recommended an upper limit of ₹40 crore on the pre-deposit payable for specified appeals involving only penalties and no tax demand.

The limit would consist of ₹20 crore under CGST and ₹20 crore under SGST/UTGST, subject to the applicable provisions.

This is an appeal pre-deposit limit, not a maximum limit on the underlying GST penalty.

When Will the GST Penalty New Rules 2026 Become Effective?

The GST Council announced the recommendations on 8 October 2026. However, the Council's press release did not provide a common effective date for all penalty and prosecution changes.

The following recommendations require relevant legislative amendments:

• Reduction of the maximum general penalty to ₹10,000.
• Introduction of the ₹10,000 show cause notice threshold.
• Reduced penalty provisions for eligible non-fraud cases.
• Increase in the prosecution threshold to ₹5 crore.
• Removal of GST arrest powers.
• Changes to imprisonment and prosecution provisions.

As of 10 October 2026, these measures should be treated as recommendations unless their implementation has been confirmed through the relevant legal amendments or notifications.

Businesses should continue complying with the GST provisions currently in force.

Conclusion

The GST penalty changes recommended in October 2026 include a lower maximum general penalty, reduced penalties in eligible non-fraud cases, a minimum threshold for GST demand notices and significant changes to arrest and prosecution provisions.

Businesses should continue maintaining accurate GST records, responding to notices and monitoring the implementation of these recommendations. For assistance with GST notices, penalties, dispute resolution and compliance, Connect with Startup Movers.