Table of Contents
Introduction: When GST Notices Knock
Receiving a GST notice is more than just an administrative inconvenience—it’s often the first signal that your compliance processes are under scrutiny. Among the most consequential provisions in the GST regime are Section 73 and 74 of the CGST Act, 2017. These two sections form the backbone of the government’s mechanism to detect and recover tax shortfalls, wrong ITC claims, or non-payment of tax, whether due to a genuine error or a deliberate attempt to evade tax.
What makes these sections so critical is their clear distinction between unintentional mistakes and fraudulent conduct, with vastly different consequences under each. From the timeline of issuing notices, to the quantum of penalties, and the opportunities available for voluntary compliance, everything hinges on whether your case falls under Section 73 or 74.
This comprehensive guide unpacks the scope, procedure, penalties, and legal intricacies of Sections 73 and 74, enabling taxpayers and professionals to navigate GST recovery proceedings with confidence and precision.
Understanding Section 73 of CGST Act – Cases where there is no Fraud or Suppression
Legal Provision – Section 73 of the CGST Act, 2017
Section 73 of the Central Goods and Services Tax Act, 2017, is the statutory provision governing recovery of tax where there is no fraud, willful misstatement, or suppression of facts with intent to evade tax. This section is invoked when the taxpayer’s default arises due to genuine mistakes—such as clerical errors, incorrect interpretation of law, or procedural lapses—without any mala fide intention.
As per Section 73(1):
“Where it appears to the proper officer that any tax has not been paid or has been short-paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax, requiring him to show cause why he should not pay the amount specified in the notice along with interest payable under Section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.”
This provision lays the foundation for demand and recovery proceedings in non-fraudulent cases.
When Is Section 73 Invoked?
Section 73 is typically applicable in scenarios such as:
- ✅ Clerical or computational errors in GST returns
- ✅ Incorrect classification of goods or services, resulting in lower tax payment
- ✅ Wrongful availment of ITC due to lack of understanding or oversight
- ✅ Misinterpretation of ambiguous provisions of the GST law
- ✅ Genuine omission of transactions without any intent to conceal or evade
In such instances, though a tax liability may arise, no penal consequences under Section 74 apply, since there is no element of fraud or suppression.
Procedure Under Section 73 – As per Rule 142 of CGST Rules
The procedure for issuing demand and recovery notices under Section 73 is guided by Rule 142 of the CGST Rules, 2017, which prescribes the manner and format of communication between the department and the taxpayer.
Here’s a step-by-step breakdown:
1. Opportunity for Voluntary Payment – Section 73(5)
Before any notice is issued, the taxpayer may voluntarily pay:
- The tax amount along with interest under Section 50
- No penalty is payable if full payment is made before the issuance of SCN (Show Cause Notice)
- Such payment should be intimated to the proper officer using Form GST DRC-03
If this is done, as per Section 73(6), no SCN is required, and the case concludes.
2. Issuance of Show Cause Notice (SCN) – Section 73(1)
If voluntary payment is not made, the proper officer shall issue a Show Cause Notice under Form GST DRC-01, explaining:
- The nature of short payment or wrongful ITC
- The amount recoverable
- The interest and penalty proposed
As per Section 73(2), the notice shall specify why tax should not be recovered along with interest under Section 50 and penalty not exceeding 10% of tax or ₹10,000, whichever is higher.
3. Submission of Reply to SCN – Rule 142(2)
- The taxpayer can file a written reply along with supporting documents in Form GST DRC-06
- A personal hearing may also be granted under principles of natural justice
4. Issuance of Adjudication Order – Section 73(9)
After considering the reply and personal hearing (if any), the proper officer will:
- Pass an adjudication order determining the final liability
- The order is issued in Form GST DRC-07
The order must be passed within 3 years from the due date of annual return for the relevant financial year, as per the limitation prescribed under Section 73(10).
5. Recovery Proceedings – If Payment Not Made
If the taxpayer does not pay the demand raised in the order:
- Recovery proceedings can be initiated under Section 79
- This may involve attachment of property, bank account, or garnishee orders
Penalty Under Section 73
As per Section 73(9):
- Penalty shall not exceed 10% of tax due or ₹10,000, whichever is higher
- No penalty is imposed if voluntary payment is made before issuance of SCN under Section 73(5)
Time Limits Under Section 73
Stage | Time Limit |
Issuance of SCN | At least 3 months prior to expiry of 3-year limit |
Adjudication Order | Within 3 years from due date of annual return |
Voluntary payment before SCN | Any time before issuance of SCN |
Voluntary payment after SCN | Within 30 days of SCN to avoid penalty |
Understanding Section 74 of the CGST Act – When There Is Fraud, Willful Misstatement, or Suppression
Legal Provision – Section 74 of CGST Act, 2017
Section 74 of the Central Goods and Services Tax Act, 2017, is the key statutory provision that deals with recovery of tax not paid, short paid, or wrongly refunded, or wrongful availment or utilization of Input Tax Credit (ITC), specifically in cases where such default has occurred due to:
- Fraud
- Willful misstatement of facts
- Suppression of facts with intent to evade tax
This section is invoked with serious implications, as it involves intentional evasion, unlike Section 73 which deals with unintentional or genuine errors.
As per Section 74(1):
“Where it appears to the proper officer that any tax has not been paid or has been short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized by reason of fraud or any wilful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax requiring him to show cause why he should not pay the amount specified in the notice along with interest payable under Section 50 and a penalty equivalent to the tax specified in the notice.”
This clause sets the foundation for adjudication in fraud-related cases, leading to more stringent consequences than under Section 73.
When Is Section 74 Invoked?
Section 74 is triggered only when there is mala fide intent behind the default. It applies in scenarios such as:
- ✅ Intentional non-payment or short payment of tax
- ✅ Filing of incorrect returns knowingly
- ✅ Availing ITC based on fake or non-existent invoices
- ✅ Suppression of outward supplies to underreport turnover
- ✅ Deliberate misclassification of goods/services to reduce tax liability
- ✅ Concealing facts or falsifying records with an intention to evade tax
The burden of proof lies with the department, but once established, harsh penalties and recovery proceedings follow.
Procedure Under Section 74 – As per Rule 142 of CGST Rules
The process for initiating and completing proceedings under Section 74 follows a rigorous framework, given the seriousness of the offence. The steps are as follows:
1. Voluntary Payment Before SCN – Section 74(5)
Before issuing the notice, if the taxpayer:
- Pays the full amount of tax and interest, and
- Also pays a penalty equivalent to 15% of the tax amount,
- And intimates the department in Form GST DRC-03,
Then, as per Section 74(6), no Show Cause Notice (SCN) is issued, and the matter concludes without further proceedings.
2. Issuance of SCN – Section 74(1)
If voluntary payment is not made:
- The proper officer issues a Show Cause Notice (SCN) in Form GST DRC-01
- The SCN will allege fraudulent conduct or suppression of facts, with specific reference to the evidence and records
- The taxpayer is asked to show cause why tax, interest, and penalty (equal to 100% of tax) should not be recovered
3. Reply and Representation – Rule 142(2) & (3)
- The taxpayer may submit a detailed written reply along with documentary evidence in Form GST DRC-06
- A personal hearing must be offered before final adjudication, to ensure adherence to principles of natural justice
4. Adjudication and Order – Section 74(9)
After evaluating the reply and submissions:
- The officer issues a final adjudication order in Form GST DRC-07
- The order will quantify the amount of tax, interest, and penalty equal to 100% of tax due
- A copy of the adjudication order is uploaded electronically
Section 74(10) mandates that the order must be passed within 5 years from the due date of filing the annual return for the relevant financial year.
5. Recovery Proceedings – Section 79
If the taxpayer fails to comply with the order, the department is empowered to initiate recovery proceedings under Section 79, which may include:
- Attachment of bank accounts or property
- Garnishee orders
- Auction of movable or immovable property
Deduction from other dues payable to taxpayer
Penalty Structure Under Section 74
The penalties are significantly higher under Section 74 compared to Section 73:
Stage of Payment | Penalty Payable |
Before issuance of SCN (Section 74(5)) | 15% of tax amount |
Within 30 days after SCN (Section 74(8)) | 25% of tax amount |
Within 30 days of order (Section 74(11)) | 50% of tax amount |
After 30 days of order | 100% of tax amount (mandatory penalty) |
Time Limits Under Section 74
Action | Time Limit |
SCN issuance | Minimum 6 months before expiry of 5-year period |
Adjudication order | Within 5 years from due date of annual return |
Voluntary payment before SCN | Anytime before SCN to conclude matter |
Payment after SCN | Within 30 days to avail lower penalty |
Key Differences of Section 73 and 74 OF CGST
Particulars | Section 73 | Section 74 |
Nature of Default | Genuine mistake, no fraud | Fraud, suppression, or willful misstatement |
Penalty | Max 10% of tax or ₹10,000 | 100% of tax (can be reduced to 15%, 25%, 50%) |
Adjudication Time Limit | 3 years | 5 years |
Voluntary Payment Relief | No penalty if paid before SCN | 15% penalty even if paid before SCN |
SCN Format | DRC-01 | DRC-01 |
Voluntary Payment before SCN [Section 73(5) & 74(5)]
Section 73(5): Voluntary Payment of Tax and Interest Without Issuance of SCN
Provision: Under Section 73(5) of the Central Goods and Services Tax (CGST) Act, 2017, if a taxpayer has not paid, short-paid, or wrongly availed or utilized the Input Tax Credit (ITC) but wishes to rectify the situation voluntarily, they can pay the full amount of tax due along with interest before the issuance of a Show Cause Notice (SCN).
Key Features:
- Tax and Interest Payment: The taxpayer can voluntarily make the payment of the tax amount along with the applicable interest before the SCN is issued.
- No SCN Issued: If the taxpayer makes the payment under Section 73(5), the tax authorities will not issue a Show Cause Notice (SCN). The liability will be considered resolved, and the case will not proceed to the adjudication stage.
- Avoidance of Penalty: One of the major benefits of making this voluntary payment is that no penalty will be imposed, as the payment is made proactively, without the need for any formal notice.
Documentation Requirements: While Section 73(5) allows the taxpayer to settle the issue voluntarily, the proper documentation needs to be filed. One such document is DRC-03 (Payment under Section 73), which is required for recording and completing the payment process.
Advantages:
- Saves Time and Cost: By paying voluntarily, taxpayers can avoid the time-consuming and expensive litigation process that would follow if a Show Cause Notice (SCN) were issued.
- No Penalties: There will be no penalties if the payment is made before the SCN, thus reducing the overall liability for the taxpayer.
- Timely Resolution: Taxpayers can resolve disputes quickly without waiting for the lengthy adjudication process.
Section 74(5): Voluntary Payment with Tax, Interest, and 15% Penalty
Provision: Section 74(5) addresses situations where a taxpayer has engaged in fraudulent activities or has made willful misstatements that resulted in the short payment or incorrect availing of ITC. In such cases, the taxpayer has the option to make a voluntary payment before the issuance of the Show Cause Notice (SCN), which involves paying the tax, interest, and an additional penalty of 15% of the tax amount due.
Key Features:
- Tax and Interest: As with Section 73(5), the taxpayer must pay the tax and interest owed before the issuance of the SCN.
- Penalty of 15%: In addition to tax and interest, a penalty of 15% of the tax amount is also imposed. This penalty is applicable to cases involving fraud or willful misstatement, as provided under Section 74.
- No SCN Issued: If the taxpayer makes this voluntary payment, an SCN will not be issued, and the case will not proceed to adjudication, saving the taxpayer from a prolonged legal process.
Documentation Requirements: Similar to Section 73(5), taxpayers must file DRC-03 (Payment under Section 74) to complete the payment process. This helps to ensure that the payment is properly recorded and acknowledged by the tax authorities.
Advantages:
- Quick Resolution: Voluntary payment ensures that the issue is resolved quickly, without the need for formal proceedings and litigation.
- Reduction in Penalty: While there is a penalty under Section 74(5), it is significantly lower than the penalty that would be imposed if the case progresses to adjudication.
- Prevention of Further Action: By paying voluntarily, the taxpayer can avoid further scrutiny and legal consequences.
Relevant Circulars and Clarifications
CBIC Circular No. 76/50/2018-GST: Procedural Aspects under Sections 73 & 74
This circular, issued by the Central Board of Indirect Taxes and Customs (CBIC), provides guidance on the procedural aspects of Sections 73 and 74. It highlights how taxpayers can utilize the voluntary payment provisions under both sections and explains the processes involved.
Key Points:
- Voluntary Payment Process: The circular elaborates on the procedure for voluntary payment under Section 73(5) and Section 74(5), providing clarity on the required documentation, such as DRC-03, and how taxpayers should report such payments to the authorities.
- No SCN Issued: It clarifies that once the payment is made voluntarily before the issuance of SCN, no SCN will be issued, and the taxpayer’s liability is considered settled.
- Timelines for Payment: The circular also provides details on the timeframes within which the taxpayer should make the payment to avail of the benefits of voluntary payment under both sections.
This circular serves as a crucial tool for taxpayers and consultants, as it provides clear guidance on how to proceed with voluntary payments and avoid unnecessary legal hassles.
Instruction Dated 07.12.2022: Pre-SCN Consultation Not Mandatory Under Section 74
This instruction, issued by the CBIC, clarifies that the mandatory pre-SCN consultation required under Section 74, as per earlier interpretations, is no longer a necessity. Previously, taxpayers were expected to engage in a pre-SCN consultation to discuss any discrepancies before the formal issuance of the SCN.
Key Points:
- Pre-SCN Consultation Not Required: The instruction specifically clarifies that under Section 74, taxpayers are no longer required to participate in a pre-SCN consultation before the issuance of the Show Cause Notice. This reduces administrative delays and expedites the resolution process.
- Streamlining the Process: By removing this step, the process is made more efficient, enabling quicker resolutions without the procedural delay of consultations.
- Impact on Fraudulent Cases: While consultation is not required, the taxpayer is still encouraged to make voluntary payments (tax, interest, and penalty) to avoid the issuance of SCN and related penalties.
This instruction has significantly simplified the procedure for handling fraud-related discrepancies, ensuring that the focus remains on the timely resolution of issues through voluntary payments.
Recent Case Laws
Maruthengal Moideen & Others vs. State Tax Officer (Kerala High Court)
In this case, the Kerala High Court quashed the order passed under Section 73, which demanded reversal of ITC along with interest and penalty for availing credit under the wrong head (CGST and SGST instead of IGST). The court held that such a mistake is technical and does not constitute wrongful availment of ITC, thereby not attracting proceedings under Section 73.
HCL Infotech Ltd. vs. Commissioner, Commercial Tax (Allahabad High Court)
The Allahabad High Court quashed the demand order and SCN issued under Section 73, citing that retrospective extension of time limits does not apply to periods where the limitation had already expired. This reinforces the importance of adhering to statutory time limits under the CGST Act.
Common Errors That Invite Notices under Section 73 and 74
GST compliance can often be tricky, especially when taxpayers inadvertently make errors that lead to notices under Section 73 and Section 74 of the GST Act. Section 73 deals with cases of non-payment, short payment, or erroneous refunds without fraudulent intent, while Section 74 applies when fraud or willful misstatements are involved. To avoid facing penalties or legal actions, taxpayers must be vigilant about the common errors that can trigger such notices.
Here are the most frequent mistakes that may lead to GST notices and actions under Section 73 and Section 74:
1. Claiming ITC Not Available in GSTR-2A
One of the primary errors that can lead to a GST notice is claiming Input Tax Credit (ITC) on purchases not reflected in GSTR-2A, which is the auto-populated return for input supplies. Section 73 emphasizes the importance of correctly reconciling ITC claims with the details of invoices available in the system. If a taxpayer claims ITC on invoices that do not appear in GSTR-2A, it can lead to a mismatch and attract notices for non-payment or short payment of tax.
Key Points to Avoid:
- Always ensure that the ITC claimed corresponds to the purchases reflected in GSTR-2A.
- Keep track of the suppliers’ GSTR-1 filings to ensure proper matching.
- Reconcile your purchase details with GSTR-2A before filing GSTR-3B.
2. Non-Payment of GST on Reverse Charge Mechanism (RCM) Transactions
Under the Reverse Charge Mechanism (RCM), the recipient of goods or services is liable to pay the GST instead of the supplier. Failing to pay the applicable GST on RCM transactions is a common error that can lead to notices under Section 73 for non-payment or short payment of tax.
Key Points to Avoid:
- Ensure that all eligible RCM transactions are correctly accounted for and GST is paid on time.
- Verify if any services or goods under RCM require you to pay tax directly.
- Pay special attention to imports, legal services, and other specified categories under RCM.
3. Delayed Filing of GSTR-1 vs GSTR-3B Mismatch
Another prevalent mistake is the mismatch between the GSTR-1 (sales return) and GSTR-3B (summary return). GSTR-1 must be filed first as it contains details of outward supplies. A delay in filing GSTR-1 or discrepancies between the details in GSTR-1 and GSTR-3B can lead to notices under Section 73 for discrepancies in reported sales and output tax.
Key Points to Avoid:
- File GSTR-1 on time and ensure all sales are accurately reported.
- Ensure that the values in GSTR-1 and GSTR-3B match to avoid discrepancies.
- Avoid delays in filing as it can lead to penalties, interest, and notices.
4. Fake Vendor Invoicing
Engaging in or dealing with fake vendor invoicing is a serious offense under the GST Act. Section 74 specifically targets cases where there is a fraudulent intent or willful misstatement, such as claiming ITC based on fake or non-genuine invoices. This can lead to significant penalties, interest, and legal repercussions.
Key Points to Avoid:
- Ensure that all vendors are genuine and have valid GST registrations.
- Verify that the goods or services mentioned in the invoices were actually received.
- Maintain proper documentation to substantiate all claims, especially for ITC.
Key Takeaways to Avoid GST Notices:
- Compliance with ITC: Always cross-check ITC claims with GSTR-2A.
- RCM Payment: Ensure proper payment of GST under the reverse charge mechanism.
- Timely Filing: Avoid mismatches and delays between GSTR-1 and GSTR-3B.
- Verify Vendors: Deal only with legitimate vendors to prevent fraudulent invoicing.
By adhering to the guidelines above, taxpayers can avoid the common errors that lead to GST notices under Section 73 and Section 74. Ensuring accurate reporting, timely filing, and proper documentation are key to staying compliant with the GST Act and preventing unnecessary legal complications.
Conclusion: Navigating Section 73 and 74 with Confidence
Sections 73 and 74 of the CGST Act play a critical role in maintaining GST compliance and addressing discrepancies in tax payments. However, they are not just punitive measures; they are designed to ensure fairness by offering a corrective framework. Section 73 provides a route for taxpayers to resolve issues like non-payment or short-payment of taxes without any fraudulent intent, allowing them to correct mistakes before facing penalties. On the other hand, Section 74 addresses cases involving fraud or willful misstatements, with stricter penalties. The key to navigating these sections lies in understanding your actions and the intent behind them, as it determines how the authorities will categorize your case.
Taxpayers who stay updated on GST laws, properly maintain records, and respond proactively to any notices can avoid unnecessary complications. By understanding the nuances of Section 73 and Section 74, you can take timely corrective measures and avoid prolonged litigation. Being well-informed not only helps in resolving disputes effectively but also ensures that you avoid costly mistakes, safeguarding your business’s financial health and reputation. When approached with clarity, these sections are not a cause for fear but an opportunity for better compliance and dispute resolution.
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