Section 138 of CGST Act - Compounding of Offences

Section 138 of the Central Goods and Services Tax Act, 2017 provides the statutory mechanism for compounding of offences under GST. Subject to the conditions and exclusions prescribed by the Act and the CGST Rules, an eligible accused person may seek compounding either before or after the institution of prosecution.

Important amendment: Section 138 was substantially amended by the Finance Act, 2023 with effect from 1 October 2023. Among other changes, the statutory range of the compounding amount was reduced. The minimum is now twenty-five per cent of the tax involved and the maximum cannot exceed one hundred per cent of the tax involved, subject to the amount determined in accordance with Rule 162 of the CGST Rules.

What is compounding of an offence under GST?

Compounding provides a statutory method of resolving an eligible GST offence on payment of the prescribed compounding amount. Section 138 permits the Commissioner to compound an eligible offence either before prosecution is instituted or after prosecution has already commenced.

Once the determined compounding amount is paid in accordance with Section 138, no further proceedings under the CGST Act are to be initiated against the accused person for the same offence, and criminal proceedings already initiated in respect of that offence stand abated.

Section 138 of the CGST Act - Updated legal position

Section 138(1) - Power to compound offences

An offence under the CGST Act may be compounded by the Commissioner, either before or after institution of prosecution, on payment by the accused person of the prescribed compounding amount to the Central Government or the State Government, as applicable.

The power is subject to the exclusions contained in the proviso to Section 138(1), the requirement to discharge tax, interest and penalty, and the procedure prescribed under the CGST Rules.

Persons and offences excluded from compounding

Under the presently applicable provisions, compounding is not available in the following cases:

  1. A person who has already been allowed to compound once in respect of any offence specified in clauses (a) to (f), (h), (i) and (l) of Section 132(1).
  2. A person accused of committing the offence specified in clause (b) of Section 132(1).
  3. A person who has been convicted by a court for an offence under the CGST Act.
  4. Any other class of persons or offences that may be prescribed.

Compounding under Section 138 does not affect proceedings instituted under any other law.

Further, compounding can be allowed only after payment of the tax, interest and penalty involved in the offence.

Section 138(2) - Compounding amount

The compounding amount is prescribed under the CGST Rules, subject to the statutory limits in Section 138(2). The amount cannot be less than twenty-five per cent of the tax involved and cannot be more than one hundred per cent of the tax involved.

Section 138(3) - Effect of payment

After payment of the compounding amount determined by the Commissioner, no further proceedings under the CGST Act are to be initiated against the accused person in respect of the same offence. Criminal proceedings already initiated in respect of that offence stand abated.

Section 138 at a glance

Issue Legal position
Relevant provision Section 138 of the CGST Act, 2017
Subject Compounding of offences
When application may be made Before or after institution of prosecution
Authority Commissioner
Relevant rule Rule 162 of the CGST Rules, 2017
Application form FORM GST CPD-01
Commissioner's order FORM GST CPD-02
Statutory minimum 25% of tax involved
Statutory maximum 100% of tax involved
Pre-condition Payment of tax, interest and penalty involved in the offence
Effect after payment No further proceedings for the same offence under the Act; pending criminal proceedings for that offence stand abated

Rule 162 - Procedure for compounding of GST offences

Rule 162 of the Central Goods and Services Tax Rules, 2017 prescribes the procedure for an application under Section 138. It should be read together with Section 138 and the relevant provisions of Section 132 of the CGST Act.

1. Application in FORM GST CPD-01

The applicant may apply to the Commissioner for compounding of an offence in FORM GST CPD-01. The application may be made either before or after prosecution has been instituted.

2. Report from the concerned officer

After receiving the application, the Commissioner calls for a report from the concerned officer regarding the particulars stated in the application and any other information considered relevant for examining the request.

3. Order in FORM GST CPD-02

After considering the application, the Commissioner may allow or reject it. Where the statutory and prescribed conditions are satisfied and the applicant has made full and true disclosure of the facts relating to the case, the Commissioner may issue an order in FORM GST CPD-02, specifying the compounding amount and granting immunity from prosecution.

Rule 162 provides for the application to be dealt with within ninety days of its receipt. An application cannot be rejected without giving the applicant an opportunity of being heard and recording the grounds for rejection.

4. Determination of compounding amount

Rule 162(3A), inserted with effect from 1 October 2023, contains the offence-wise mechanism for determining the compounding amount. The applicable percentage depends on the offence under Section 132 and the punishment attracted in the particular case.

For certain offences, the prescribed amount may vary within a specified percentage range, while for specified categories it is fixed at twenty-five per cent of the relevant tax evaded, input tax credit wrongly availed or utilised, or refund wrongly taken, as applicable.

Note: The 25% to 100% limits in Section 138(2) are statutory outer limits. The actual compounding amount in an individual case must be determined in accordance with the applicable provisions of Rule 162, including Rule 162(3A).

Payment of tax, interest and penalty is mandatory

The third proviso to Section 138(1) expressly provides that compounding is allowed only after payment of the tax, interest and penalty involved in the offence. Therefore, payment of the compounding amount does not substitute the underlying statutory liability for tax, interest and penalty.

Effect of compounding on criminal proceedings

Section 138(3) gives compounding an important legal consequence. Once the compounding amount determined by the Commissioner is paid, no further proceedings under the CGST Act are to be initiated against the accused for the same offence. If criminal proceedings for that offence have already been initiated, they stand abated.

This protection is confined to the same offence under the CGST Act. Section 138 expressly preserves proceedings, if any, instituted under another law.

Relationship between Section 132 and Section 138

Section 132 specifies offences for which criminal punishment may be imposed, while Section 138 provides the mechanism through which eligible offences may be compounded. The nature of the alleged offence under Section 132 is therefore important in deciding both eligibility for compounding and the applicable compounding amount.

Section 138 should also be read with Section 134 concerning cognizance of offences, Section 135 concerning presumption of culpable mental state, and Section 137 concerning offences by companies.

Key points for taxpayers and accused persons

  • Compounding may be sought before or after prosecution has commenced.
  • Compounding is not available for every person or every offence; the exclusions in Section 138 must first be checked.
  • Tax, interest and penalty involved in the offence must be paid before compounding is allowed.
  • FORM GST CPD-01 is used to make the application.
  • The Commissioner's decision is issued in FORM GST CPD-02.
  • The applicant must make full and true disclosure of the facts relating to the case.
  • Rejection requires an opportunity of hearing and reasons must be recorded.
  • The applicable compounding amount must be determined under Section 138 read with Rule 162.
  • Successful compounding does not terminate proceedings under another law.

Finance Act, 2023 amendment to Section 138

The Finance Act, 2023 rationalised the compounding provisions of the CGST Act. The amendments to Section 138 took effect from 1 October 2023.

The amendments modified the categories excluded from compounding and replaced the earlier statutory compounding limits. The previous provision referred to a minimum based on Rs. 10,000 or fifty per cent of the tax involved and a maximum based on Rs. 30,000 or one hundred and fifty per cent of the tax involved. That earlier formula is no longer the current law.

Under the amended Section 138(2), the statutory range is twenty-five per cent to one hundred per cent of the tax involved, with the actual amount governed by the prescribed rules.

Related provisions of Chapter XIX - Offences and Penalties

Last reviewed: 15 September 2026. This article should be read with the CGST Act, CGST Rules and applicable notifications and circulars.