DRC in GST: Meaning, Process, Forms & Appeals

When there is a shortfall in tax paid or when an input tax credit is claimed incorrectly, the GST authorities issue a show cause notice in DRC, also known as a Demand and Recovery Certificate, to recover such taxes. DRC in GST is a form for communication between taxpayers and GST authorities for resolving such discrepancies under the GST Act. 

In this article, we will explore key provisions governing DRC, related DRC forms, process flow, how to appeal against a DRC order, and ways to avoid a DRC notice.

What is a Demand and Recovery Certificate (DRC)?

The demand and recovery certificate is issued by the GST authorities to the taxpayers when they identify any discrepancy in tax payments or when an input tax credit is incorrectly claimed. 

A notice is sent to the taxpayer for such unpaid tax dues. In case the taxpayer does not respond or pay such liabilities, then a demand and recovery notice is issued to the taxpayer intimating that the GST authorities will initiate recovery proceedings for unpaid dues.

The DRC also serves as a correction tool for taxpayers in case they or their auditors find any discrepancy in tax liabilities. The taxpayers can voluntarily pay such tax liabilities through DRC forms discussed below.

Key Sections Governing DRC Process

Sections 73 to 84 of the CGST Act 2017 govern the process for DRC, entailed in Chapter XV of the CGST Act. Details of essential sections are given below:

List of DRC Forms and Their Purpose

Detailed Process Flow of DRC Notices and Recovery

The proceedings start with the tax officer identifying a discrepancy, whether there is a shortfall in tax paid, an excess input tax credit is claimed, or an incorrect GST refund is obtained by the taxpayer. This is communicated via Form DRC-01.

The taxpayer, upon receiving DRC-01, has 30 days to respond. It can either pay the demand via Form DRC-03 or challenge the demand via Form DRC-06.

If the taxpayer pays the demand via Form DRC-03, the tax officer will issue Form DRC-04 to acknowledge the payment received and, thereafter, Form DRC-05 to intimate the taxpayer that demand proceedings are officially closed. 

Recovery Mechanism under DRC

If a taxpayer fails to make a payment or does not respond within three months from the date of service of such order, the tax officer can initiate recovery proceedings. The tax officer can either proceed to recover through:

Directly: deducting dues from refunds due, attaching movable and immovable property or freezing bank accounts.

Third-party recovery: by sending notices to debtors of taxpayers and instructing them to pay the required amount to the GST authorities instead of the taxpayers.

Auction process: The tax officer may sell the seized goods through auction.

Detain property: The tax officer may detain movable or immovable property owned or under the control of the taxpayer until tax liabilities are settled.

Tax officers can give details of unpaid taxes to the district collector of the taxpayer, who shall help in recovering such unpaid taxes.

Tax office can also file application with the magistrate, who shall proceed to recover unpaid taxes 

Appeal Against DRC Order

Taxpayers can appeal against a DRC order issued by a tax officer via Form GST APL-01 before the Appellate Authority within three months from the date of communication. 

The taxpayer will be required to pay 10% of the disputed tax before filing an appeal before the Appellate Authority. This can be paid either using cash or an input tax credit available in the electronic credit ledger.

Supporting evidence must be maintained and submitted by the taxpayers, which will be utilised at the time of hearing before the Appellate Authority.

Best Practices to Avoid DRC Notice

A taxpayer must reconcile, preferably on a monthly basis, between GSTR-1 & GSTR-3B to compare outward liabilities on the sale of goods and services. GSTR-2B & GSTR-3B to compare input tax credit. The taxpayer can use the Invoice Management System (IMS) tool available on the GST Portal; this tool helps the taxpayer and their vendor to validate their transactions on the portal.  

An annual reconciliation of outward liability and input tax credit before initiation of audit under GST, such that any error can be rectified before finalisation of the audit.

The taxpayer must maintain proper documents for all transactions. For instance, for purchases, the taxpayer should have a proper bill, e-way bill, e-invoice, packing list, payment advice, etc. Also, avoid claiming an ineligible input tax credit.

The taxpayer should ensure that they and their creditors file their GST return on time, ensuring no input tax credit leakages.

Check the GST portal regularly to remain updated on the latest notices uploaded by the tax officer under Return Compliance, which can be accessed from Services > Returns > Return Compliance.