Understanding Tax Demand Procedures by Authorities Under GST Law
This article details the Goods and Services Tax (GST) demand and recovery procedures initiated by tax authorities for unpaid tax, short payments, or incorrect input tax credit utilization. It differentiates between demands raised without fraudulent intent (Section 73) and those involving fraud (Section 74), outlining their respective time limits, penalties, and voluntary payment options. Recent legislative updates regarding waiver conditions and amendments to demand applicability are also discussed, alongside general provisions for tax determination and interest rates on GST shortfalls.
The Goods and Services Tax (GST) framework includes specific provisions for raising and recovering tax demands when there is a failure to comply with tax payment obligations. These demand and recovery procedures are initiated if an assessee falls short in their tax payments or incorrectly utilizes input tax credit (ITC). These provisions are comparable to those under previous Service Tax and Central Excise laws. This article outlines the key aspects of tax demand and recovery under GST.
Recent Updates to GST Demand Provisions
September 9, 2024: The 54th GST Council Meeting proposed new conditions and procedures, via an amendment to Rule 164 of the CGST Rules, for waiving interest and/or penalties on tax demands under Section 73 of the CGST Act for fiscal years 2017-18, 2018-19, and 2019-20. Registered taxpayers can qualify for this waiver by paying the required tax amount by March 31, 2025, as per Section 128A. Further clarifications on this waiver process will be issued through a circular, with the relevant provisions taking effect from November 1, 2024.
July 23, 2024: The Union Budget 2024 introduced several amendments:
- Sections 73 and 74 of the CGST Act are being modified to limit their application to demands up to FY 2023-24. For FY 2024-25 onwards, demands will be determined under the newly inserted Section 74A, which establishes a common time limit for issuing demand notices and orders under these sections.
- The period for taxpayers to benefit from reduced penalties under Sections 73 and 74, by paying the demanded tax along with interest, is being extended from 30 days to 60 days, as per Section 74A.
- A new Section 128A is being added to the CGST Act, allowing for a conditional waiver of interest and penalty for demands related to financial years 2017-18, 2018-19, and 2019-20. This applies to cases where demand notices were issued under Section 73, provided the taxpayer pays the full tax liability by a future notified date.
- Clause (i) of Section 17 of the CGST Act is being amended to restrict the blockage of input tax credit for tax paid under Section 74 for demands up to FY 2023-24.
These amendments will become effective once officially notified by the CBIC.
When Can Tax Authorities Issue a GST Demand?
GST is primarily a self-assessment tax system. Issues arise when taxpayers underpay or incorrectly claim input tax credit. In such scenarios, GST authorities initiate demand and recovery procedures. The table below summarizes key differences between demand raised without fraudulent intent and demand raised due to fraud.
| Particulars | No Fraud (Section 73) | Fraud (Section 74) | Comments |
|---|---|---|---|
| Show cause notice | Yes | Yes | |
| Maximum time limit | 3 years | 5 years | Time is calculated from the due date of filing the annual return for the relevant year or date of refund. |
| Time limit for SCN | 3 months before expiry of 3 years | 6 months before expiry of 5 years | This indicates the maximum time limit for issuing the GST demand payment order. |
| Penalty | 10% of tax | 25% of tax |
GST Demand Without Fraudulent Intent (Section 73)
Section 73 addresses situations where tax shortfalls or incorrect ITC usage occur for reasons other than fraud, misrepresentation, or deliberate evasion. This includes:
- Unpaid or underpaid tax.
- Erroneous refunds.
- Incorrectly claimed or utilized input tax credit.
The proper officer (GST authority) will issue a show-cause notice (SCN) to the taxpayer, requiring them to pay the outstanding amount along with applicable interest and penalty. Circular 185/17/2022-GST, dated December 27, 2022, provides guidelines on how tax officers should re-determine tax, interest, and penalty demands in non-fraud cases where fraud evidence is absent.
Time Limit for Non-Fraud Cases
The proper officer must issue the SCN at least three months before the expiry of the three-year time limit. The maximum period for issuing the payment order is three years from the due date for filing the annual return for the financial year to which the demand pertains.
Demands for Other Tax Periods
Once an SCN is issued for a specific period, the officer can subsequently issue a statement detailing unpaid tax or wrong refunds for other periods not covered in the initial notice. A separate SCN is not necessary for each tax period.
Voluntary Tax Payment
Taxpayers can proactively pay the tax due, along with interest, based on their own calculations or an officer's assessment, before an SCN or statement is issued. They must inform the officer in writing. In such cases, no notice will be issued. However, if the officer finds any remaining shortfall, an SCN can be issued for the balance amount.
No Penalty Condition
If the taxpayer settles all dues within 60 days from the date of the SCN, no penalty will be applied, and all proceedings related to that notice (except prosecution under Section 132) will be closed. The 53rd GST Council meeting recommended waiving interest and penalties for demand notices issued under Section 73 (for FYs 2017-18, 2018-19, and 2019-20) in non-fraud cases, provided the full amount is paid by March 31, 2025. A new Section 128A will be notified for this purpose.
Penalties in Other Situations (Non-Fraud)
After considering the taxpayer's submission, the tax officer will calculate interest and penalty. The penalty will be the higher of 10% of the tax or Rs. 10,000. The tax officer must issue an order within three years from the due date for filing the relevant annual return.
| Situation | Penalty Amount |
|---|---|
| Payment before notice | No penalty |
| Payment within 60 days from notice | No penalty |
| Payment after 60 days from notice or issue of order | Higher of 10% of demanded tax or Rs.10,000 |
Example: A taxpayer failed to deposit tax for October 2020 (FY 2020-21). The annual return for FY 2020-21 was due by December 31, 2021. The maximum time limit for issuing an order is three years from this date, making it December 31, 2024. Therefore, the SCN must be issued by September 30, 2024, at least three months prior to the order's deadline.
Illustration for No Fraud Scenario: Mr. Gnan received an SCN on January 13, 2022, regarding a tax shortfall for January 2021, reported via GSTR-3B, due to an error in GSTR-1 data entry. This SCN was issued within the three-month window before the three-year deadline from the annual return filing date.
GST Demand Involving Fraudulent Intent (Section 74)
Section 74 applies to instances of tax evasion involving fraud, willful misstatement, or suppression of facts, leading to:
- Unpaid or underpaid tax.
- Incorrect refunds.
- Wrongly availed or utilized input tax credit.
In these cases, the proper officer will issue an SCN requiring the taxpayer to pay the due amount, along with interest and a penalty. The officer has the authority to issue an SCN under Section 74 to multiple individuals for tax underpayment or excessive ITC claims attributed to fraud. Recent amendments allow officers to confiscate and seize goods or vehicles even after concluding proceedings against persons liable for specific or general penalties.
Time Limit for Fraud Cases
For cases involving fraud, the proper officer must issue the SCN at least six months before the expiry of the five-year time limit. The maximum period for issuing the payment order is five years from the due date for filing the annual return for the financial year to which the amount relates.
Demands for Other Tax Periods (Fraud Cases)
Similar to non-fraud cases, after an initial SCN, the officer can issue a statement detailing outstanding tax or incorrect refunds for other periods not covered in the original notice, eliminating the need for separate SCNs.
Voluntary Tax Payment (Fraud Cases)
If a person pays the tax, interest, and a 15% penalty voluntarily (based on their or the officer's calculations) before an SCN or statement is issued, and informs the officer in writing, no notice will be issued. However, if a shortfall is later identified, a notice for the remaining balance can still be issued. If the taxpayer pays all dues and a 25% penalty within 60 days from the notice date, all proceedings (excluding prosecution under Section 132) will be closed.
Order Issuance (Fraud Cases)
The tax officer will consider the taxpayer's representation, then determine interest and penalty, and issue an order. This order must be issued within five years from the due date for filing the relevant annual return (or within five years from the date of the erroneous refund). If the taxpayer pays all dues and a 50% penalty within 30 days from the order date, all proceedings, including prosecution, will be closed.
| Situation | Penalty Amount |
|---|---|
| Payment before notice | 15% of the demanded tax |
| Payment within 60 days from notice | 25% of the demanded tax |
| Payment after 60 days from order | 50% of the demanded tax |
| For other cases (Section 122) | 100% of the demanded tax |
Example: A taxpayer failed to deposit tax for October 2020 (FY 2020-21). The annual return for FY 2020-21 was due by December 31, 2021. The maximum time limit for issuing an order is five years from this date, making it December 31, 2026. Therefore, the SCN must be issued by June 30, 2026, at least six months prior to the order's deadline.
Illustration for Fraud Scenario: Mrs. Disha Patil received an SCN on April 13, 2021, regarding a tax shortfall for July 23, 2019, due to fake input tax credit claims identified by tax authorities. This SCN was issued within the six-month window before the five-year deadline from the annual return filing date for FY 2019-20 (March 31, 2021).
General Provisions for Tax Determination (Section 75)
Section 75 outlines general rules for determining tax liabilities:
- Stay Period Exclusion: If a Tribunal or Court order has stayed the service of a notice or the issuance of an order, the period of the stay will not be counted towards the three-year or five-year time limits.
- Reclassification of Fraud Cases: If an Appellate Authority, Tribunal, or Court determines that fraud charges are unsustainable, the original notice issued will be re-evaluated as if it were issued under Section 73 (a non-fraud case). The tax officer will then recalculate the tax accordingly.
- Re-determination Guidelines: CGST Circular 185/2022, issued on December 27, 2022, provides clarity on when and how to re-determine tax dues.
- Court-Directed Orders: If a Tribunal or Court mandates that an order be passed, it must be issued within two years from the date of such direction, i.e., two years from the communication date by the Appellate Authority, Tribunal, or Court.
- Officer's Re-determination Process: The officer must re-determine interest, penalty, and tax demand as follows:
- Non-Fraud Cases: If an SCN was issued within two years and nine months from the GSTR-9 due date for the relevant financial year, only the short-paid or unpaid tax, or wrongly availed/utilized ITC, along with interest and penalty as per Section 73 of CGST Act, can be recomputed. Similarly, for erroneous refunds, re-computation is possible only if the SCN was issued within two years and nine months from the refund date.
- Expired Time Limit (Non-Fraud): If the SCN was issued after the aforementioned time limit, the proceedings must be halted.
- Fraud Cases (Within Limit): If an SCN was issued within two years and nine months from the GSTR-9 due date for the relevant financial year, the entire demand in such notice represents the recomputed amount.
- Fraud Cases (Multiple Years, Expired Limit): If SCNs were issued for multiple years but after the expiry of the time limit for some, the re-determination under Section 73 will apply only to the financial year(s) where the SCN was issued before the expiry.
- Opportunity for Personal Hearing: Taxpayers will be granted a personal hearing if they request it in writing or if a penalty or any adverse decision is proposed against them.
- Adjournments: The proper officer may adjourn a personal hearing up to a maximum of three times, provided the person provides sufficient written cause.
- Demand Limits: The total amount of tax, interest, and penalty demanded in the final order cannot exceed the amount specified in the original notice. All demands must be based solely on the grounds specified in the notice.
- Appellate Modifications: The Appellate Authority, Tribunal, or Court has the power to modify the tax amount determined by the officer.
- Interest Payment: Interest on unpaid or short-paid tax must be settled, regardless of whether it is explicitly stated in the order.
- Adjudication Completion: If an order is not issued within the stipulated three or five years, the adjudication proceedings are considered complete, and no further order can be issued.
For cases where decisions were unfavorable to revenue and appealed to a higher authority, the period between the date of the original decision and the date of the higher authority's appeal decision will be excluded from the three-year or five-year limits.
Recovery provisions for unpaid or short-paid tax and interest are applicable independently of demand provisions. Penalties under Section 122 are not applicable in cases where a penalty has already been imposed under Sections 73 or 74 for unpaid/short-paid tax, wrongly calculated refunds, or incorrectly availed/utilized ITC. However, charges for offenses under Section 132 leading to prosecution will not be dropped.
Interest Applicability on GST Demand
Interest on tax shortfalls is charged at 18% per annum for underpaid tax or short-assessed liability, and also when input tax credit is availed but not yet utilized. However, for cases where input tax credit is both availed and utilized in excess of the eligible amount, the interest rate is 24% per annum, as per Section 50 of the CGST Act.