GST penalty notices: A bitter pill for small traders
GST penalty notices issued to thousands of bakeries and small traders across Karnataka have triggered massive protests. Many of these businesses—some valued under ₹10 lakh—are being slapped with notices demanding up to ₹39 lakh. The mismatch between actual business scale and penalty amounts has brought GST enforcement practices under public scrutiny.
Why are bakeries receiving GST penalty notices?
The penalties largely relate to alleged under-reporting or non-filing of GST returns for the period 2021 to 2024. According to local reports and trader accounts:
- Notices are being issued under Section 122 of the CGST Act, which allows penalty equal to the tax evaded.
- In many cases, small bakeries either didn’t register for GST or filed nil returns inconsistently.
- The department used data from power bills, rent agreements, or outward supplies to estimate turnover and demand tax plus penalty.
Example:
Sudhakar Shetty, a bakery owner, received a demand for ₹38.5 lakh despite his annual turnover being below ₹15 lakh.
Legal basis of GST penalties: What does the law say?
As per the CGST Act, 2017, GST penalties can be imposed under several sections:
| Section | Provision | Implication for SMEs |
|---|---|---|
| 122(1) | Penalty for tax evasion | Equal to tax evaded or ₹10,000, whichever is higher |
| 125 | General penalty | ₹25,000 for contraventions not covered elsewhere |
| 73/74 | Demand & recovery | Used to raise tax demands with or without fraud |
If authorities believe there’s intent to evade, Section 74 applies — and penalties plus interest can be steep.
What’s triggering the protest?
From July 23 to 25, 2025, around 65,000 bakery and small shop owners plan to shut down operations. The protest, organised at Freedom Park in Bengaluru, includes:
- Milk and tobacco sale boycott
- Support from multiple trade associations
- Demand for amnesty or waiver of penalties
Traders argue that instead of focusing on education and handholding, the department is relying heavily on retrospective penalties. In their words, “We are being punished for not knowing, not for fraud.”
Expert view: Can small businesses survive this?
Tax expert CA Bimal Jain pointed out on X that such aggressive enforcement risks wiping out small businesses that operate on razor-thin margins. His post gained traction for highlighting how GST penalties are now threatening even “daily bread.”
He recommends:
- Department should issue show cause notices first, not final demands.
- Small businesses need dedicated compliance support, not penal action.
- A state-level grievance redressal mechanism is essential for MSMEs.
Practical tips for small businesses to avoid GST penalties
- Register for GST if your turnover exceeds ₹20 lakh (₹10 lakh for special category states).
- File GSTR-1 and GSTR-3B on time — even nil returns.
- Use accounting software or a platform like Efiletax to automate filings.
- Respond to intimations or notices on the GST portal without delay.
- Regularly reconcile books with Form 2B and outward supply records.
FAQ: Understanding GST penalties for small businesses
Q1. Can GST demand exceed the business’s actual value?
Yes, under Section 122 or 74, penalties plus interest can go beyond the business’s book value — especially if turnover is estimated by the department.
Q2. Can I appeal against a GST penalty?
Yes, you can file an appeal under Section 107 of the CGST Act within 3 months from the date of the order.
Q3. Is there any amnesty scheme available?
As of now, Section 128A amnesty is available for old returns and revocation of cancelled registrations — but it may not cover all such bakery cases. A new scheme may be needed.
Time for a compliance reset
The GST system was meant to simplify indirect taxation. But when small bakeries face crores in penalties, trust in the system takes a hit. Instead of treating small shops as fraudsters, tax departments must balance enforcement with empathy.
If you run a small business and are worried about notices, missed returns, or GST penalties — let Efiletax help you with expert filing, notice replies, and compliance tracking.
👉 Get GST support now with Efiletax.in
Summary
GST penalty notices on small bakeries in Karnataka demand up to ₹39 lakh. Traders protest unfair enforcement and urge relief. Learn legal rules and compliance tips.