Section 74 of the Central Goods and Services Tax (CGST) Act, 2017 relates to tax evasion that may involve fraud, willful misstatement or suppression of facts. It empowers tax authorities to recover wrongly availed input tax credit (ITC) or tax not paid under such circumstances. The section lays down the legal framework for issuing show cause notices, imposing penalties, and setting timelines for compliance.
This blog explains the essence of Section 74, how it works, the process involved, penalties applicable, and the practical implications for businesses and taxpayers.
Introduction
Under the GST system, there is a lot that businesses need to stay in compliance with. Nobody can misreport tax because they didn’t mean to; however, sometimes people evade tax intentionally. The CGST Act has different provisions for each of these. Among them, Section 74 specifically addresses cases where tax has not been paid or has been underpaid due to fraud, willful misstatement, or suppression of facts.
This section is more stringent than others because it deals with deliberate non-compliance. The penalties and recovery processes under this section are also more severe.
What Does Section 74 of the CGST Act Cover?
Section 74 of the CGST Act sets out the process for the determination and recovery of tax that has not been paid or has been short paid, or input tax credit claimed or utilized incorrectly, because of Fraud, Willful misstatement or Suppression of fact with the intent to evade tax.
This section allows the tax officer to issue a show cause notice (SCN) and proceed if the officer has reason to believe that the taxpayer has deliberately defaulted.
The scope includes –
- Under-reported sales
- Fake input tax credit claims
- Bogus invoices
- Falsified books of accounts
- Intentional non-disclosure of supply
If the tax officer finds that the mistakes were intentional, Section 74 would apply instead of Section 73 (which would apply in the case of honest mistakes or unintentional defaults).
Key Components of Section 74 of CGST Act
Let’s break down the section into its key parts –
1. Detection and Assessment
The process begins when a tax officer identifies a possible case of fraud or suppression based on a tax audit, inspection, or intelligence input. The officer must have “reasons to believe” that the taxpayer has evaded tax intentionally.
2. Show Cause Notice (SCN)
The officer issues a notice to the taxpayer under Section 74(1), asking them to show cause why-
- Tax should not be recovered,
- Interest should not be levied, and
- Penalty should not be imposed
This notice includes details of the alleged default, amount involved, and supporting findings.
3. Opportunity to Pay Before Notice
Before issuing the notice, Section 74(5) allows the taxpayer to pay the full tax amount along with interest and a 15% penalty voluntarily. If they do so, no notice is issued, and proceedings are deemed closed.
4. Time Limits
The department must issue the SCN within 5 years from the due date of filing the annual return for the relevant financial year. The final order under Section 74(10) must be passed within one year from the date of service of SCN.
5. Payment After Notice
If the taxpayer accepts the charge after receiving the SCN, they can pay the tax, interest, and a 25% penalty within 30 days to close the case without further litigation.
If they wish to contest, they must file a detailed reply, and a personal hearing may be scheduled.
6. Final Order
If the officer finds the taxpayer guilty, a final order is passed under Section 74(9). This includes Tax to be recovered, Interest payable or a 100% penalty (if charges are proven).
Penalties Under Section 74
Penalties under Section 74 are strict because the section deals with deliberate acts. The structure is as follows-
- If paid before SCN – 15% penalty + tax + interest
- If paid within 30 days of SCN, there is a 25% penalty + tax + interest
- If paid within 30 days of final order – 50% penalty + tax + interest
- If paid after 30 days of order – 100% penalty + tax + interest
This tiered approach encourages early settlement and reduces litigation.
Appeal Process
If a taxpayer is aggrieved by the final order under Section 74, they can –
- File this appeal before the Appellate Authority under Section 107 of the CGST Act.
- This must be done within 3 months of the date of the order.
- A pre-deposit of 10% of the disputed tax amount must be paid to file the appeal.
Appeals can be taken to higher authorities, including the Appellate Tribunal, High Court, and Supreme Court, depending on the case.
Practical Implications for Businesses
Businesses must understand that Section 74 is not invoked lightly. When it is, the GST department usually has gathered substantial evidence through audits, reconciliations, and third-party data.
Some common scenarios that can trigger Section 74 include –
- Claiming input tax credit on non-existent purchases
- Not reporting cash sales
- Using fake invoices
- Misreporting turnover deliberately
Such issues often come to light during data reconciliation with GSTR-1, GSTR-3B, and GSTR-9, or based on data from suppliers. Businesses have to ensure their GST compliance is tight, returns are filed correctly, and no false claims are made.
Best Practices to Avoid Section 74 Actions
- Always file accurate and timely GST returns
- Reconcile your GSTR-2B with your purchase records before claiming ITC
- Avoid any temptation to inflate expenses or fabricate invoices
- Maintain books of accounts properly
- Respond to any GST notices immediately
- Conduct internal GST audits at regular intervals
If you have made an honest mistake, Section 73 may apply instead, which carries lower penalties. But once fraud is established, the consequences under Section 74 are much harsher.
Conclusion
Section 74 of the CGST Act serves as a powerful enforcement mechanism for tax discipline in cases of fraud or wilful default. It allows the tax authority to determine and/or recover taxes along with penalties and interest in a much more astringent manner. In other words, Section 74 highlights the need for businesses to be honest and accurate in fulfilling their tax obligations.
While mistakes happen, the GST law offers a coherent distinction between a mistake and tax evasion. Knowing the process, timeframes and alternatives under Section 74 can help businesses prepare for potential audits as well as take steps to avoid unnecessary penalties by acting quickly.
References
The Central Goods & Services Tax (CGST) Act, 2017
https://selfservice.gstsystem.in
https://www.gst.gov.in/
