Baba Ramdev’s Patanjali Faces Tax Penalty: Comprehensive Insights into GST and Income Tax Laws

Introduction

Patanjali Ayurved, a fast-moving consumer goods (FMCG) company that has its roots in yoga instructor Baba Ramdev, was recently presented with a significant tax penalty and an equally enormous demand for income tax.

Patanjali Ayurved is a fast-growing corporation. A penalty amounting to ₹273.5 crore was upheld by the Allahabad High Court as a component of the government’s Goods and Services Tax (GST) system.

The Supreme Court, on the other hand, rejected a claim for 186 crore rupees in income tax that was filed against Patanjali Foods, which is the subsidiary of the firm of the same name.

As a result of these various results, a number of significant features of India’s indirect and direct tax laws, the procedures for appealing assessments, and the fine line that differentiates civil penalties from criminal liability have been brought to light.

Background of the GST Penalty

In April 2024, the Directorate General of GST Intelligence (DGGI) issued a show-cause notice to Patanjali Ayurved, proposing a penalty of ₹273.51 crore. This was done in compliance with Section 122(1)(ii) and (vii) of the Central Goods and Services Tax Act, which is the provision in which the penalty was recommended.

Circular trade is the practice of generating fraudulent tax invoices without actually delivering any things in order to raise a firm’s claims for input tax credit. The corporation was accused of participating in circular trade, which is a practice that involves circular commerce.

However, Patanjali proceeded to oppose the penalty component and simultaneously filed a legal challenge with the Allahabad High Court. Despite the fact that she paid the tax demands that were issued under Section 74, she continued to contest the penalty component.

General Goods and Services Tax (GST) Legal Provisions and the Characteristics of the Proceedings According to Section 122 of the CGST Act, tax authorities are granted the ability to impose penalties for specific offenses. These violations include the filing of fraudulent invoices and the suppression of documents.

In contrast to crimes that are governed by the Indian Penal Code, the penalties that are imposed in accordance with this provision of the Goods and Services Tax (GST) are of a civil nature and are determined by the individual who is tasked with the responsibility of adjujudging the GST.

There is no need for them to initiate a criminal case in order for them to be successful. However, offenses that are either serious or frequent may result in parallel criminal investigations being conducted in accordance with Section 132 of the CGST Act. The purpose of this is to discourage people from committing similar actions by deterring them from doing so via the use of monetary sanctions rather than incarceration.

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GST Legal Provisions and Nature of Proceedings

On May 29, 2025, a division bench of the Allahabad High Court decided not to grant Patanjali’s plea. Patanjali’s petition was denied. Justice Shekhar B. Saraf and Justice Vipin Chandra Dixit were the members of the bench.

The court deliberated and came to the conclusion that actions for the imposition of fines under Section 122 do not entail criminal responsibility and may be carried out without the need of a criminal trial being conducted by the court.

Patanjali’s stance, which said that penalties need prosecution in criminal courts, was deemed to be irrational and without basis by the verdict. The Court also underlined the fact that the framework of the CGST clearly assumes civil adjudication by tax agents.

As a result of this ruling, the ₹273.5 crore punishment has been upheld, which reinforces the jurisdiction of the GST authorities to protect the exchequer from fraudulent acts that are facilitated by invoicing.

Allahabad High Court’s Decision

With regard to Patanjali Foods Limited, which is a publicly traded component of the Patanjali group, a notice of reassessment was issued. According to Section 148 of the Income Tax Act of 1961, this notification was sent to the appropriate parties.

According to the Principal Commissioner of Income Tax (Central), who said that income was avoiding assessment, there was a demand for ₹186 crore, which comprised taxes and penalties.

This demand was made. Patanjali Foods filed a challenge against the reassessment finding before the Bombay High Court, and the court provided some relief to the company. Due to the fact that the company was unable to recognize the impact that it would have on its financial records, it filed a petition for special leave with the court before the court.

Income Tax Demand and Litigation History

In accordance with Section 147, the authorities in charge of taxation have the ability to reopen assessment in situations where there are reasons to believe that income that is subject to taxation has been prevented from being assessed.

Following the issuance of a notice in line with Section 148, the procedure requires the assessee to be provided with the opportunity to submit a response. It is possible that penalties for income concealment will be applied in line with Section 271(1)(c) in the event that the reassessment is upheld.

It is possible for income tax penalties to have both financial and reputational repercussions, notwithstanding the fact that charges for willful evasion under Section 276C need separate criminal proceedings. When compared to income tax penalties, which are mostly of a civil character, this distinction is significant.

It was determined by the Supreme Court that the petition for income tax should be rejected.
In an order that was issued on March 15, 2025, the Supreme Court came to the conclusion that the reassessment that was carried out by the department of Income Tax did not have a sufficient base.

The bench said that the agency had not provided any new information that would merit reopening after the first assessment had been completed. A further point that was brought to light by the ruling was that the notice that was issued included procedural errors.

The Court overturned the demand for 186 crores of rupees and the penalties that were associated with it. This came after the Court reaffirmed that reassessment powers should be used sparingly and only where there is substantial evidence of fugitive income. As a result of this ruling, the obligation of the court to prevent the arbitrary application of Section 147 and to protect the rights of taxpayers has been again brought to light.

Income Tax Act Provisions and Assessment Procedure

These two verdicts shed light on a number of fundamental problems that have been previously hidden. It has been established by the courts that penalties imposed under Section 122 are considered to be civil in nature and may be enforced by adjudicating authorities.

This is a component of the Goods and Services Tax (GST) system. This eliminates the need for criminal stigma and guarantees that prompt financial solutions are accessible to those who need them.

Alternately, the framework for income tax permits a higher degree of ability to reassess assessments, but it does so while retaining rigorous procedural safeguards. This is available to taxpayers. The emphasis that the Supreme Court places on presenting fresh evidence prior to invoking Section 147 is a reaffirmation of the idea that tax laws, regardless of whether they are express or implicit, must be applied in a way that is both fair and predictable.

Supreme Court’s Quashing of Income Tax Demand

A reminder was given to Patanjali Ayurved about the need of adhering to high compliance requirements when it comes to the documentation of transactions and the claims for input tax credit.

Prior to the construction of complicated supply networks, firms may choose to alter their internal audit systems and search for more sophisticated judgments as a consequence of the decision.

Despite the fact that the victory of Patanjali Foods in the Supreme Court is reassuring, it also serves as a reminder that the authorities that are responsible for reassessing income tax must base their conclusions on actual facts.

When all of these cases are taken into account, they will have an effect on the way in which businesses deal with tax risk, communicate with authorities, and adopt litigation strategies.

Key Issues and Principles

Patanjali’s experiences in the Goods and Services Tax (GST) and Income Tax forums are demonstrative of the multiple routes that are available within the framework of India’s tax enforcement architecture.

As a result of the Allahabad High Court’s decision to uphold a large penalty for goods and services tax (GST), both the civil nature of GST violations and the authority of Section 122 have been brought to light.

In general, the procedural fairness of Section 147 has been improved as a consequence of the judgment made by the Supreme Court to deny a major claim for income tax. In the context of finding a balance between safeguarding revenue and constitutional rights against arbitrary state action, these results, when viewed as a whole, give crucial lessons for both taxpayers and authorities about how to achieve this balance.