Significant GST penalties imposed on company executives are under legal scrutiny.

The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued thousands of notices to various companies, their directors, and promoters over the wrongful availing of input tax credit (ITC), according to sources. This tax dispute mainly revolves around vendors failing to remit taxes to the government, along with other issues related to the availment and utilization of credits.

Experts suggest that a key issue arising from this situation is whether tax liability can be imposed on the recipients of services, especially when they are not at fault. The ongoing investigations underscore the complexities of tax compliance and the responsibilities of all parties within the supply chain.

A show-cause notice reviewed by the TNIE indicates that an interesting aspect of these notices—particularly those issued for the financial year 2017-18 by the first week of August—is the question of whether imposing personal penalties is appropriate. In some cases, penalties have been as high as 100% of the disputed tax amount, targeting the directors and promoters of the companies.

The imposition of such steep penalties has caused considerable concern in the industry, especially given that the finance minister has clearly stated that taxpayers should not face harassment.

A key technical issue is whether these individuals can be subjected to such severe personal penalties.

Experts argue that imposing personal penalties on individuals must withstand the test of constitutional validity, and such harsh penalties may not hold up in appeal forums or jurisdictional High Courts.

'Directors, promoters, or individuals can only face personal penalties under specific, exceptional circumstances—particularly in rare cases where they have personally gained. If no benefit has been retained by these individuals, any penalties imposed will be subject to constitutional scrutiny in the jurisdictional High Court,' explained Abhishek A Rastogi, founder of Rastogi Chambers, who has filed petitions against these substantial penalties on individuals.

'The burden of proving malafide intent lies with the revenue authorities, especially when no personal gain is involved,' added Rastogi.