Section 74 of CGST Act: Demand of Tax under Fraud Cases

Initially, GST intended to simplify tax estimation, reporting, claiming input tax credits, and other processes; however, many micro, small, and medium-scale businesses find it challenging to comply with the law and often receive tax demand notices. The most infamous among these notices is the tax demand under Section 74 of the CGST Act. A clear understanding of the legal ramifications under this section is essential for any entrepreneur and company. 

This article discusses show cause notice under section 74 of the CGST Act, its applicability, consequences and many more. Stay with us.

What is Section 74 of the CGST Act? 

Non-payment of GST, misreporting or erroneous refund and excess appropriation of input tax credit can occur for various reasons, and an appropriate GST officer can issue show cause notices to the respective GSTIN holders. Sections under which show-cause notices can be issued are:

• Section 63 - For discrepancies in GST return 
• Section 65 - short payment or non-payment detected during an audit 
• Section 35 - failure to record transactions 
• Section 52 - default in collecting tax at the source  

However, Section 74 differs from the above sections. It allows the issuing of show cause notice only when a GST officer suspects fraud or deceit on the part of the GSTIN holders. Section 74 of the CGST Act is the legal provision and guidelines provided to GST officers to deal with willful misstatement or fraudulent practices by GSTIN holders in filing GST data and related short payment, non-payment, erroneous refund or input tax credit availed.

As per Section 74, the appropriate GST officer:

• Can adjudicate within the limit of 5 years from the year in which discrepancies have been noticed or identified. 
• Can issue show cause notice with demand for the tax short paid, unpaid or excess credit claimed. 
• It can charge interest on the tax short paid, unpaid, or excess credit claimed, along with a penalty of 15%, 25%, or 50% of the tax due or excess credit claimed. The penalty rate depends on the time within which the person clears the tax demand.

Applicability of Section 74 in FY 2024-25 & onwards 

Under the provision of Section 74, a show-cause notice can be raised following a suspicion of: 

• Suppression of facts 
• Wilful misstatement 
• Fraud 

Suppression of facts—Section 74 (Explanation 2) of the CGST Act, 2017 defines suppression of facts as the non-declaration of information or facts that a taxable entity is legally expected to declare, submit, or state. 

The critical aspect of 'suppression', as per the CGST Act, is the deliberate or intentional non-declaration or failure to submit. An unintentional omission or failure to submit cannot be considered 'suppression of fact'. 

Example: Suppose ABC Trading Pvt Ltd trades in textile chemicals. While filing their GST return, an accounts department employee makes a mistake declaring sales invoice data. This under-declaration caused a decrease in GST payment liability. During verification, the GST officer found the lower GST payment was due to the wrong filing of invoice documentation. So, the officer issued a show cause notice to the respective GSTIN. However, this may not amount to a 'suppression of fact' if ABC Trading can prove that it was merely a mistake by a data entry operator.  

Wilful misstatement - This involves intentionally filing a statement or document in the GST portal that does not convey information or conveys wrong information for claiming input tax credits, refunds or similar benefits. It is essential to understand that it cannot be a wilful misstatement just because a submitted document does not contain all the necessary facts and information. Establishing the intent to evade tax is essential for declaring it a wilful misstatement.   

Example: 

• Considering the previous example, suppose ABC Trading uploads a false raw material purchase invoice and claims input tax credit. 
• To declare this action a wilful misstatement, the GST officer must establish that it was not accidental or unintentional. 
• Repeating the action of false document submission or a pattern of false documentation submission by the same company can amount to wilful misstatement. 

Fraud - Unlike 'suppression of fact' and 'wilful misstatement', The CGST Act does not clearly define the term' fraud'. However, it can be legally defined per Section 17 of the Contract Act as an 'act of deceit'. Fraud occurs when a person submits a document as accurate, but the same person does not believe it to be true. 

The tax demand under Section 74 can be subject to subjectivity and nuances around the definitions of fraud, wilful misstatement, and suppression of fact. This has caused unnecessary confusion regarding the time limit of such a demand and order. 

In its 53rd meeting on 22nd June 2024, the GST Council tried to address such confusion and offer relief to GSTIN holders. 

Recommendations of the 53rd GST Council Meeting regarding Section 74:  

• Insertion of a new Section 74A in the CGST Act. The objective is to bring harmony in time limits for raising demand notices and orders under Section 73 and Section 74 of the CGST Act. Different time limits for raising tax demand and order under Sections 74 and 73 exist depending on the charges of willful misstatement, suppression of fact and fraud, etc.
• The time limit to avail of the reduced penalty increased from 30 to 60 days.
• The implementation of the recommendation should happen starting from FY 2024-25.

Section 74 of the CGST Act time limit 

For Section 74, the time limits are: 

• For issuing notice -  6 months before the expiry of 5 years from the due date of filing the annual return in which the incident occurred.
• For issuing an order- 5 years from the due date of filing the annual return on which the incident occurred.

As per the newly introduced Section 74A, 

• The time limit for tax demand notice, irrespective of fraud, wilful misstatement, or suppression of facts, is 42 months from the due date of filing the annual return. 
• Taxpayers have 60 days to file their response and pay the demanded tax with interest for the period the tax was unpaid, short-paid, or an excess credit or refund was claimed. 

Earlier, this time limit was 30 days. 

Procedure for issuing a notice under section 74 

The steps for issuing tax demand notice under Section 74 of the CGST Act: 

Options available for taxpayers regarding demand notice u/s 74 

Upon receiving the tax demand under Section 74, a taxpayer can either,  

• Make the full payment equal to the tax demanded and the interest charged on tax dues and have the right to receive an order concluding the tax demand proceeding. 

Or 

• File a reply or representation with valid documents substantiating his stand on the tax demand. The officer will consider the representation. The officer will conclude the tax demand and communicate it to the taxpayers if it is found valid. 

Section 74 of the CGST Act penalty 

• A penalty of 15% - if the taxpayer, before receiving the DRC-01, makes full payment of tax demand and interests charged on the tax dues. 
• A penalty of 25% - if the taxpayer, upon receiving the DRC-01, makes full payment within 30 days of the notice's issuance. 
• A penalty of 50% - if the taxpayer, upon receiving the DRC-07, makes full payment within 30 days of the order's issuance. 
• A penalty of 100% - Beyond 30 days from the issuance of DRC-07.    

Input Tax Credit (ITC) of tax paid under Section 74 of the CGST Act

The Government of India amended section 17(5) of the CGST Act via the Union Budget 2024. Section 17(5) deals with block credits. The amendment restricted blockage of input tax credit for tax paid under Section 74 (fraud or any willful- misstatement or suppression of facts) for demands up to FY 2023-24.

Section 74 of CGST Act case laws

• CC, CE and ST - Bangalore (Adjudication) vs M/s Northern Operating System (2022 (5) TMI 967 - Supreme Court - In this case law, the Supreme Court gave the verdict that Section 74(1) can be invoked only when material evidence is available to substantiate the occurrence of fraud, wilful misstatement or suppression of fact. The officer has to make such evidence part of the tax demand notice. 
• Gayathri Cloth and General Stores, Vijayawada Vs State of Andhra Pradesh (45 APSTJ 133) - In this case, the appellate tribunal, Hyderabad, observed that the officer cannot ignore his responsibility of producing material evidence of fraud, wilful misstatement or suppression of fact. Without proper evidence, the office cannot establish a claim based on personal whim or perception.

Also Read
Section 74A vs 73 & 74 of CGST Act: Understanding the Differences