Demand of Tax Under GST by Tax Authorities

Demand under GST and the recovery provisions will be initiated if there is a failure to pay the tax in compliance with the Goods and Services Tax (GST) laws.

Latest Updates

9th September 2024
In the 54th GST Council Meeting, the Finance Minister recommended to outline new conditions and procedure through newly added rule 164 in the CGST Rules, for waiving interest, penalties, or both for tax demands under Section 73 of the CGST Act for the financial years 2017-18, 2018-19, and 2019-20. Registered taxpayers can avail of this waiver if they make the necessary tax payments by 31st March 2025, as per Section 128A. Clarifications on the waiver process will be provided through a circular, and the related provisions will be effective from 1st November 2024.

23rd July 2024
In the Union Budget 2024, the Finance Minister proposed the following amendments: 

1. Sections 73 and 74 of CGST Act are being amended to limit the applicability of these sections to demands up to FY 2023-24, since from FY 2024-25 onwards demands are to be ascertained as per provisions of newly inserted section 74A such as providing a common time limit for issuance of demand notices and orders under the respective sections.
2. Also, the time limit for the taxpayers to avail the benefit of reduced penalty u/s 73 and 74, by paying the tax demanded along with interest, is being increased from 30 days to 60 days by virtue of Section 74A.
3. Section 128A is being inserted in the CGST Act to provide for a conditional waiver of interest and penalty in respect of demands pertaining to financial years 2017-18, 2018-19 and 2019-20, in cases where demand notices have been issued under section 73 and full tax liability is paid by the taxpayer before a date to be notified.
4. Clause (i) of Section 17 of CGST Act is being amended to restrict blockage of input tax credit for tax paid under Section 74 for demands pertaining up to FY 2023-24.

*This will come into force once notified by the CBIC. 

When can a Demand Under GST be Raised by the Tax Authorities?

GST is payable on a self-assessment basis. If the assessee pays the tax on self-assessment correctly then there will not be any problem. 

If there is any short payment or wrong utilisation of input tax credit, then the GST authorities will initiate demand and recovery provisions against the assessee. Provisions of demand under the GST Act and the consequent recovery provisions are similar to the provisions of the erstwhile Service Tax and Central Excise laws. Further sections of the article will give you an overview of the demand and recovery provisions.

GST Demand when there is No Fraud (Section 73)

This provision applies to the following cases when for any reason other than fraud, i.e., without any motive to evade tax:

• Tax is unpaid/short paid or,
• Refund is wrongly made or,
• The input tax credit has been wrongly availed/utilised

The proper officer (i.e., GST authorities) will serve a show-cause notice on the taxpayer. They will be required to pay the amount due, along with interest and penalty.
Circular 185/17/2022-GST issued on 27th December 2022 clarified how and by when the tax officers can re-determine the tax, interest and penalty demand where there is no proper evidence of fraud, as a no-fraud case.

Time Limit

The proper officer is required to issue the show-cause notice 3 months before the time limit. The maximum time limit for the order of payment is 3 years from the due date for filing of annual return for the year to which the amount relates.

For Other Tax Periods

Once the above notice has been issued, the proper officer can serve a statement, with details of any unpaid tax/wrong refund etc. for other periods not covered in the notice. A separate notice does not have to be issued for each tax period.

Voluntary Tax Payment

A person can pay tax along with interest, based on his own calculations (or the officer’s calculations), before the notice/statement is issued and inform the officer in writing of the same. The officer will not issue any notice in this case. However, if the officer finds that there is a short payment, they can issue a notice for the balance amount.

No Penalty

If the taxpayer pays all their dues within *60 days from the date of the notice, then the penalty will not be applicable. All proceedings (excluding proceedings u/s 132, i.e., prosecution) regarding the notice will be closed.

*This will come into force once notified by the CBIC. 

Penalty in Other Cases

The tax officer will consider the taxpayer’s representation and then calculate interest and penalty. The penalty will be 10% of tax subject to a minimum of Rs. 10,000. The tax officer will issue an order within three years from the due date for filing of relevant annual return.

As per the 53rd GST Council meeting, the Council has recommended to waive off the interest and penalties for demand notices issued u/s 73 of CGST (applicable for fiscal years 17-18, 18-19 and 19-20) for cases not involving fraud, suppression and misstatement. It is applicable to cases where the taxpayer pays the full amount in the notice by 31st March 2025.(A new Section 128A shall be notified)

*This will come into force once notified by the CBIC. 

Let us understand how the penalty works in non-fraud cases with this instance of a taxpayer who did not deposit their tax for a particular month. For example-

Illustration for No Fraud Scenario

Mr Gnan received a notice of a shortfall in tax paid via GSTR-3B for January 2021 due to erroneous data entry in the GSTR-1. He received a show-cause notice on 13th January 2022 as to why he should not be subject to tax on the differential amount. The show-cause notice is issued within the given time limit of three months before the expiry of three years from the due date of annual returns filings.

GST Demand when there is a Fraud (Section 74)

This section applies to cases of tax evasion involving:

• Fraud
• Wilful misstatement
• Suppression of facts

This results in:

• Unpaid/short paid tax or,
• Wrong refunds or,
• Wrongly availed/utilised input tax credit

In such cases, the proper officer will serve a show-cause notice to the taxpayer. The taxpayers will be required to pay the amount due along with interest and penalty.

The officer can issue notice u/s 74 to multiple persons for tax short paid or excess ITC claims by fraud. Now, it is amended that the officer can confiscate and seize goods or vehicles even after concluding proceedings against all persons liable to pay specific or general penalties.

Time Limit

For cases of fraud, the proper officer is required to issue the notice 6 months before the time limit. The maximum time limit is 5 years from the due date for filing of annual return for the year to which the amount relates.

For Other Tax Periods

Once the above notice has been issued, the proper officer can serve a statement, with details of any unpaid tax/wrong refund, etc. for other periods not covered in the notice. A separate notice need not be issued for each tax period.

Voluntary Tax Payment

If the person pays the tax along with interest and a 15% penalty based on their own calculations (or the officer’s calculations) before the notice/statement is issued and informs the officer in writing, then the officer will not issue any notice. 

However, if the officer finds that there is a short payment, they can issue a notice for the balance amount. If the taxpayer pays all their dues and a penalty of 25% within *60 days from the date of the notice, then all proceedings (excluding proceedings under Section 132, i.e., prosecution)regarding the notice will be closed.
*This will come into force once notified by the CBIC. 

Issue of Order

The tax officer will consider the taxpayer’s representation and then calculate interest and penalty and issue an order. The order must be issued within five years from the due date for filing the relevant annual return. [For wrong refunds the order must be issued within five years from the date of the wrong refund]. 

If the taxpayer pays all their dues and a penalty of 50% within 30 days from the date of order, then all proceedings (including prosecution) regarding the notice will be closed.

*This will come into force once notified by the CBIC. 

For example- Let us understand how the penalty works in fraudulent cases with this instance of a taxpayer who did not deposit their tax for a particular month.

Illustration for a Fraud Scenario

Mrs Disha Patil received a notice of a shortfall in tax paid via GSTR-3B for 23rd July 2019 due to fake input tax credit claims noticed by the tax authorities. He received a show-cause notice on 13th April 2021 as to why he should not be subject to tax on the differential amount. The show-cause notice is issued within the given time limit of six months before the expiry of five years from the due date of annual returns filing, i.e., 31st March 2021 for FY 2019-20

General Provisions for Determination of Tax (Section 75)

• If the service of notice or issue of the order has been stayed by a Tribunal/Court order then the stay period will be excluded from the time limits of 3 and 5 years.
• If the Appellate Authority/Tribunal/Court decides that charges of fraud are not sustainable (i.e., it is not a fraud case), then the notice issued earlier will be assumed to be a notice under Section 73 (i.e. non-fraud case). The tax officer will re-calculate the tax accordingly.
• CGST Circular 185/2022 issued on 27th December 2022 clarifies by when and how to re-determine the tax dues.
• If the Tribunal/Court directs that an order has to be passed, then it will be issued within two years from the date of the direction. In other words, it is within two years from the date of communicating by Appellate Authority or Tribunal or the Court, clarified the Circular.
• The officer shall re-determine the interest/penalty/tax demand as follows-
  • In non-fraud cases, if SCN was issued within 2 years and 9 months from the due date GSTR-9 for the particular financial year, then only the tax short paid or unpaid, or input tax credit wrongly availed or utilised, together with interest and penalty, as per Section 73 of CGST Act for such financial years can be re-computed. Similarly, the amount of tax liability for erroneous refund along with interest and penalty payable can be re-computed only where SCN was issued within 2 years and 9 months from the date of erroneous refund.
  • Where SCN is issued after the above time limit, then the proceedings must be dropped.
  • In fraud cases, if SCN was issued within 2 years and 9 months from the due date GSTR-9 for the particular financial year, then entire demand in such notice is the re-computed amount.
  • In fraud cases, if SCN was issued for many years but after the expiry of time limit, then re-determination of amount under Section 73 will be for only that financial year where the SCN was issued before the expiry of time limit.
• An opportunity for a personal hearing will be given to the taxpayer when they request it in writing or a penalty or any adverse decision is proposed against such person.
• The proper officer can adjourn the personal hearing if the person provides sufficient cause in writing. But adjournment will be allowed for a maximum of 3 times.
• The amount of tax, interest and penalty demanded in the order will not exceed the amount specified in the notice. All demands will be only on grounds specified in the notice.
• The Appellate Authority/Tribunal/Court can modify the amount of tax determined by the officer.
• Interest unpaid/short paid tax will have to be paid whether or not specified in the order.
• If the order is not issued within 3 or 5 years then it is assumed that the adjudication proceedings are completed. No order will be issued afterwards.

Pending cases where the decision was against the interest of revenue might be appealed to a higher authority. For these, the period between the date of the decision (aggrieved order) and the date of appeal decision of higher authority) will be excluded from the period of 3 or 5 years.

• Recovery provisions for unpaid/short paid tax and interest is applicable irrespective of demand provisions.

Penalty u/s 122 is not applicable in these cases. Once any penalty is imposed under sections 73 or 74, then no penalty under any of the GST sections is applicable.

This stands for cases (fraud or non-fraud) where:

• Tax is unpaid/short paid or,
• Refunds have been wrongly calculated or,
• The input tax credit has been wrongly availed/utilised

Only the penalty under Sections 73 and 74 will be applicable. Other penalties under Section 122 will not be applicable in these 3 cases. However, charges for offences under Section 132 facing prosecution will not be dropped.

Interest applicability on GST demand

The interest charged for the tax shortfall is 18% per annum where the tax is short paid or liability is short-assessed. Also, where the input tax credit is only availed but not utilised, this is the interest charge.

However, the interest charged for availing and utilising input tax credit in excess of what is available is 24% per annum, as per Section 50 of the CGST Act.

For further understanding, read our articles:

• All about GST Notices
• Chapter 18: Demands and Recovery
• Steps to reply to a demand notice
• Guide to appeal against the demand order
• All you need to know about penalties under GST
• Section 74A of CGST Act: GST Demand Provisions
• Section 74A vs 73 & 74 of CGST Act