Section 138 at a Glance
Contents
1. Statutory Text of Section 138
(1) Any offence under this Act may, either before or after the institution of prosecution, be compounded by the Commissioner on payment, by the person accused of the offence, to the Central Government or the State Government, as the case may be, of such compounding amount in such manner as may be prescribed:
Provided that nothing contained in this section shall apply to—
(a) a person who has been allowed to compound once in respect of any of the offences specified in clauses (a) to (f), (h), (i) and (l) of sub-section (1) of section 132;
(b) [Omitted]
(c) a person who has been accused of committing an offence under clause (b) of sub-section (1) of section 132;
(d) a person who has been convicted for an offence under this Act by a court;
(e) [Omitted]
(f) any other class of persons or offences as may be prescribed:
Provided further that any compounding allowed under this section shall not affect the proceedings, if any, instituted under any other law:
Provided also that compounding shall be allowed only after making payment of tax, interest and penalty involved in such offences.
(2) The amount for compounding of offences under this section shall be such as may be prescribed, subject to the minimum amount not being less than ten thousand rupees or fifty per cent. of the tax involved, whichever is higher, and the maximum amount not being less than thirty thousand rupees or one hundred and fifty per cent. of the tax, whichever is higher.
(3) On payment of such compounding amount as may be determined by the Commissioner, no further proceedings shall be initiated under this Act against the accused person in respect of the same offence and any criminal proceedings, if already initiated in respect of the said offence, shall stand abated.
The current CGST Act text reflects the amendments to the compounding exclusions, including the changes made with effect from 1 October 2023. citeturn0search25turn0search28
2. Section 138 Explained in Simple Language
GST offences can lead to prosecution under the CGST Act. Section 138 provides a statutory mechanism called compounding for eligible offences.
Instead of allowing an eligible criminal prosecution to continue for the same offence, the accused person can seek compounding by paying the amount determined under the Act and Rules, after satisfying the mandatory conditions.
Three things must be separated
| Item | Meaning |
|---|---|
| Tax / interest / penalty | The amounts involved in the underlying GST offence must be paid before compounding is allowed. |
| Compounding amount | An additional statutory amount determined under Section 138 and the prescribed rules. |
| Criminal proceedings | Eligible prosecution proceedings are dealt with according to Section 138 and the resulting compounding order. |
3. Compounding Can Be Sought Before or After Prosecution Is Instituted
Section 138(1) expressly allows compounding either before or after the institution of prosecution.
4. When Compounding Is Not Available
The proviso to Section 138(1) contains important exclusions. The current law should be checked carefully because the exclusion list has changed through amendments.
| Exclusion | What it means in practice |
|---|---|
| Previous compounding of specified Section 132 offences | A person who has already been allowed to compound once in respect of the offences specified in the current clause cannot use Section 138 again for that specified category. |
| Section 132(1)(b) offence | The current clause (c) excludes a person accused of an offence under Section 132(1)(b). |
| Already convicted | A person convicted for an offence under the CGST Act by a court is excluded. |
| Other prescribed exclusions | The law permits additional classes of persons or offences to be excluded by prescription. |
| Proceedings under other laws | Compounding under CGST does not affect proceedings instituted under another law. |
Older GST articles may display the original Section 138 exclusions. The Finance Act changes and subsequent amendments mean that the current text should be used rather than relying on an old blog or old bare-act copy. citeturn0search28
5. Why Section 132 Matters When Reading Section 138
Section 138 refers directly to particular clauses of Section 132. Therefore, an accurate compounding analysis requires identifying the exact offence alleged.
| Step | Question |
|---|---|
| 1 | What exact offence is alleged? |
| 2 | Which clause/sub-clause of Section 132 or other provision creates that offence? |
| 3 | Does the current Section 138 exclusion list cover that offence or person? |
| 4 | Has the person previously compounded an offence falling within an exclusion? |
| 5 | Has a court already convicted the person? |
| 6 | Have tax, interest and penalty been paid? |
6. Tax, Interest and Penalty Must Be Paid First
The third proviso to Section 138(1) contains a clear condition: compounding is allowed only after payment of the tax, interest and penalty involved in the offence.
This creates an important distinction between resolving the underlying tax liability and paying the compounding amount.
Only after this mandatory payment condition is satisfied can the compounding application be allowed under the statutory framework.
Example
The taxpayer cannot treat the compounding amount as a substitute for those underlying dues. The tax, interest and penalty condition must first be satisfied, and the compounding amount is a separate amount under Section 138.
7. Compounding Amount – Statutory Limits
Section 138(2) provides the statutory boundaries within which the prescribed compounding amount operates.
| Limit | Statutory rule |
|---|---|
| Minimum | Not less than ₹10,000 or 50% of the tax involved, whichever is higher. |
| Maximum | Not less than ₹30,000 or 150% of the tax involved, whichever is higher. |
Illustrative calculation of the statutory boundaries
| Tax involved | 50% of tax | Minimum boundary | 150% of tax | Maximum boundary |
|---|---|---|---|---|
| ₹20,000 | ₹10,000 | ₹10,000 | ₹30,000 | ₹30,000 |
| ₹1,00,000 | ₹50,000 | ₹50,000 | ₹1,50,000 | ₹1,50,000 |
| ₹10,00,000 | ₹5,00,000 | ₹5,00,000 | ₹15,00,000 | ₹15,00,000 |
These are illustrations of the statutory boundaries, not a statement of the amount that the Commissioner will necessarily order in an individual case.
8. Procedure for Applying for Compounding – Rule 162
Rule 162 of the CGST Rules provides the procedural framework for an application under Section 138.
| Stage | Procedure |
|---|---|
| 1. Application | Applicant may apply before or after institution of prosecution in FORM GST CPD-01 to the Commissioner. |
| 2. Officer's report | Commissioner calls for a report from the concerned officer and may consider relevant information. |
| 3. Commissioner examines | The application, report and relevant facts are considered. |
| 4. Cooperation and disclosure | The prescribed rule requires consideration of whether the applicant has cooperated and made full and true disclosure of facts relating to the case. |
| 5. Order | Commissioner may allow by FORM GST CPD-02, indicating the compounding amount and granting immunity from prosecution, or reject the application. |
| 6. Hearing | An application cannot be rejected without giving the applicant an opportunity of being heard and recording the grounds of rejection. |
| 7. Tax dues | Application cannot be allowed unless tax, interest and penalty liable to be paid have been paid for the case. |
| 8. Payment | The ordered compounding amount must be paid within the prescribed period and proof furnished. |
Rule 162 specifies CPD-01, CPD-02, the report process, hearing before rejection, the 90-day decision framework, and the 30-day payment period after the order. citeturn0search27
9. Important Timelines Under Rule 162
10. What Happens After Compounding?
Section 138(3) provides the principal statutory effect.
- Once the compounding amount determined by the Commissioner is paid, no further proceedings shall be initiated under the CGST Act against the accused person in respect of the same offence.
- If criminal proceedings have already been initiated in respect of the same offence, they shall stand abated.
11. Compounding vs Payment of GST Demand
| Point | Tax demand / payment | Compounding |
|---|---|---|
| Purpose | Resolution/payment of tax liability, interest and applicable penalty. | Statutory mechanism for an eligible criminal offence. |
| Section | Can arise under assessment, demand, recovery and other provisions. | Section 138. |
| Underlying dues | Depends on the applicable demand/order. | Tax, interest and penalty involved must be paid before compounding is allowed. |
| Additional amount | Not necessarily a compounding amount. | Separate compounding amount determined under the prescribed framework. |
| Criminal prosecution | Payment alone should not automatically be described as compounding. | Section 138(3) deals specifically with proceedings for the same offence after payment of the compounding amount. |
12. Practical Examples
An eligible person identifies a GST offence and prosecution has not yet been instituted. Subject to the exclusions and payment conditions, the person may apply for compounding under Section 138.
Criminal prosecution has already been instituted for an eligible offence. Section 138 still permits an application, subject to all statutory conditions and Rule 162 procedure.
The applicant wants compounding but the tax, interest and penalty involved have not been paid. The application cannot be allowed until the statutory payment condition is satisfied.
A person has already been allowed to compound an offence falling within the current Section 138(1)(a) exclusion. The person cannot obtain compounding again for that excluded category.
A person is accused of the offence covered by Section 132(1)(b). The current Section 138(1)(c) exclusion must be considered before an application is treated as eligible.
A court has already convicted the person for an offence under the CGST Act. Section 138 excludes a person convicted by a court.
A transaction also gives rise to proceedings under another law. CGST compounding does not affect proceedings instituted under that other law.
The Commissioner proposes to reject the application. Rule 162 requires an opportunity of being heard and recording of the grounds of rejection before the application is rejected.
The Commissioner is satisfied with the application, cooperation and full and true disclosure and issues the prescribed order specifying the compounding amount and granting immunity from prosecution.
The applicant pays the ordered compounding amount within the prescribed period and provides proof. Section 138(3) then addresses further proceedings for the same offence.
The Commissioner passes a compounding order but the applicant does not pay the amount within the period prescribed by Rule 162. The rule provides that the order is vitiated and void.
A company receives a prosecution-related communication. The finance/legal team should identify the exact offence, quantify tax/interest/penalty, check Section 138 exclusions and prepare the prescribed application only after verifying eligibility.
13. Practical Company Workflow for Section 138
- Identify the offence: Record the exact section and clause alleged.
- Check prosecution status: Determine whether prosecution has already been instituted.
- Check exclusions: Review Section 138(1) carefully against the current law.
- Quantify underlying dues: Calculate tax, interest and penalty involved.
- Pay mandatory dues: Complete the payment condition before compounding is allowed.
- Prepare CPD-01: Compile facts, chronology, documents and disclosures.
- Coordinate with legal counsel: Review eligibility and the implications of compounding.
- Respond to departmental report: Preserve a complete record of submissions.
- Attend hearing if required: If rejection is proposed, ensure the opportunity of being heard is used appropriately.
- Track CPD-02/order: Record the compounding amount and conditions.
- Pay within 30 days: Preserve proof of payment and furnish it as required.
- Close the matter carefully: Record the effect of compounding on the same CGST offence and separately track any proceedings under other laws.
15. Common Misunderstandings
“Paying tax automatically means the criminal case is compounded.”
No. Payment of tax, interest and penalty is a prerequisite for compounding, not the same thing as compounding.
“Compounding is available for every GST offence.”
No. Section 138 contains exclusions and allows additional prescribed exclusions.
“The statutory maximum is always charged.”
No. Section 138 provides boundaries and says the amount is to be prescribed. The actual amount is determined under the applicable framework.
“Once prosecution starts, compounding is impossible.”
No. Section 138 expressly allows compounding either before or after institution of prosecution, subject to eligibility.
“A previous compounding never matters.”
It can matter. The current Section 138(1)(a) contains a restriction concerning a person who has already been allowed to compound once for specified offences.
“Compounding settles every legal proceeding arising from the transaction.”
No. Section 138 expressly states that compounding does not affect proceedings instituted under any other law.
“CPD-01 is optional paperwork.”
Rule 162 provides the prescribed application form for compounding.
“After CPD-02, payment can be made whenever convenient.”
No. Rule 162 specifies a 30-day period and provides consequences if the ordered amount is not paid within that period.
16. Questions People Commonly Search
- What is Section 138 of the CGST Act?
- What is compounding of offences under GST?
- Can GST offences be compounded?
- What is GST CPD-01?
- What is GST CPD-02?
- Can compounding be done before prosecution?
- Can GST prosecution be compounded after it starts?
- What is the minimum compounding amount under Section 138?
- What is the maximum compounding amount under Section 138?
- Is payment of tax enough for GST compounding?
- What is Rule 162 of CGST Rules?
- How many days does the Commissioner have to decide a compounding application?
- What happens if GST compounding amount is not paid within 30 days?
- Which GST offences cannot be compounded?
- What happens after GST compounding?
- Section 138 CGST Act explained with examples
17. Frequently Asked Questions
1. What is Section 138 of the CGST Act?
It provides the statutory mechanism for compounding eligible GST offences on payment of the prescribed compounding amount, subject to the exclusions and conditions in the Act and Rules.
2. Can an offence be compounded before prosecution?
Yes. Section 138 expressly allows compounding before institution of prosecution, subject to eligibility.
3. Can an offence be compounded after prosecution starts?
Yes. The section also permits compounding after institution of prosecution, subject to the statutory conditions.
4. Is every GST offence compoundable?
No. Section 138 contains exclusions, and additional classes may be prescribed.
5. Must tax, interest and penalty be paid?
Yes. Section 138 states that compounding shall be allowed only after payment of tax, interest and penalty involved in the offence.
6. What is the minimum compounding amount?
The statutory minimum boundary is not less than ₹10,000 or 50% of the tax involved, whichever is higher, subject to the prescribed framework.
7. What is the maximum compounding amount?
The statutory maximum boundary is not less than ₹30,000 or 150% of the tax involved, whichever is higher. The actual amount is determined under the prescribed framework.
8. What form is used to apply for compounding?
Rule 162 specifies FORM GST CPD-01 for the application.
9. What is CPD-02?
Rule 162 specifies FORM GST CPD-02 for the Commissioner's order allowing the application, indicating the compounding amount and granting immunity from prosecution.
10. How long does the Commissioner have to decide?
Rule 162 provides for allowing or rejecting the application within 90 days of receipt, following the prescribed process.
11. Is a hearing required before rejection?
Yes. Rule 162 states that the application cannot be rejected without an opportunity of being heard and recording the grounds for rejection.
12. How long does the applicant have to pay the compounding amount?
Rule 162 provides 30 days from receipt of the order to pay the ordered compounding amount and furnish proof.
13. What if the amount is not paid within 30 days?
The rule states that the order made under the relevant sub-rule becomes vitiated and void.
14. What happens after the compounding amount is paid?
Section 138(3) provides that no further proceedings shall be initiated under the CGST Act against the accused person for the same offence, and existing criminal proceedings for that same offence stand abated.
15. Does compounding stop proceedings under another law?
No. Section 138 expressly says that compounding does not affect proceedings instituted under any other law.
16. Does a previous compounding matter?
Yes. The current Section 138 contains an exclusion for a person who has already been allowed to compound once in respect of specified Section 132 offences.
17. Can a convicted person apply for compounding?
Section 138 excludes a person who has been convicted for an offence under the CGST Act by a court.
18. Does Section 138 apply to Section 132(1)(b)?
The current Section 138(1)(c) excludes a person accused of committing an offence under Section 132(1)(b).
18. Quick Revision – Section 138
- Section 138 = Compounding of offences.
- Compounding may be sought before or after prosecution is instituted.
- Not every offence/person is eligible; Section 138 exclusions must be checked.
- Tax, interest and penalty involved must be paid before compounding is allowed.
- Section 138(2) provides statutory minimum and maximum boundaries for the compounding amount.
- Rule 162 provides the procedure, including CPD-01 and CPD-02.
- Rule 162 provides a 90-day decision framework and a 30-day payment period after the order.
- Failure to pay within the prescribed period makes the compounding order vitiated and void.
- After payment of the determined compounding amount, Section 138(3) deals with further CGST proceedings for the same offence.
- Compounding does not affect proceedings under another law.
19. Legal Disclaimer
This page is provided for general educational and compliance-workflow purposes. GST law, rules, notifications, circulars, instructions, evidence law, criminal procedure and judicial interpretation can change, and the legal position can depend on the facts, date, jurisdiction and exact proceeding. Before taking a tax, accounting, litigation or criminal-law decision, verify the law applicable to the relevant period and obtain professional advice where appropriate. This page is not a substitute for professional legal advice.