If you collected GST from a buyer and did not pay it to the government, Section 76 of the CGST Act treats that money as government funds held in trust and requires you to deposit it immediately, along with 18% annual interest running from the day you collected it. Tax collected but not deposited under GST carries three escalating consequences: interest that cannot be waived, a penalty equal to the full amount withheld once three months pass, and criminal prosecution with imprisonment up to five years when the sum exceeds ₹5 crore. The obligation applies even if the underlying supply was exempt or outside GST, because once you charged the buyer “GST,” the money changed character.1Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 76
The Three-Month Line
A short delay past your return due date is a civil problem. Interest accrues, but nothing more serious is triggered. Three months is where the picture changes. Section 122 treats failure to deposit collected tax within three months of the payment due date as a specific offence carrying heavy penalties.2Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 122 Section 132 uses the same three-month threshold to open the door to criminal prosecution.3Central Board of Indirect Taxes and Customs. CGST Act – Punishment for Certain Offences
If you are reading this within that window, the arithmetic of self-correction still works heavily in your favor. Past it, the penalty framework alone can double your liability.
Interest From the Date of Collection
Interest runs at 18% per annum on unpaid tax.4Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 50 For tax collected but not deposited, Section 76 starts the clock at the date of collection, not the date your GSTR-3B was due.1Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 76 Money you took in the first week of a month accrues interest from that week, not from the 20th of the following month.
This interest is not discretionary. Officers cannot waive it during assessment, and it applies whether the delay was deliberate or accidental. A business sitting on ₹50 lakh in collected GST for six months would owe roughly ₹4.5 lakh in interest alone before any penalty enters the picture.
The Penalty That Doubles Your Liability
Once past the three-month mark, Section 122 imposes a penalty equal to ₹10,000 or the full amount of tax withheld, whichever is higher.2Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 122 Because collected tax almost always exceeds ₹10,000, the higher figure applies in practice, and your effective exposure becomes the original tax plus a matching penalty plus interest running on top.
If ₹20 lakh was collected and not deposited, the demand can reach ₹20 lakh in tax, up to ₹20 lakh in penalty, and 18% annual interest from the date each rupee was collected.
Where the government can show fraud, willful misstatement, or deliberate suppression of facts, Section 74 applies instead. The show cause notice itself demands a penalty equal to 100% of the tax specified in the notice.5Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 74 Section 74 also extends the government’s reach back in time: five years from the annual return due date, compared to three years under Section 73 for non-fraud cases.6Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 73
Paying Voluntarily Before a Notice Arrives
The single most valuable escape hatch in this area is Section 73. If you calculate the outstanding tax and interest yourself, pay it, and inform the proper officer in writing, they cannot issue a show cause notice for that amount and no penalty applies.6Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 73
You still owe the interest for the period of delay. But eliminating the penalty in a case where the penalty could equal 100% of the tax is the difference between a manageable correction and a demand that doubles your bill. Voluntary payment should be the first move the moment you realize collected tax has not been deposited.
What Happens After a Show Cause Notice
If the government finds the discrepancy first, formal proceedings begin with a show cause notice identifying the undeposited amounts and the proposed penalty. You respond in writing, upload supporting documents, and may request a personal hearing. Paying after the notice but before the adjudication order is passed still helps: under Section 73, the penalty is reduced to 10% of the tax due or ₹10,000, whichever is higher.6Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 73
Once the officer passes a formal demand order, the tax, interest, and penalty amounts are fixed. That order becomes the legal basis for recovery unless you appeal.
Recovery Powers Once the Demand Is Final
If the debt is unpaid after a demand order, Section 79 gives the proper officer several enforcement tools:7Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 79
- Deducting the amount from any money the government already holds that belongs to you.
- Detaining and selling business inventory, equipment, or other goods in the officer’s control.
- Directing anyone who owes you money, including your bank, to pay the government instead. This effectively freezes the attached funds.
- Seizing movable or immovable property. If the debt is not cleared within 30 days, the property can be sold at auction.
- Certifying the debt to the district Collector for recovery as an arrear of land revenue.
- Applying to a Magistrate to recover the amount as if it were a court-imposed fine.
The third-party attachment power is particularly disruptive because a notice to your bank can freeze operating accounts without prior court approval. If you intend to appeal, filing before recovery starts is the priority.
When Prosecution Becomes a Possibility
Criminal prosecution under Section 132 requires two things together: the amount collected but not deposited must exceed ₹2 crore, and the withholding must continue beyond three months from the due date. The imprisonment tiers are:3Central Board of Indirect Taxes and Customs. CGST Act – Punishment for Certain Offences
- ₹2 crore to ₹5 crore: imprisonment up to three years, plus a fine. The offence is bailable and non-cognizable.
- Above ₹5 crore: imprisonment up to five years, plus a fine. The offence is cognizable and non-bailable, meaning arrests can be made without a warrant and bail is not available as a matter of right.
The minimum sentence in both tiers is six months unless the court records specific reasons justifying a shorter term.
Charges do not stop at the company. Under Section 137, every person who was in charge of and responsible for the company’s business at the time of the offence is deemed guilty alongside the company. Any director, manager, or secretary whose consent, connivance, or negligence contributed to the offence faces personal prosecution. The only defense is proving the offence occurred without your knowledge or that you exercised all due diligence to prevent it.
The Reversed Burden of Proof
Section 135 makes defending these cases harder than most criminal charges. Where the offence requires a “culpable mental state,” the court presumes the accused had that state of mind. You then have to prove beyond a reasonable doubt that you did not. The usual criminal standard, where the prosecution carries the full burden, is inverted.
Compounding as a Way Out
Section 138 lets certain offences, including this one, be compounded. Compounding settles the criminal case with a monetary payment and no trial. The conditions are strict. You must first pay all outstanding tax, interest, and penalties. Compounding for this offence is available only once. It is not available if you have already been convicted, if the same conduct violates another law, or if you fall within excluded categories the government has specified.
Directors’ Personal Liability
Section 89 pierces the corporate veil for private companies. When a private company owes tax, interest, or penalty that cannot be recovered from the company, every person who was a director during the period the liability arose becomes jointly and severally liable. The only defense is proving the non-recovery was not caused by your own gross neglect, misfeasance, or breach of duty related to the company’s affairs.
The proper officer can then pursue directors’ personal bank accounts and property using the same Section 79 recovery powers listed above. Directors not involved in day-to-day finance still carry exposure, because the burden of proving no neglect sits on them, not on the department.
The Hit to Your Buyer’s Input Tax Credit
Non-deposit is not only your problem. Under Section 16(2)(c), a buyer can claim Input Tax Credit only if the tax charged on the supply has actually been paid to the government by the supplier.8Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 16 If you have not filed the GSTR-3B containing the invoice, the credit will not appear in the buyer’s GSTR-2B, and any credit already claimed must be reversed.
Rule 37A sets the timeline. If the supplier has not filed the relevant GSTR-3B by September 30 of the year following the financial year in which the buyer claimed the credit, the buyer must reverse that ITC in their own GSTR-3B on or before November 30. Reversals after that date attract interest.9Central Board of Indirect Taxes and Customs. CGST Rules – Rule 37A The buyer can reclaim the credit later if the supplier eventually files and pays, but the cash flow gap in the meantime is real, and the commercial fallout with customers often outlasts the tax matter itself.
Appeal and the Pre-Deposit
An adverse demand order can be appealed to the Commissioner of GST (Appeals) under Section 107 within three months. The appeal comes with a financial condition: you must first pay the full admitted amount of tax, interest, and penalty, and deposit 10% of the remaining disputed tax, capped at ₹25 crore. For orders imposing only a penalty without a tax demand, the pre-deposit is 10% of the disputed penalty.
The pre-deposit forces real money to the table, but filing the appeal and making the deposit also pauses recovery. Given how quickly Section 79 attachment can freeze bank accounts, getting the appeal on file before recovery begins is often the most urgent step after a bad order.