The 'Charge' Not the 'Penalty' - Section 28(6) Reform Under Finance Bill 2026 Why Recharacterisation Alone Does Not Free AEO/MOOWR/DGFT Licence Holders from the 'No Prior Penalty' Declaration Trap

Summary

Clause 88 of the Finance Bill 2026 proposes to amend Section 28(6) of the Customs Act 1962 to provide that the penalty paid under Section 28(5) on voluntary compliance shall be deemed to be a 'charge for non-payment of duty' rather than a punitive penalty. While welcomed by the trade as a step toward ease of doing business, this article argues that the recharacterisation is only partial relief. Under the Authorised Economic Operator (AEO) Regulations 2018, the Manufacture and Other Operations in Warehouse Regulations 2019 (MOOWR), and the Foreign Trade Policy 2023 (Advance Authorisation and EPCG schemes), licence applicants must declare that they have not been 'penalised' under the Customs Act - a requirement that operates independently of Section 28 and captures penalties under Sections 114, 117, and 124 . This article analyses the gap, proposes a consolidated CBIC clarification, and offers a practical compliance roadmap for importers seeking to utilise the Section 28(6) route without jeopardising their AEO/MOOWR/DGFT status.

1. The Problem

The voluntary compliance route under Section 28(5) of the Customs Act 1962 is one of the most efficient dispute-resolution mechanisms available to the trade. Where an importer or exporter pays the duty demanded along with applicable interest and 15 per cent of the duty amount as penalty within 30 days of receiving a show cause notice, the proceedings stand 'deemed to be concluded' under Section 28(6). On paper, this is a settled closure mechanism.

In practice, however, the word 'penalty' in the text of Section 28(6) has operated as a poison pill that deters even bona fide importers from availing the voluntary compliance route. Once a payment is characterised as a 'penalty' under the Customs Act, three independent compliance frameworks treat the importer as having been penalised:

(i) Authorised Economic Operator (AEO) Regulations 2018 - Regulation 4(3)(c) requires the applicant to declare that it has not been 'penalised' under the Customs Act during the preceding three years for any offence involving fraud or mis-statement. A Section 28(5) payment triggers this bar regardless of whether the underlying issue was a bona fide classification dispute.

(ii) Manufacture and Other Operations in Warehouse Regulations 2019 (MOOWR) - Applications under Section 65 read with MOOWR Regulations require similar declarations; any 'penalty' entry on the importer's compliance record disqualifies or complicates MOOWR licence grant and renewal.

(iii) DGFT Foreign Trade Policy 2023 - Paragraph 2.14 read with the Handbook of Procedures requires declarations of no prior penalty for Advance Authorisation, EPCG, MEIS/RoDTEP, and other DGFT schemes. A Section 28(5) payment affects the importer's standing for years after closure.

The consequence is perverse: a bona fide importer who voluntarily pays a disputed amount to close a matter is treated, across three separate regulatory regimes, as a penalised entity - while an aggressive litigant who fights the same issue and eventually loses may face a final order that is also a 'penalty', but has meanwhile preserved operational flexibility. This creates a structural disincentive for voluntary compliance.

2. The Proposed Amendment - Clause 88 of the Finance Bill 2026

The Finance Bill 2026, presented to the Lok Sabha on 1st February 2026, proposes through Clause 88 to amend sub-section (6) of Section 28. The text, as proposed, provides that 'the penalty paid under sub-section (5), on determination under sub-section (6), shall be deemed to be a charge for non-payment of duty.' The procedure, quantum (15 per cent), and timelines remain unchanged.

The CBIC, in its Departmental Officer JS TRU-I Letter dated 1st February 2026, confirmed that the recharacterisation is intended to 'align legal form with policy intent' and to remove the adverse accounting and reputational consequences that have so far deterred voluntary compliance. The amendment is expected to come into force from the date of Presidential assent to the Finance Act 2026.

3. The Analysis - What the Amendment Solves and What It Does Not

3.1 What Is Solved

The amendment directly addresses three immediate consequences of the 'penalty' label: accounting treatment (the amount no longer requires disclosure as an extraordinary penalty item in financial statements); tax deductibility under the Income-tax Act (a 'charge for non-payment of duty' is not hit by Explanation 1 to Section 37(1) of the Income-tax Act 1961 / corresponding provisions of the Income-tax Act 2025 in the same way as a penalty for violation of law); and reputational optics in public filings, tender disclosures, and credit rating reports.

3.2 What Is NOT Solved - The Three Independent Declaration Regimes

The amendment amends Section 28(6) alone. It does not amend the AEO Regulations 2018, the MOOWR Regulations 2019, or the Foreign Trade Policy 2023. The critical legal question is: does a 'charge for non-payment of duty' under the amended Section 28(6) satisfy the 'no prior penalty' declaration under these three regimes?

The answer, absent further clarification, is uncertain and likely unfavourable. The AEO Regulations speak of 'penalisation under the Customs Act' - a phrase wide enough to capture any payment labelled as a penalty at the time it was made, even if subsequently recharacterised. MOOWR and DGFT declarations use similar generic language. More critically, these regimes also capture penalties imposed under Sections 114 (penalty for attempt to export improperly), 117 (penalty for contravention not elsewhere provided), and 124 (penalty for confiscation of improperly imported goods) - which are entirely outside the scope of the Section 28(6) amendment.

3.3 Sections114, 117, and 124 - The Untouched Penalty Provisions

A substantial proportion of customs disputes involve parallel or alternative penalty proceedings under Sections 114, 117, or 124 of the Customs Act. These penalties arise in diverse situations: goods not declared correctly in the Bill of Entry, technical contraventions of importation procedures, misclassification leading to confiscation proceedings, and irregular use of export incentive schemes. Voluntary payment under Section 28(5) does not close proceedings under these sections unless a separate settlement is reached, and the resulting 'penalty' under these sections retains its punitive character. The AEO/MOOWR/DGFT barriers continue to apply in full to such penalties.

4. Comparison Table - What Section 28(6) Amendment Changes and What It Does Not

5. The Solution - A Practical Compliance Roadmap

5.1 For Importers Considering the Section 28(5) Route

Where a Section 28 show cause notice is received, the importer should evaluate the voluntary compliance route against three parameters: (a) whether the dispute also involves parallel proceedings under Sections 114, 117, or 124; (b) whether the importer holds or plans to apply for AEO, MOOWR, or DGFT-scheme licences within the next three years; and (c) whether the underlying allegation is purely a classification or valuation disagreement (non-fraud) or involves allegations of mis-statement or suppression. Only where (a) is absent and (c) is a non-fraud dispute does the Section 28(6) route become unambiguously beneficial.

5.2 Document the Bona Fides Contemporaneously

At the time of voluntary payment, the importer should place a formal representation on record stating: (i) that the payment is made without admission of any mens rea or fraud; (ii) that the payment is made exclusively to avail the Section 28(6) 'deemed conclusion' route; and (iii) that the dispute is one of bona fide interpretation of the statutory provisions. This contemporaneous record is critical for defending any subsequent AEO/MOOWR/DGFT application.

5.3 Address Parallel Penalty Proceedings Separately

Where parallel SCNs under Sections 114, 117, or 124 are pending, the importer must not assume that Section 28(5) payment closes these. These require separate adjudication or settlement through the Settlement Commission (where eligible) or closure through appeals.

6. Key Takeaways for Practitioners

First, the Section 28(6) amendment is a welcome but partial reform. It corrects the accounting and reputational stigma of a voluntary payment but does not clear the AEO/MOOWR/DGFT declaration barrier unless the CBIC issues a parallel clarificatory circular and the respective authorities (CBIC for AEO/MOOWR, DGFT for FTP) amend their declaration formats.

Second, practitioners advising clients on voluntary compliance must conduct a holistic risk assessment that extends beyond Section 28 alone - covering parallel Section 114/117/124 exposure, the client's AEO/MOOWR/DGFT scheme footprint, and the character of the underlying allegation.

Third, contemporaneous documentation of the bona fide nature of the voluntary payment is essential to preserve the importer's ability to defend future AEO/MOOWR/DGFT applications. The record should explicitly negate any admission of fraud or culpable conduct.

Fourth, industry bodies and trade associations should formally petition the CBIC to extend the recharacterisation principle beyond Section 28(6) - specifically to the penalty regimes under Sections 114, 117, and 124 in voluntary-settlement situations - and to amend the AEO, MOOWR, and DGFT declaration formats to recognise a 'charge for non-payment of duty' as distinct from a penalty.

7. Conclusion and CBIC Recommendations

The Section 28(6) amendment under the Finance Bill 2026 is a meaningful reform that signals the Government's commitment to trust-based customs administration. However, its practical benefit is significantly diluted by the continued operation of three independent declaration regimes (AEO, MOOWR, DGFT) and the untouched penalty regimes under Sections 114, 117, and 124 of the Customs Act. The author makes the following specific recommendations:

(i) CBIC should issue a Circular under Section 151A of the Customs Act clarifying that a 'charge for non-payment of duty' paid under the amended Section 28(6) shall not constitute a 'penalty' for the purposes of the AEO Regulations 2018 and the MOOWR Regulations 2019;

(ii) CBIC and the Directorate General of Foreign Trade should jointly amend the declaration formats prescribed under the Foreign Trade Policy 2023 to exclude 'charges' paid under Section 28(6) from the scope of the 'no prior penalty' declaration requirement;

(iii) The CBIC should consider extending the 'charge' recharacterisation principle to voluntary settlements under Sections 114, 117, and 124 of the Customs Act, where the underlying dispute is bona fide and does not involve fraud; and

(iv) The CBIC should clarify that Section 28(6) closure under the amended provision shall not, by itself, be treated as an admission of guilt for purposes of prosecution under Sections 135, 135A, and 140 - aligning the legal position with the policy intent of promoting cooperative compliance.

Until such clarifications are issued, importers must navigate a landscape in which the Section 28(6) amendment offers partial comfort - better than before, but short of the complete 'no-stigma' regime that the policy intent suggests. Practitioners should advise clients with full awareness of the declaration-level gaps, and industry should continue to press for consolidated reform across all three regulatory frameworks.