A comparative note on how a taxpayer can buy peace from criminal prosecution under the Income Tax Act 2025 and the CGST Act 2017 — eligibility, amounts, exclusions, and the practical decision-making that goes into each.
What Is Compounding, and Why It Matters
“Compounding” borrows its meaning from Section 320 of the old Code of Criminal Procedure (now the Bharatiya Nagarik Suraksha Sanhita) — to forbear from prosecution in exchange for a consideration. In both direct and indirect tax law, it is the statutory mechanism that lets an accused person pay a prescribed sum to the tax authority and, in return, avoid or terminate a criminal complaint that would otherwise proceed to trial before a Special Court or Magistrate.
It sits at a very specific point in a litigation practice: after a taxable event has gone wrong enough to attract a criminal offence provision, but before (or even after) the machinery of prosecution has been set in motion. For a practice built around litigation, knowing exactly when compounding is available — and, just as importantly, when it is not — is often the difference between a client facing a short administrative process and one facing a multi-year criminal trial.
Discretionary, not a right
Under both laws, compounding is a discretionary power vested in a specified authority (Commissioner under GST; specified income-tax authorities under the IT Act). An applicant has no vested right to have an offence compounded merely by offering to pay.
Before or after prosecution
Both regimes allow an application either before a complaint is filed or after prosecution has already commenced — though the earlier the application, the stronger the practical case for allowing it.
Payment-linked, not fault-linked
Compounding does not amount to an admission of guilt in the way a conviction does, and it does not erase the underlying tax, interest, or civil penalty liability — those must typically be paid in full before or as part of the process.
Compounding Under the Income Tax Act 2025
Compounding of income-tax offences is not a separate numbered section in the same way as it is under GST — it operates through the sanctioning authority’s power under Chapter XXII (Offences and Prosecution) read with CBDT’s periodically revised Compounding Guidelines, issued under the Board’s administrative powers. The framework carries forward the substance of the 2019 and subsequent CBDT guidelines into the Tax Year 2026-27 regime.
Two broad categories of offence
Category A — Technical/Procedural
- Failure to pay TDS/TCS to the credit of the government (Section 476/477, old 276B/276BB)
- Failure to file return of income (Section 479, old 276CC)
- Failure to produce accounts and documents (Section 481, old 276D)
- Other default-type offences not involving concealment of income
- Compounded more liberally, generally on payment of the compounding charge and satisfaction of eligibility conditions
Category B — Involving Concealment/Evasion
- Wilful attempt to evade tax (Section 478, old 276C)
- False statement in verification (Section 482, old 277)
- Falsification of books, abetment of false return (Sections 483–484, old 277A/278)
- Compounded far more sparingly, and typically not at all for repeat or high-value offenders
- Generally requires clearer evidence of bona fides and a stronger justification
Sanction and forum
Since prosecution itself requires the sanction of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner under Section 491 (old Section 279), compounding is administered through that same authority (or the Board’s designated compounding authority), and CBDT’s compounding guidelines prescribe the compounding charge, generally linked to the tax sought to be evaded, plus applicable interest, and subject to a floor amount.
Compounding Under the CGST Act
GST, by contrast, has a clean, single statutory home for this mechanism: Section 138 of the CGST Act, 2017, read with Rule 162 of the CGST Rules, 2017. Any offence under the Act — other than a short list of exclusions — may, either before or after institution of prosecution, be compounded by the Commissioner on payment of the prescribed compounding amount.
The Finance Act, 2023 (effective 1 October 2023, and still the operative framework through Tax Year 2026-27) materially eased the GST compounding regime as part of a broader decriminalisation push recommended by the GST Council: the compounding amount band was brought down from the earlier 50%–150% of tax to the current 25%–100% of tax, the minimum threshold for launching prosecution in most cases was raised from ₹1 crore to ₹2 crore of tax involved (the invoice-without-supply offence remains an exception, with no such relaxed threshold), and a set of relatively minor offences — obstructing an officer, tampering with evidence, failure to supply information — were decriminalised altogether and removed from the list of offences that could attract prosecution in the first place.
Compounding does not stop at one payment for large cases
A taxpayer whose offence involves supplies valued at more than ₹1 crore is, under the amended framework, restricted from availing compounding a second time for an offence of the same nature — a material point to flag for clients who have compounded once before and now face a fresh notice.
Side-by-Side Comparison
| Feature | Income Tax Act 2025 | CGST Act 2017 |
|---|---|---|
| Governing provision | Chapter XXII + CBDT Compounding Guidelines (administrative) | Section 138 + Rule 162 (statutory) |
| Compounding authority | Pr. CCIT / CCIT / Pr. CIT / CIT, per CBDT guidelines | Commissioner (CGST/SGST) |
| Application form | Prescribed application per CBDT guidelines (no single all-India e-form) | FORM GST CPD-01 |
| Timing | Before or after filing of complaint | Before or after institution of prosecution |
| Compounding amount | Generally tax-evaded linked, category-dependent, subject to a prescribed floor per guideline | 25%–100% of tax involved, subject to ₹10,000 floor |
| Repeat offenders | Second/subsequent offence under Section 485 (old 278A) generally outside compounding eligibility | No second compounding where earlier offence > ₹1 Cr in value, under the same or another GST law |
| Pre-condition | Tax, interest and (generally) penalty dues expected to be cleared/regularised | Payment of tax, interest and penalty is an express pre-condition |
| Effect of compounding | No further prosecution proceedings for the same offence on that fact pattern | No further proceedings for the same offence; pending criminal proceedings abate on payment |
| Discretion | Discretionary; guidelines list ineligible categories | Discretionary; Section 138 lists statutory exclusions |
Who Cannot Compound
Both regimes carve out categories of offenders and offences that are simply not eligible for compounding, regardless of willingness to pay.
Income Tax — Typically Excluded
- Offences involving proven mala fide/fabrication where the Board’s guidelines specifically bar compounding
- Cases where prosecution has already resulted in conviction by a court
- Habitual/repeat defaulters, as identified under the applicable compounding guideline
- Certain offences linked to undisclosed foreign income/assets or benami transactions, which fall outside the ordinary compounding framework
GST — Statutorily Excluded (Section 138)
- A person already compounded once for supplies exceeding ₹1 crore in value under any GST law
- A second-time offender for the cognizable offences listed in Section 132(1)(a)–(f)
- A person already convicted by a court under the CGST Act
- A person accused of an offence that is also an offence under another law (e.g., NDPS Act, FEMA)
- Categories of persons/offences separately prescribed by the Government
Procedure: Filing a Compounding Application
Clear the underlying dues
Under both laws, the practical starting point is regularising the tax, interest, and (where applicable) civil penalty that gave rise to the offence — compounding is rarely, if ever, entertained while these remain outstanding.
File the application in the prescribed form
For GST, this is FORM GST CPD-01 to the jurisdictional Commissioner. For income tax, the application follows the format and channel prescribed in the applicable CBDT compounding guideline in force, addressed to the competent authority.
Departmental report and eligibility check
Under GST, the Commissioner calls for a report from the concerned officer (Rule 162(2)) before deciding. The income-tax process similarly involves verification of eligibility against the guideline’s exclusion list before the competent authority takes a view.
Payment of the compounding amount
Once the authority determines the amount within the prescribed band, payment must be made within the stipulated time. Under GST, the applicant receives immunity from further prosecution via FORM GST CPD-02 upon payment.
Effect on pending proceedings
Payment results in cessation of further proceedings for that offence, and any already-instituted criminal proceedings stand abated (GST) or are withdrawn/not pursued further (income tax) — but immunity obtained on the basis of false or incomplete disclosure can be withdrawn later.
Practical Strategy for Practitioners
Apply early, not as a last resort
Both regimes allow pre-complaint applications. An early compounding application, filed once dues are cleared, is generally viewed far more favourably than one filed mid-trial as damage control.
Quantify exposure before advising
Since the compounding amount under GST is a direct percentage of tax involved, and income-tax compounding charges are similarly tax-linked, an accurate computation upfront lets the client make an informed cost-benefit call against a full trial.
Check repeat-offender status first
Before advising a client to pursue compounding, verify whether an earlier offence (under GST, above the ₹1 crore threshold; under income tax, a prior conviction or guideline-barred category) already disqualifies them — this is a threshold question, not a negotiating point.
Keep the civil and criminal files aligned
Since payment of tax, interest and penalty is a pre-condition in both regimes, coordinate the appellate/settlement strategy on the civil side with the compounding application on the criminal side — a favourable civil outcome (e.g., penalty deletion) strengthens, but does not replace, the compounding process.
Common Questions
Does compounding amount to an admission of guilt?
No. Compounding is a statutory settlement mechanism, not a conviction, and it does not carry the same legal consequences (such as disqualifications tied to a criminal conviction) that a court verdict would.
Can compounding be sought after conviction by a court?
Generally, no. Under GST, Section 138 expressly bars compounding for a person already convicted by a court under the Act. Income-tax compounding guidelines take a similar position — compounding is meant to pre-empt or terminate a trial, not to reopen a concluded one.
Is the compounding amount refundable if the case is later found to have no merit?
No. Once paid and accepted, the compounding amount is not ordinarily refundable — which is precisely why the cost-benefit analysis (likelihood of conviction, quantum of exposure at trial versus the compounding charge) needs to be done carefully before an application is filed, not after.
Does compounding under GST also protect against parallel proceedings under Customs or the Income Tax Act?
No. Compounding under Section 138 of the CGST Act only affects proceedings under GST law. It has no bearing on independent proceedings under the Income Tax Act, Customs Act, FEMA, or other statutes arising from the same or related facts — each requires its own compounding or defence strategy.