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Unraveling Section 74 of the CGST Act: Demands for Tax Evasion and Fraud

Section 74 of the CGST Act addresses tax demands arising from fraud, willful misstatement, or suppression of facts by taxpayers. It outlines the conditions for issuing show-cause notices, applicable time limits, and various penalties. Recent changes from the 53rd GST Council Meeting, including the introduction of Section 74A, aim to harmonize time limits and provide relief to taxpayers. Understanding this provision is crucial for businesses to navigate potential tax liabilities.

📖 4 min read read🏷️ GST Notices

The Goods and Services Tax (GST) system was designed to streamline tax assessment, reporting, and input tax credit claims. However, numerous businesses, particularly micro, small, and medium enterprises, often face challenges in adherence, leading to the receipt of tax demand notices. Among these, notices issued under Section 74 of the CGST Act, pertaining to cases involving fraud, are particularly significant. A thorough comprehension of the legal implications of this section is vital for all entrepreneurs and companies. This article delves into the show cause notices issued under Section 74 of the CGST Act, covering their applicability, consequences, and other crucial aspects.

Recent Development Businesses should be aware that the final deadline for issuing Show Cause Notices (SCN) under Section 74 (for Financial Year 2019-20) and Section 73 (for Financial Year 2021-22) is September 30, 2025. Consequently, an increase in such notices is anticipated for enterprises.

Understanding Section 74 of the CGST Act

A GST officer can issue show cause notices (SCN) to GSTIN holders for various reasons, including non-payment of GST, inaccurate reporting, incorrect refunds, or excessive input tax credit claims. These notices might be issued under different sections, such as:

  • Section 63 for discrepancies found in GST returns
  • Section 65 for short payments or non-payments identified during an audit
  • Section 35 for failing to record transactions
  • Section 52 for defaults in collecting tax at the source

Section 74, however, stands apart as it permits the issuance of an SCN only when a GST officer suspects fraudulent activities or intentional deception by the GSTIN holder. This section provides the legal framework and guidelines for GST officers to address instances of willful misstatement or deceitful practices by taxpayers concerning GST data filing, leading to underpayment, non-payment, wrongful refunds, or inflated input tax credit claims.

Under Section 74, a competent GST officer has the authority to:

  • Conclude adjudication within a five-year period from the financial year in which the discrepancies were observed.
  • Issue a show cause notice demanding payment for any tax underpaid, unpaid, or for excess credit wrongfully claimed.
  • Levy interest on the outstanding tax or excess credit, in addition to a penalty ranging from 15%, 25%, or 50% of the tax due or excess credit claimed. The specific penalty rate is determined by how promptly the taxpayer settles the demand.

Conditions for Applying Section 74 (FY 2024-25 and Beyond)

Section 74 provisions apply when there is a suspicion of:

  • Suppression of facts
  • Wilful misstatement
  • Fraud

Suppression of Facts

According to Explanation 2 of Section 74 of the CGST Act, 2017, 'suppression of facts' refers to the non-disclosure of information or details that a taxable entity is legally obligated to provide or state. The core element of 'suppression' under the CGST Act is the deliberate or intentional withholding of information. An unintentional oversight or failure to submit data is not considered suppression of facts.

Example: If ABC Trading Pvt Ltd, a textile chemicals firm, has an employee in its accounts department make an error while declaring sales invoice data in their GST return, resulting in a lower GST liability. During verification, a GST officer discovers this discrepancy. This may not be considered 'suppression of fact' if ABC Trading can demonstrate that it was an innocent mistake by a data entry operator.

Wilful Misstatement

'Wilful misstatement' involves deliberately submitting a statement or document through the GST portal that is inaccurate or misleading, with the intent to claim input tax credits, refunds, or other benefits. It is crucial to note that a document merely lacking comprehensive information does not automatically constitute a wilful misstatement. The intent to evade tax must be established for it to be classified as such.

Example: Continuing with ABC Trading, if the company intentionally uploads a falsified raw material purchase invoice to claim excess input tax credit. For this to be deemed a wilful misstatement, the GST officer must prove that the action was not accidental. A recurring pattern of false document submission by the same company could indicate wilful misstatement.

Fraud

Unlike 'suppression of fact' and 'wilful misstatement', the CGST Act does not provide a specific definition for 'fraud'. However, it can be understood as an 'act of deceit', as per Section 17 of the Contract Act. Fraud occurs when an individual presents a document as truthful while knowing it to be false. The application of tax demand under Section 74 can be nuanced due to the subjective interpretations of 'fraud,' 'wilful misstatement,' and 'suppression of fact,' which has previously led to ambiguities concerning demand issuance and order timelines. To address these complexities and offer relief to GSTIN holders, the GST Council made recommendations in its 53rd meeting on June 22, 2024:

  • Introduction of a new Section 74A within the CGST Act to standardize the time limits for issuing demand notices and orders under both Section 73 and Section 74. This aims to resolve disparities arising from varying time limits based on charges of willful misstatement, suppression of fact, or fraud.
  • Extension of the period to avail a reduced penalty from 30 to 60 days.
  • These recommendations are slated for implementation starting from Financial Year 2024-25.

Time Limits for Section 74 of the CGST Act

The established time limits for Section 74 are:

  • For issuing a notice: Six months prior to the expiration of five years from the due date of the annual return related to the incident.
  • For issuing an order: Five years from the due date of the annual return pertaining to the incident.

With the introduction of the new Section 74A, the time limit for issuing a tax demand notice, regardless of whether it involves fraud, wilful misstatement, or suppression of facts, is now 42 months from the annual return's due date. Taxpayers are granted a 60-day period (previously 30 days) to submit their response and settle the demanded tax along with accrued interest for any unpaid, short-paid tax, or excess credit/refund claimed.

Procedure for Issuing a Notice Under Section 74

A defined procedure guides the issuance of a tax demand notice under Section 74 of the CGST Act. This process ensures due diligence and adherence to legal protocols before a notice is served to a taxpayer.

Taxpayer Options Upon Receiving a Section 74 Demand Notice

When a taxpayer receives a tax demand notice under Section 74, they have two primary options:

  • Full Payment: The taxpayer can choose to pay the entire demanded tax amount along with the applicable interest. Upon this payment, they are entitled to receive an order that formally concludes the tax demand proceedings.
  • Representation: Alternatively, the taxpayer can submit a detailed reply or representation, supported by valid documents, to justify their position against the tax demand. The officer will then review this representation and, if deemed valid, will issue an order concluding the tax demand, which will be communicated to the taxpayer.

Penalties Under Section 74 of the CGST Act

Penalties under Section 74 vary based on the timing of tax payment:

  • 15% Penalty: Applies if the taxpayer makes full payment of the tax demand and interest before receiving the DRC-01 notice.
  • 25% Penalty: Imposed if the taxpayer settles the full payment within 30 days of receiving the DRC-01 notice.
  • 50% Penalty: Levied if the taxpayer makes full payment within 30 days of the DRC-07 order being issued.
  • 100% Penalty: Applies if payment is made more than 30 days after the issuance of the DRC-07 order.

Input Tax Credit (ITC) for Tax Paid Under Section 74

The Union Budget 2024 brought an amendment to Section 17(5) of the CGST Act, which pertains to blocked credits. This change specifically limited the blocking of input tax credit for taxes paid under Section 74 (in cases of fraud, wilful misstatement, or suppression of facts) for demands up to Financial Year 2023-24.

Judicial Precedents for Section 74 of the CGST Act

  • CC, CE and ST - Bangalore (Adjudication) vs M/s Northern Operating System (2022 (5) TMI 967 - Supreme Court): The Supreme Court ruled that Section 74(1) can only be applied when concrete evidence supports allegations of fraud, wilful misstatement, or suppression of fact. This evidence must be included in the tax demand notice issued by the officer.
  • Gayathri Cloth and General Stores, Vijayawada Vs State of Andhra Pradesh (45 APSTJ 133): The Hyderabad appellate tribunal noted that officers are obligated to present material evidence for claims of fraud, wilful misstatement, or suppression of fact. A claim cannot be substantiated purely on personal judgment or suspicion without sufficient proof.

Frequently Asked Questions

What is the primary distinction between tax demands under Section 73 and Section 74 of the CGST Act?
The main difference lies in the intent. Section 73 addresses tax demands without an element of fraud, wilful misstatement, or suppression of facts, often due to clerical errors or misinterpretations. Section 74 specifically applies to cases where there is an intention to evade tax through fraud, wilful misstatement, or suppression of facts.
How does 'suppression of facts' differ from 'wilful misstatement' in the context of GST tax evasion?
'Suppression of facts' involves deliberately failing to declare information that a taxable entity is legally required to disclose. 'Wilful misstatement' refers to intentionally providing incorrect or misleading information in documents or statements submitted to the GST portal. Both imply intent to evade tax, but one is about omission, and the other is about active misrepresentation.
What are the key implications of receiving a show-cause notice under Section 74 for a business in India?
Receiving a Section 74 notice implies the authorities suspect fraudulent tax evasion, leading to potentially higher penalties (up to 100% of the tax due), interest charges, and a rigorous adjudication process. It also impacts the time limits for response and payment, with stricter deadlines compared to non-fraudulent cases.
Can Input Tax Credit (ITC) be blocked for tax amounts paid under Section 74 of the CGST Act?
As per an amendment in the Union Budget 2024 to Section 17(5) of the CGST Act, the blocking of Input Tax Credit for taxes paid under Section 74 (in cases of fraud, wilful misstatement, or suppression of facts) has been restricted for demands up to Financial Year 2023-24.
What recent amendments have been made to Section 74 regarding time limits and penalties?
The 53rd GST Council Meeting recommended introducing Section 74A to harmonize time limits for demand notices and orders. It also extended the period to avail a reduced penalty from 30 to 60 days, with these changes expected to be effective from FY 2024-25.