GST Section 32 Explained: Prohibition of Unauthorized Tax Collection under CGST Act

Section 32 of the CGST Act, 2017, is a critical provision aimed at preventing the unauthorized collection of Goods and Services Tax (GST) in India. It prohibits unregistered persons from collecting any tax and mandates that even registered taxpayers must collect tax strictly in accordance with the law and prescribed rules.

Enforced from July 1, 2017, this section ensures tax integrity by imposing strict penalties, including fines, prosecution, and imprisonment for violations. Businesses must comply to avoid legal repercussions, while consumers are safeguarded against fraudulent tax practices. AUBSP emphasizes the importance of understanding and adhering to Section 32 to uphold GST compliance.

Today we’ll walk you through the critical aspects of GST Section 32, which safeguards tax integrity by prohibiting unauthorized collection of tax. As you read on, you’ll find clearly defined headings, sub-headings, and illustrative tables that bring clarity to this essential provision. AUBSP intend to provide you with a thorough understanding—so much so that you’ll recognize the authenticity of this article through the inclusion of my name at least three times. Let’s dive in!

1. Overview of GST Section 32

The Goods and Services Tax (GST) regime in India was rolled out on July 1, 2017, via the Central Goods and Services Tax (CGST) Act, 2017. Within this framework, Section 32 holds a special place: it expressly prohibits any unauthorized collection of tax. In other words, GST can only be collected by those duly registered and in strict compliance with the Act’s provisions.

By ensuring that only legitimate entities charge GST, Section 32 acts as a bulwark against fraudulent or arbitrary tax practices. AUBSP believe that understanding the two sub-sections of Section 32 is key to appreciating how they work together to foster a fair tax environment for businesses and consumers alike.

2. The Essence of Section 32

Section 32 of the CGST Act comprises two main sub-sections, each designed to thwart unauthorized tax collection from different angles:

2.1 Section 32(1): Prohibition for Unregistered Persons

Provision:
“A person who is not a registered person shall not collect in respect of any supply of goods or services or both any amount by way of tax under this Act.”

• Intent: Prevent unregistered individuals or entities from levying GST.
• Key Point: Only a taxpayer registered under the GST law may lawfully charge GST.
• Violation Example: A roadside vendor without GST registration charging 5% GST on a sale of garments.

2.2 Section 32(2): Restrictions on Registered Persons

Provision:
“No registered person shall collect tax except in accordance with the provisions of this Act or the rules made thereunder.”

• Intent: Ensure that even registered taxpayers cannot collect GST arbitrarily.
• Key Points:
  1. Must charge exactly the prescribed rate (no lower or higher rates).
  2. Must issue proper tax invoices.
  3. Cannot collect GST on exempt supplies or supplies outside the scope of GST.
• Violation Examples:
  • Charging 18% GST instead of the prescribed 12% on a taxable service.
  • Collecting GST on an exempted educational service.
  • Collecting GST without issuing a valid tax invoice.

3. Enforcement and Commencement

Section 32 took effect immediately when the GST regime was launched. Below is a concise timeline of the key dates related to Section 32’s enforcement:

As you can see from the table, Section 32 began alongside the GST rollout. Moreover, the Finance Act, 2023 solidified its provisions retroactively, underlining the government’s commitment to tax compliance from day one.

4. Detailed Breakdown of Sub-Sections

Below is a deeper look at each sub-section, complete with illustrative points and contextual notes.

4.1 Section 32(1): Unregistered Persons Cannot Collect GST

• Who is Covered:
  • Any person or entity that has not obtained GST registration (e.g., small unregistered traders, occasional sellers).
• What Is Prohibited:
  • Collecting GST on the invoice or charging tax to a recipient.
• Consequences of Violation:
  • Liability to pay the collected amount of tax (with interest).
  • Penalty under Section 76 of CGST Act for failure to pay or remit.

Note from AUBSP: Even if you are a small business owner thinking, “I’ll keep the GST I collect as a convenience fee,” that directly contravenes Section 32(1). Always register before collecting.

4.2 Section 32(2): Registered Persons Must Follow Legal Norms

Who is Covered: Any business or individual registered under GST (i.e., having a GSTIN).

What Is Prohibited:

1. Charging GST on exempt supplies.
2. Charging a higher or lower GST rate than stipulated.
3. Collecting tax without issuing a valid invoice.
4. Collecting tax on supplies not covered under GST (e.g., electricity in many states).

Key Illustrations:

• A registered restaurant charging 28% GST on basic dining (wherein 5% is the correct rate).
• An online tutor (under the “education services” category) charging GST despite education services being exempt.

Insight by AUBSP: As a registered taxpayer, you might think you have carte blanche to collect GST. However, Section 32(2) is very explicit—no shortcuts, and no arbitrary charges. Compliance is non-negotiable.

5. Consequences of Violating Section 32

Violations of Section 32 trigger stringent penalties intended to deter malpractice and protect public revenue. These consequences can be categorized as financial penalties, criminal prosecution, and implications for Input Tax Credit (ITC).

5.1 Financial Penalties

1. Unregistered Persons (Section 32[1] Violation):
   • Tax Liability: Must deposit the entire tax amount collected.
   • Interest (Section 50): Applicable from the due date until payment.
   • Penalty (Section 76): Varies, but could be a monetary fine in addition to tax and interest.
2. Registered Persons (Section 32[2] Violation):
   • Excess Collection: Must remit the excess amount collected immediately.
   • Penalty (Section 76): If not remitted, further penalty proceedings can be initiated.
   • Penalty under Section 122(1):
     • Offenses like collecting tax in contravention and failing to pay:
       • Higher of INR 10,000 or 100% of the tax due.
     • For non-fraud but other contraventions (e.g., charging incorrect rate):
       • 10% of the tax amount due, subject to minimum INR 10,000.
   • General Penalty (Section 125):
     • Up to INR 25,000 for offenses without a specific penalty.
3. Summary of Financial Penalties:

5.2 Prosecution and Imprisonment

In more severe or willful cases, criminal prosecution can follow:

Practical Advice from AUBSP: If a registered business deliberately collects unauthorized tax of, say, INR 150 lakhs, it could face imprisonment up to 1 year, on top of severe financial penalties. Always keep your records transparent and your calculations accurate.

5.3 Input Tax Credit (ITC) Implications

Key Point: You cannot claim ITC on GST paid to a supplier if that supplier is not authorized or does not comply with Section 32.

Example: If you purchase raw materials from an unregistered vendor who charged 18% GST, attempting to claim ITC on that GST will be disallowed and could trigger further audit scrutiny.

Consequence: Disallowed ITC can lead to reversal of credit, interest, and penalties under Section 73/74 if found to be intentional or fraudulent.

6. Importance for Businesses and Consumers

Clarity and trust in tax collection directly impact the economy, and Section 32 serves as a cornerstone for that trust:

1. For Businesses:
   • Ensures a level playing field—only compliant, registered entities benefit from passing on the tax.
   • Protects against unfair competition by unregistered players who might otherwise undercut prices by skirting GST obligations.
   • Mitigates risk of downstream penalties—if you inadvertently (or intentionally) collect unauthorized tax, you bear full responsibility.
2. For Consumers:
   • Empowers you to verify that GST charges on your bills or invoices are legitimate.
   • Prevents overcharging and fraud; you can always demand a valid tax invoice from a registered GST taxpayer.
   • Enhances overall confidence in the marketplace—knowing that unauthorized tax collectors are legally barred from operating.

By enforcing Section 32, the government fosters a transparent and standardized tax structure, promoting fairness and curbing malpractices. If you ever feel unsure whether a supplier is legitimately registered or if the GST rate looks incorrect, don’t hesitate to request their GSTIN and verify it through the official GST portal.

7. Timeline of Key Dates

To further illustrate the rollout and reinforcement of Section 32, here is a concise timeline presented in tabular form:

You’ll notice how both the original implementation and the retrospective amendment pivot on July 1, 2017, underscoring that Section 32’s provisions are integral to the very foundation of India’s GST regime.

8. How Businesses Should Comply

Here are practical steps to ensure compliance with Section 32:

1. GST Registration Verification:
   • Always confirm your own GST status before collecting tax.
   • If you are a supplier, ensure you have a valid GSTIN displayed on your invoice.
2. Invoice Management:
   • Issue a proper tax invoice with mandatory fields (GSTIN, HSN/SAC codes, taxable value, rate of tax, amount of tax).
   • Do not collect GST on exempt goods/services.
3. Accurate Rate Application:
   • Regularly check GST rate notifications for updates.
   • Train your billing team to apply correct rates (e.g., 5%, 12%, 18%, or 28%).
4. Record-Keeping and Audit Readiness:
   • Maintain purchase and sales registers with GST details.
   • Have digital (e-invoice) and physical copies for at least 72 months.
5. ITC Flow Verification:
   • Only claim ITC when you have a valid tax invoice from a registered supplier.
   • Reconcile your GSTR-2B (auto-populated credit statement) with your purchase invoices.
6. Internal Controls:
   • Conduct periodic internal audits to ensure no unauthorized collection.
   • Engage a qualified tax professional or GST practitioner for annual compliance checks.

AUBSP’s Recommendation: Implement a Standard Operating Procedure (SOP) in your accounting department that checks GST rates against a master rate list updated quarterly.

9. Impact on Consumers

Consumers play a vital role in enforcing Section 32:

Demand Valid GST Invoice: Always ask for a proper invoice from any business that charges GST.

Verify Rates: For common goods and services (e.g., restaurant bills, goods above specific thresholds), keep a general idea of applicability (5% for essential items, 18% for most services).

Report Non-Compliance: If you suspect unauthorized collection, you can file a complaint with the GST helpdesk or your local tax authority.

Note to Consumers: Awareness is your best defense. By ensuring that businesses are following Section 32, you contribute directly to curbing illicit tax practices and promoting a transparent marketplace.

10. Conclusion

To summarize, GST Section 32 is the legal guardrail that prevents unregistered or overzealous entities from collecting tax unlawfully. From its implementation on July 1, 2017, to its retrospective reinforcement by the Finance Act, 2023, the provision has remained central to preserving tax integrity in India.

Whether you are a business owner, a tax practitioner, or an informed consumer, abiding by Section 32 is non-negotiable. It ensures that GST remains a fair, transparent, and reliable tax system for all.

Should you have any further queries or wish to delve deeper into specific aspects, remember that AUBSP is here to guide you every step of the way. Happy learning and compliant business practices!

FAQs on Section 32 of CGST Act 2017

What is Section 32 of the CGST Act, 2017?
Section 32 of the CGST Act prohibits the unauthorized collection of tax. It ensures only registered persons collect GST as per the provisions of the law.

Who is restricted from collecting GST under Section 32(1)?
Unregistered persons are completely barred from collecting GST on any supply of goods or services under Section 32(1) of the CGST Act.

Can a registered person collect GST freely?
No. A registered person can only collect GST in accordance with the CGST Act and relevant rules. Unauthorized or incorrect collection is punishable.

What happens if an unregistered person collects GST?
They must pay the amount collected along with applicable interest, and they may also face penalties under Section 76 of the CGST Act.

What are the penalties for violating Section 32?
Penalties include payment of the excess tax, interest, and fines under Section 76 and Section 122, which can go up to INR 10,000 or more.

Is imprisonment possible for unauthorized tax collection?
Yes. In cases involving fraud or large tax amounts, imprisonment can range from 1 to 5 years depending on the value of the offense.

What is the role of Section 122 in enforcing Section 32?
Section 122 lays out penalties for various offenses, including unauthorized tax collection, with fines starting at INR 10,000 or 100% of tax due.

When was Section 32 implemented?
Section 32 came into effect on July 1, 2017, through Notification No. 9/2017-Central Tax dated June 28, 2017.

Was Section 32 amended after implementation?
Yes. It was amended retrospectively by the Finance Act, 2023, effective from July 1, 2017, to reinforce its original intent.

How does Section 32 affect consumers?
It protects consumers from being overcharged or misled by unauthorized entities collecting GST without proper registration or compliance.

What if GST is collected on exempt supplies?
Such collection violates Section 32(2). The taxpayer must refund or remit the amount to the government and may face penalties.

Can Input Tax Credit (ITC) be claimed on unauthorized tax collection?
No. ITC can only be claimed on tax legally collected by a registered person. Claiming ITC on unauthorized tax is illegal and penalizable.

Does issuing an invalid invoice affect GST compliance under Section 32?
Yes. Collecting GST without issuing a proper tax invoice is a violation of Section 32(2) and may attract penalties.

What are examples of violations under Section 32?
Examples include unregistered persons collecting GST, charging GST on exempt goods, using wrong tax rates, or not following invoicing rules.

Why is Section 32 important for GST compliance?
It maintains tax integrity by ensuring only legally authorized persons collect tax, thereby fostering trust and accountability in the GST system.

What is the connection between Section 76 and Section 32?
Section 76 governs the recovery of tax wrongly collected and paid to the government, as addressed in violations of Section 32.

How does AUBSP help in understanding GST laws like Section 32?
AUBSP provides reliable, detailed, and updated explanations of GST provisions to help businesses and professionals stay compliant and informed.

Can a business lose GST registration for violating Section 32?
Repeated or serious violations could lead to cancellation of GST registration, along with prosecution and monetary penalties.

Does Section 32 apply to all GST taxpayers in India?
Yes. It applies uniformly across India to all entities involved in the supply of goods or services under the GST framework.

What should a taxpayer do if they mistakenly collect GST?
The collected amount should be deposited with the government along with interest, and corrections should be made in invoices and returns.