Section 138 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The statutory exit from a GST prosecution. The Finance Act, 2023 made it materially cheaper and materially wider — two changes worth knowing precisely.
Section 138(1): any offence under the Act may, either before or after the institution of prosecution, be compounded by the Commissioner on payment of the prescribed compounding amount. 138(2): the amount shall be not less than twenty-five per cent of the tax involved and not more than one hundred per cent of the tax involved — substituted by the Finance Act, 2023, notified through Notification No. 28/2023-CT dated 31.07.2023, w.e.f. 01.10.2023, replacing a formula that ran from ₹10,000 or 50% of tax, whichever is higher, to ₹30,000 or 150% of tax, whichever is higher. 138(3): on payment, no further proceedings shall be initiated under the Act for the same offence, and any criminal proceedings already instituted shall stand abated. Third proviso: compounding is allowed only after payment of the tax, interest and penalty involved.
What the 2023 amendment changed
| Element | Before 01.10.2023 | From 01.10.2023 |
|---|---|---|
| Minimum compounding amount | ₹10,000 or 50% of tax, whichever is higher | 25% of the tax involved |
| Maximum compounding amount | ₹30,000 or 150% of tax, whichever is higher | 100% of the tax involved |
| Bar for a repeat compounder | Clauses (a) to (f) and clause (l) relatable to them | Clauses (a) to (f), (h), (i) and (l) |
| Bar for value exceeding ₹1 crore on any other offence | Existed | Omitted |
| Bar for an offence also an offence under another law | Existed | Substituted |
| Bar for clauses (g), (j), (k) offences | Existed | Omitted (those clauses were themselves omitted) |
Two consequences. The ceiling fell from 150% to 100% of the tax and the floor from a 50%-or-₹10,000 formula to a flat 25% — a substantial reduction. And the ₹1 crore value bar on a second compounding of other offences was removed entirely.
The bars in the first proviso
Compounding shall not 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 s.132(1) — as substituted in 2023;
(d) a person who has been convicted for an offence under this Act by a court;
(f) any other class of persons or offences as may be prescribed.
Clause (b) — the second compounding where supplies exceeded ₹1 crore — was omitted. Clause (c) was substituted, and clause (e) — offences under clauses (g), (j) or (k) — was omitted, consistently with the omission of those clauses from s.132(1).
So the practical bars now are: a prior compounding of a serious-clause offence, and a conviction.
The two remaining provisos
Second proviso: any compounding allowed shall not affect the proceedings, if any, instituted under any other law.
So compounding under the GST Act does not close a prosecution under the Indian Penal Code or the Bharatiya Nyaya Sanhita, the Prevention of Money Laundering Act, or any other statute. Where the same facts support charges under another law, compounding resolves only the GST offence.
Third proviso: compounding shall be allowed only after making payment of tax, interest and penalty involved in such offences.
The compounding amount is on top. The sequence is: pay the tax, interest and penalty, then pay the compounding amount of 25% to 100% of the tax. That total should be computed before the application is made, because the aggregate is substantial and the decision is commercial.
What compounding achieves
Section 138(3): on payment of the compounding amount as may be determined by the Commissioner:
- no further proceedings shall be initiated under the 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.
"Shall stand abated" is the strongest word in the section. The prosecution ends — not adjourned, not withdrawn subject to conditions.
And it is available at any stage — "either before or after the institution of prosecution". So compounding remains open after a complaint has been filed, which is when it is most often used.
Compounding compared with the other exits
| Route | What it costs | What it closes |
|---|---|---|
| s.74A(8)(i) — pay before the notice, non-fraud | Tax + interest, no penalty | The demand; not s.132 prosecution |
| s.74A(9)(i) — pay before the notice, fraud | Tax + interest + 15% | The demand; not s.132 prosecution |
| s.74A(9)(ii) — within 60 days of the notice | Tax + interest + 25% | The demand; not prosecution |
| s.128A — FY 2017-18 to 2019-20, s.73 demands | Tax only | Interest and penalty on the demand |
| s.138 — compounding | Tax + interest + penalty + 25% to 100% of tax | The prosecution, which stands abated |
The critical point: Explanation 1(i) to s.74A provides that "all proceedings in respect of the said notice" shall not include proceedings under s.132. So paying under the demand windows does not close a prosecution. Section 138 is the only route that does. Section 74A penalty windows → Section 128A →
The procedure
Rule 162 governs the procedure for compounding. The application is made to the Commissioner in FORM GST CPD-01; the Commissioner may call for a report from the concerned officer, and shall give the applicant an opportunity of being heard before rejecting an application; and the order allowing or rejecting compounding is issued in FORM GST CPD-02.
Practical steps:
- Compute the total — tax, interest, penalty, and the compounding amount at both ends of the 25%–100% band.
- Pay the tax, interest and penalty first, since the third proviso conditions compounding on it.
- Check the bars — a prior compounding of a clause (a) to (f), (h), (i) or (l) offence, or a conviction.
- Apply in CPD-01, with the computation and the evidence of payment.
- Ask for the hearing where rejection is indicated.
- Note the second proviso — proceedings under other laws are unaffected, and that should be factored into the decision.
- On the CPD-02 order, ensure the criminal proceedings are recorded as abated before the court.
Key takeaways
- Any offence may be compounded by the Commissioner, before or after prosecution is instituted.
- The amount is 25% to 100% of the tax involved, following the Finance Act, 2023 substitution effective 01.10.2023.
- Tax, interest and penalty must be paid first; the compounding amount is additional.
- The bars are a prior compounding of a clause (a)–(f), (h), (i) or (l) offence, and a conviction.
- The ₹1 crore value bar on a second compounding was omitted.
- Compounding abates the criminal proceedings — the only route that does, since Explanation 1(i) to s.74A excludes s.132 from what a demand payment concludes.
Read next
- Section 132: Offences and the Threshold for Prosecution
- Section 69: The Power to Arrest and Its Boundaries
- Section 137: Offences by Companies and the Due Diligence Defence
- Section 74A Penalties: Four Windows and What Each Costs
Disclaimer: Positions stated as on 5 September 2026, based on the CGST Act and Rules as amended to 31 March 2026 (ICAI Bare Law, 12th edition). This is general information, not advice in any criminal proceeding.
Key Facts About Section 138
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
What is the compounding amount under GST?
Not less than twenty-five per cent and not more than one hundred per cent of the tax involved, as prescribed and determined by the Commissioner.
Can an offence be compounded after prosecution has started?
Yes. Section 138(1) allows compounding either before or after the institution of prosecution.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Section 138: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.