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Demand of Tax Under GST by Tax Authorities

Updated on:  

08 min read

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.

Recent Updates on Demand under GST

1st February 2021
Union Budget 2021 Outcome
1. Seizure and confiscation of goods and conveyances in transit are now made a separate proceeding from the recovery of tax from Section 74.
2. Self-assessed tax referred to under section 75 of the CGST Act shall also cover the outward supplies/sales as reported in the GSTR-1 under Section 37 of the CGST Act, but which has been missed out while reporting in the GSTR-3B under Section 39.

3rd April 2020
The time limit for completion or compliance has been extended to 30th June 2020, where the time limit falls between the period from 20th March 2020 to 29th June 2020. The compliance includes issue of any GST notice and reply to any GST notice falling due in between the above dates.

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.

ParticularsWhen there is no fraud (Section 73)
When there is a fraud (Section 74)
Comments
Show cause noticeYesYes
Max. time limit3 years 5 yearsTime is calculated from the due date of filing the annual return for the year to which the demand relates or date of refund.
The time limit for SCN3 months before the expiry of 3 years6 months before the expiry of 5 yearsHence, 3 or 5 years, as the case may be, is the maximum time limit for issuing the order of GST demand payment.
Penalty10% of tax25% of tax

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.

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 30 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.

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.

Paid all duesPenalty amount
Before noticeNo penalty
Within 30 days from noticeNo penalty
After 30 days from notice or issue of orderA higher of 10% of the demanded tax or Rs.10,000, is the penalty

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-

Action/ConsequencesPeriod/Date
Tax period when he did not deposit the taxAmount relates to October 2020, i.e., FY 2020-21
Due date to file annual returns for the year to which the amount relatesThe last date of filing the annual return of FY 2020-21 is 31st December 2021
The maximum time limit for an order is 3 years from the due date of annual returns3 years from the date given above falls on 31st December 2024
Issue the order within three years The last date for issuing is
31st December 2024
Issue the show cause notice at least 3 months before the time limitThe last date of issuing the show cause notice is 30th September 2024

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.

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 30 days from the date of the notice, then all proceedings (excluding proceedings under Section 132, i.e., prosecution)regarding the notice will be closed.

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.

Paid all duesPenalty amount
Before notice15% of the demanded tax is the penalty
Within 30 days from notice25% of the demanded tax is the penalty
After 30 days from the order50% of the demanded tax is the penalty
For other cases (Section 122)100% of the demanded tax is the penalty

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.

Action/ConsequencesPeriod/Date
Tax period when he did not deposit the taxAmount relates to October 2020, i.e., FY 2020-21
Due date to file annual returns for the year to which the amount relatesThe last date of filing the annual return of FY 2020-21 is 31st December 2021
The maximum time limit for an order is 5 years from the due date of annual returns5 years from the date given above falls on 31st December 2026
Issue the order within five years The last date for issuing is
31st December 2026
Issue the show cause notice at least 6 months before the time limitThe last date of issuing the show cause notice is 30th June 2026

 

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 calculate the tax accordingly.
  • 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.
  • 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:

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