GST Council proposes no arrests and a ₹5 crore prosecution threshold: what changes

At its 57th meeting in New Delhi on 8 October 2026, the GST Council recommended removing the power to arrest under GST, raising the monetary threshold for prosecution to ₹5 crore, narrowing several offences and cutting the maximum general penalty from ₹25,000 to ₹10,000. It also proposed that no demand notice be issued for tax below ₹10,000, and a smaller penalty for businesses that pay promptly in cases without fraud. The Ministry of Finance released the recommendations through the Press Information Bureau the same day, and the Council has published FAQs explaining them.

For founders and finance teams, the practical question is criminal exposure. Under the CGST Act as it stands, the Commissioner can authorise an arrest where the amount in certain offences exceeds ₹2 crore, and imprisonment on conviction must normally be at least six months. The recommendations would remove arrest altogether, keep prosecution only for amounts above ₹5 crore, and let courts impose a fine alone.

None of this is law yet. The release says the recommendations will be given effect through circulars, notifications and law amendments, “which alone shall have the force of law”. These changes need amendments to the CGST Act, 2017, and no date has been announced for them. The bottom line: the current arrest, prosecution and penalty provisions apply until the Act is amended.

What would change

The table compares the CGST Act, as published by CBIC, with the release and the FAQs.

The FAQs add that no person shall be arrested for an offence under the GST law, but that prosecution may still be launched on a complaint by the tax authorities where the amount exceeds ₹5 crore.

The release and the FAQs describe the threshold as rising from ₹1 crore to ₹5 crore. In section 132(1) as it now reads, ₹1 crore (₹100 lakh) is the floor only for clause (b), issuing an invoice or bill without supplying goods or services. For most other offences the lowest punishment band starts above ₹2 crore (₹200 lakh). In practice, the jump is from ₹2 crore for most offences and from ₹1 crore for fake invoicing.

Other recommendations that matter to businesses

• Refunds: refunds of excess cash-ledger balances sanctioned automatically by the system; acknowledgement or deficiency memo within 10 days instead of 15, with deemed acknowledgement after that; 90% provisional refunds for zero-rated supplies and inverted duty structure sanctioned automatically on a risk basis.
• ITC in refunds: ITC on input services availed on or after 1 November 2026 to count in inverted duty refunds; ITC on capital goods availed on or after 1 April 2027 to count in zero-rated and inverted duty refunds, spread over 60 months.
• Blocked credits: section 17(5) restrictions to be removed for items including outdoor catering, health and life insurance, telecommunication towers, pipelines laid outside factory premises, free samples, and goods destroyed or written off on expiry of shelf life as required by law.
• Exports: services supplied to a business’s own foreign offices or branches to be able to qualify as exports, and services on goods that a foreign recipient makes available in India to take the recipient’s location as the place of supply.
• Movement of goods: interception only on specific intelligence, authorised by an officer not below Joint Commissioner; only the supplier’s or recipient’s State may inspect, detain or seize, unless there is no e-way bill or document; no confiscation under section 130 for goods in transit.
• Credit blocking and late fees: a right to object and be heard before a decision on credit blocked under rule 86A; late fee waived for taxpayers with turnover up to ₹5 crore in the preceding financial year who file a delayed section 39(1) return by the end of the month in which it was due.
• Notices and returns: a circular on the quality and timing of notices and orders and on invoking fraud only on merits; a validation clause for notices courts have held invalid for covering several financial years; and a new mechanism to correct liability and ITC in returns from the April 2027 return, after public consultation.

Our update on the meeting summarises the full package.

Who is affected

The arrest and prosecution changes matter most to businesses, and the people who run them, facing an investigation into fake invoices, input tax credit, tax collected but not paid, or refunds. Below ₹5 crore, such a case could no longer be prosecuted; it would be dealt with through tax, interest and penalty. Above ₹5 crore, prosecution would remain possible, but without arrest, with a two-year maximum up to ₹10 crore, and with the option of a fine alone.

The penalty and notice changes reach far more businesses. Anyone who receives a demand below ₹10,000 or pays a non-fraud demand within the window after an order would pay less, and anyone penalised for a procedural lapse under section 125 would face a lower ceiling. The release says notices and appeals below ₹10,000 that are pending when the threshold comes into force will be decided as if it had applied when the notice was issued.

Some things would not change. Tax and interest remain payable. Penalty amounts in fraud cases stay as they are; only the name of voluntary payments changes. Goods moving without an e-way bill or documents could still be inspected, detained or seized in any State. And businesses whose notices were held invalid by courts for covering several financial years should note the proposed validation clause for such notices.

Worked example

Example 1: an ITC case. Officers allege that a company fraudulently availed ITC without any invoice, an offence under clause (c) of section 132(1). The ITC involved is ₹3 crore across CGST and SGST.

1. The Explanation to section 132 counts CGST, SGST, IGST and cess together, so the amount is ₹3 crore.
2. Current Act: ₹3 crore exceeds ₹200 lakh but not ₹500 lakh, so clause (ii) of section 132(1) applies: imprisonment up to three years and fine. Under section 132(3), imprisonment must be at least six months unless the court records special and adequate reasons.
3. Arrest today: clause (c) is listed in section 69(1) and the offence is punishable under clause (ii), so the Commissioner may authorise an arrest. The offence is non-cognizable and bailable under section 132(4), because section 132(5) makes only offences punishable under clause (i) cognizable and non-bailable.
4. Recommended: ₹3 crore does not exceed ₹5 crore, so no prosecution could be launched, and section 69 would no longer exist. Tax, interest and penalty could still be demanded.

Had the ITC been ₹7 crore, prosecution would remain possible under the recommendation, with imprisonment up to two years, or fine, or both, against up to five years and fine today, and without arrest.

Example 2: a small demand. A business receives a notice under section 74A for financial year 2024-25 alleging ₹60,000 of short-paid tax, with no fraud alleged. The officer confirms the demand, and the business pays the tax and interest within 60 days of the order.

1. Current Act: section 74A(5)(i) sets the penalty at 10% of tax (₹6,000) or ₹10,000, whichever is higher, so ₹10,000. Paying after the order does not reduce it.
2. Recommended: the ₹10,000 minimum goes, and a reduced penalty of 5% applies when tax and interest are paid within 60 days of the order. 5% of ₹60,000 is ₹3,000.
3. Saving: ₹7,000. Had the business paid later, the recommended penalty would be 10%, or ₹6,000.

The release does not name the base for the 5%, so the calculator applies it to the tax, as the current 10% penalty does. Interest under section 50 is payable in both cases.

Check what changes for your case

Choose whether you are checking an alleged offence, a tax demand or a minor lapse. For an offence, pick the clause of section 132(1) and enter the amount involved. For a demand, choose the period, say whether fraud is alleged, and enter the tax, without interest or penalty, and when it is paid.

What to do now

1. Keep applying the current law. The arrest, prosecution and penalty provisions stay in force until the CGST Act is amended.
2. If you are under investigation or have been summoned, keep cooperating and take legal advice. The documents do not say whether the new thresholds will apply to pending investigations or prosecutions.
3. List open demands by amount, period and section. Flag those below ₹10,000 and non-fraud demands where a 5% penalty could apply once the law changes.
4. Use the relief that exists today: in non-fraud cases, paying tax and interest within 30 days of a notice under section 73, or 60 days under section 74A, means no penalty, unless self-assessed tax or tax collected was not paid within 30 days of its due date.
5. Tighten checks on supplier invoices and ITC claims. Fake invoicing and fraudulent ITC remain offences, and prosecution would still be possible above ₹5 crore.
6. If you claim inverted duty refunds, track ITC on input services availed from 1 November 2026, and plan for capital-goods ITC from 1 April 2027, once the rules are notified.
7. Watch for the amending law, notifications and circulars, and for the consultation on the return-correction mechanism.

Key dates

What the rules don’t say yet

• When the arrest, prosecution, penalty and notice-threshold changes take effect. Neither the release nor the FAQs give a date.
• Whether the ₹5 crore threshold and the end of arrest will apply to investigations and prosecutions already under way. The release deals with pending cases only for the ₹10,000 notice threshold.
• How clause (f), on falsified records, will be treated. Today it carries up to six months, or fine, or both, with no amount limit; the FAQs state the ₹5 crore threshold for section 132(1) offences in general.
• The exact wording of the redrafted clause (c) and the new bands. One FAQ bullet on the ₹5 crore to ₹10 crore band is worded unclearly; the FAQ answer on punishment gives two years for it.
• The base for the “reduced penalty of 5%”, and what happens to the repeat-conviction rule in section 132(2) and the cognizable offences in section 132(5).
• The State GST laws. The release refers to sections of the CGST Act and does not say how the corresponding State provisions will change.

Frequently asked questions

Can GST officers still arrest someone today?

Yes. Section 69 stays in force until an amendment omits it. It lets the Commissioner, where he has reasons to believe, authorise the arrest of a person for an offence in clauses (a) to (d) of section 132(1) punishable under clause (i) or (ii), that is, above ₹2 crore, or punishable under section 132(2) on repeat conviction.

Does the ₹5 crore threshold mean smaller evasion has no consequence?

No. It concerns criminal prosecution only. Tax, interest and penalties can still be demanded under sections 73, 74 and 74A, and in fraud cases the penalty can equal the tax.

How is the amount counted for prosecution?

Under the Explanation to section 132, “tax” includes tax evaded, ITC wrongly availed or utilised, or refund wrongly taken under the CGST, SGST, IGST and UTGST Acts, and compensation cess. So the amounts under each law are taken together. The documents do not say this will change.

Will pending notices below ₹10,000 be dropped?

The Council recommended a statutory provision under which notices and appeals involving less than ₹10,000, pending when the threshold comes into force, are decided as if it had applied when the notice was issued. The FAQs say the test uses tax including cess across all heads, leaves out interest, late fee and penalty, and is met at exactly ₹10,000.

Will calling a penalty a “charge” change what I pay?

No. The FAQs say the new name does not alter the amount. To close the proceedings you still pay the tax, interest and the reduced amount within the time allowed, and the charge is deposited under the head “Others”.

Does the late fee waiver cover every return?

The release describes a waiver for delayed returns under section 39(1) of the CGST Act, for taxpayers with annual turnover up to ₹5 crore in the preceding financial year, where the return is filed by the end of the month in which it was due. It does not mention other returns.