What is a Show Cause Notice and How to Handle it?

Tax authorities in India are strictly monitoring violations of the Goods and Services Tax (GST) law. In fact, around 50,000 show cause notices under GST were issued last year to businesses across India. 

In this article, we will discuss what is a show cause notice, how to reply to a show cause notice, and the documents to be submitted with a show cause notice reply.  

What is Show Cause Notice under GST and Types?

A show cause notice under GST is a legal document that is issued to those persons violating any provision of the GST Act or Rules. GST authorities send a show cause notice to the taxpayer to give them a fair chance of explaining the reason behind the violation. If they fail to do so, then the authorities can initiate action and impose a fine.

There are several types of show cause notices under GST, each pertaining to specific sections of the GST Act:

Show cause notice under Section 73

In cases of unpaid, underpaid, or erroneously refunded tax, or incorrect input credit claims without fraud, a notice is issued to justify why the tax, interest, and penalties specified shouldn't apply.

Show cause notice under Section 74

In cases of unpaid, underpaid, or erroneously refunded tax, or incorrect input credit claims involving tax evasion or fraud, the notice asks for justifications for not being held accountable for the unpaid tax, interest, and a penalty of 100% of the tax amount due to fraud.

Show cause notice under Section 76

When taxes are collected but not remitted to the government, the notice requires an explanation for the non-payment and why a penalty equal to the unpaid amount shouldn't be imposed. 

When is a Show Cause Notice Issued?

There are many instances when a show-cause notice under GST is issued. Some common reasons include:

• When there is a difference in the details provided in GSTR-1 and GSTR-3B, a scrutiny notice may be issued.
• If there are discrepancies in the Input Tax Credit claims between GSTR-3B and GSTR-2B/2A.
• If GSTR-1 and GSTR-3B are not filed consecutively for more than six months.
• When there are inconsistencies between the declarations in GSTR-1 and the e-way bill portal.
• If a taxpayer does not reduce prices despite reduced GST rates, leading to a default known as profiteering. GST authorities take measures to address this.
• A Show Cause Notice may be issued for non-payment or short-payment of GST tax, with or without an intent to defraud.
• If a GST refund is wrongly claimed, with or without an intent to defraud.
• If the Input Tax Credit is wrongly claimed or utilised.
• When a business is liable for GST but fails to obtain registration and discharge tax and other liabilities.
• If there are inconsistencies in reporting exports in GSTR-1 compared to information available on ICEGATE.
• For failing to provide information related to records that a taxpayer is required to maintain.
• After the audit conducted by tax authorities.
• When required information returns are not submitted within the stipulated time.

What is the Purpose of a Show Cause Notice?

The purpose of sending a show cause notice is simple - The tax authorities provide a chance to the defaulting taxpayer to explain the cause/reason behind the violation. 

Deadlines for Issuing GST Notices

While the deadline for issuing notices for FY 2017-18 was 30th September 2023, enterprises may still receive orders for FY 2017-18 for fraud cases.

Further, with reference to the upcoming deadlines for FY 2018-19 and 2019-20, enterprises may receive show-cause notices for both fraud and non-fraud cases.

Show Cause Notice and Show Cause Notice Reply Format

For better understanding, here is the show cause notice format and show cause notice reply format:

1. Show Cause Notice Format

2. Show Cause Notice Reply Format

Documents to be Submitted with Show Cause Notice Reply

The documents to be submitted with show cause notice reply are listed below. This list is for guidance only and is not exhaustive.

• Invoices
• Purchase orders
• Bank statements
• Tax returns