Navigating GST Disputes: Comparative Framework of GST Demand & Recovery Balancing Genuine Mistakes and Fraudulent Conduct under CGST Act, 2017
Goods and Services Tax (GST) has had a major impact across all sectors—trading, manufacturing, and services. Since its inception, GST has contributed to economic development, enhanced transparency in business transactions, enabled seamless input tax credit, and simplified tax rates.
However, adapting to a new tax structure takes time. During this transition period, taxpayers may inadvertently or unintentionally make mistakes or defaults, which can lead to penal implications and litigation. Conversely, some business entities have interpreted the law to serve their own interests and engaged in transactions that cause loss to the exchequer. Such conduct can attract serious penal consequences and even prosecution if the thresholds prescribed under Section 132 of the CGST Act, 2017 are crossed.
To distinguish between genuine errors and intentional fraud/suppression, the Government introduced Section 73, Section 74, and more recently Section 74A under the CGST Act, 2017. These provisions clearly demarcate timelines for notices, adjudication, and penalty provisions, forming the backbone of GST demand and recovery litigation.
Section 73 of CGST Act, 207 provides that:
(1)Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon undersection 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.
(2)The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order.
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(9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order.
(10) The proper officer shall issue the order within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund.
(Relevant Extract)
Thus, section 73 applies where tax has not been paid, short paid, erroneously refunded, or input tax credit has been wrongly availed/utilised for reasons other than fraud, willful misstatement, or suppression of facts.
Section 74 of CGST Act, 207 provides that:
(1)Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon undersection 50 and a penalty equivalent to the tax specified in the notice.
(2)The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order.
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(9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order.
(10) The proper officer shall issue the order within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of erroneous refund.
(Relevant Extract)
Thus, section 74 applies where non-payment, short payment, erroneous refund, or wrongful ITC availment arises due to fraud, willful misstatement, or suppression of facts to evade tax.
In order to determine whether the provisions of Section 73 or Section 74 are applicable, it is first necessary to understand the terms fraud, suppression, and willful misstatement. Since these terms are not defined under the GST law, reference can be drawn from Black’s Law Dictionary for better clarity, as follows:
“Fraud” means an illegal act that involves deceit, concealment, or violation of trust. A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to their detriment.
“Suppression” means failure to disclose full, correct or complete information. In other words, it means, to put a stop to, put down, or prohibit; to prevent (something) from being seen, heard, known or discussed.
“Willful Misstatement” means voluntary and intentional act of making a false or misleading assertion about something, usually with an intent to deceive.
Basis above provisions, it is clear that when a default arises from a genuine error or mistake, Section 73 is applicable. Conversely, when the default is due to fraud, suppression, or willful misstatement, Section 74 applies. In this regard, it is pertinent to note that the burden of proof for invoking Section 74 lies with the department; otherwise, Section 73 must be applied. The show cause notice (SCN) must clearly specify whether the provisions of Section 73 or Section 74 are being invoked.
Various High Courts, in numerous judgments, have held that fraud requires mens rea (guilty intent), and mere non-payment of tax does not amount to fraud. Courts have consistently protected taxpayers from misuse of Section 74, requiring clear evidence of intent on the part of the taxpayer.
To bring uniformity, the Government has introduced Section 74A, replacing Sections 73 and 74 for future periods. This means that, irrespective of whether a case involves fraud or not, all show cause notices and orders will now be issued under Section 74A for the financial year 2024–25 onwards.
Section 74A provides standardized timelines for issuance of notices and orders, thereby removing the earlier distinction between Section 73 and Section 74 of the CGST Act, 2017.
Disclaimer: This document is intended solely for general informational purposes. It does not constitute a legal opinion, tax advice, or a formal interpretation of law. The applicability of GST provisions may vary depending on specific facts and circumstances. Readers are advised to seek professional consultation before taking any action based on the information provided herein.