Tax Liability Under Section 73 & 74- Detailed Analysis

Introduction

The implementation of the Goods and Services Tax (GST) in India marked a significant overhaul in the indirect taxation system. The CGST Act, 2017, established a comprehensive compliance framework requiring businesses to register, determine their tax liability, and file accurate returns. Under this framework, taxpayers must assess their liability, pay self-assessed taxes while filing returns, and avail and utilize input tax credits (ITC) correctly.

The Department of GST scrutinizes returns under Section 61, conducts audits under Section 65, special audits under Section 66, inspections/surveys under Section 67, and summary assessments under Section 64 to ensure compliance. Discrepancies such as mismatches between liabilities declared and paid, or incorrect ITC claims, are identified through these measures.

Understanding Section 73 and 74

Key Provisions and Their Impact on Businesses

Sections 73 and 74 of the CGST Act, 2017, deal with the determination and recovery of Tax Not Paid, Short Paid, Erroneous refunds, and wrongly availed or utilized ITC.

Aspect	Section 73 (Bonafide Errors)	Section 74 (Malafide Cases)
Tax Not Paid, Short Paid	Other than fraud, Willful misstatement, or suppression of facts	Due to fraud, willful misstatement, or suppression of facts
ITC Wrongly Availed, Utilized	Other than fraud, willful misstatement, or suppression of facts	Due to fraud, willful misstatement, or suppression of facts
Erroneous Refund	Other than fraud, willful misstatement, or suppression of facts	Due to fraud, willful misstatement, or suppression of facts

Non Declaration of facts/ Information requiring disclosure in Return/ Statement/ Record/ Other document furnished & Non Response to Proper Officer shall be construed as Suppression of facts

The Importance of Show Cause Notices

The issuance of a show-cause notice (SCN) is a fundamental principle of natural justice, ensuring that taxpayers are given a fair opportunity to present their case before any recovery proceedings are initiated. Direct recovery without issuing an SCN would violate the principle of natural justice, which mandates that an individual must be given a chance to be heard. Therefore, the proper officer must serve a notice on the person, requiring them to show cause as to why they should not pay the amount specified in the notice along with interest payable under Section 50 and a penalty leviable under the provisions of the Act.

Requirements Under Sections 73 and 74 Both Sections 73 and 74 of the CGST Act stipulate the issuance of a show-cause notice for the recovery of unpaid or short-paid taxes, erroneous refunds, and wrongly availed or utilized ITC. The notice must clearly outline the discrepancies and provide the taxpayer with the opportunity to respond.
Summary of Notice to be uploaded on the GST Portal in the Form GST DRC-01

Time Limits for Issuances of Show Cause Notice and Orders

Section 73: For tax not paid, short paid, or ITC wrongly availed or utilized, the show-cause notice must be issued within 2 years and 9 months from the due date of the annual return, and the order must be issued within 3 years from the due date of the annual return. For erroneous refunds, the SCN must be issued within 2 years and 9 months from the date of the refund, with the order issued within 3 years from the date of the refund.

Section 74: For tax not paid, short paid, or ITC wrongly availed or utilized, the show-cause notice must be issued within 4 years and 6 months from the due date of the annual return, and the order must be issued within 5 years from the due date of the annual return. For erroneous refunds, the SCN must be issued within 4 years and 6 months from the date of the refund, with the order issued within 5 years from the date of the refund.

The issuance of the show-cause notice in compliance with these timelines is crucial to uphold the principles of natural justice, ensuring transparency and fairness in tax administration.

Aspect	Section 73 (Bonafide Errors)	Section 74 (Malafide Cases)
Tax Not Paid, Short Paid	SCN: 2 years 9 months from due date of annual return	SCN: 4 years 6 months from due date of annual return
	Order: 3 years from due date of annual return	Order: 5 years from due date of annual return
ITC Wrongly Availed, Utilized	SCN: 2 years 9 months from due date of annual return	SCN: 4 years 6 months from due date of annual return
	Order: 3 years from due date of annual return	Order: 5 years from due date of annual return
Erroneously Refunded	SCN: 2 years 9 months from the date of refund	SCN: 4 years 6 months from the date of refund
	Order: 3 years from the date of refund	Order: 5 years from the date of refund

Voluntary Payment Pre Show Cause Notice

As discussed earlier, Sections 73(5) and 74(5) of the CGST Act provide taxpayers the option to voluntarily pay their tax liabilities. This can be based on their own assessment or upon receiving a notice i.e. FORM DRC-01A from the proper officer. Making this voluntary payment before receiving a show-cause notice can result in concessions on penalties.

After making the payment of Tax along with Interest, the taxpayer must notify the proper officer by filing FORM GST DRC-03. The officer then acknowledges this payment using FORM GST DRC-04. Once this acknowledgment is issued, no further notice for the tax will be sent, unless the proper officer believes that the payment is less than the actual amount due. In such cases, a notice for the remaining amount may be issued as per Rule 142 of the CGST Rules, 2017.

Payment Post Issuance of Demand Order

Section 73 and Section 74

Section 74(11): If a person is served with an order under Section 74 and pays the tax along with interest payable under Section 50 and a penalty equivalent to 50% of the tax within thirty days of the issuance of the order, all proceedings in respect of the said notice shall be deemed to be concluded. This allows for a reduction in the penalty if the payment is made promptly.

Section 73: Unlike Section 74, there is no provision in Section 73 for a waiver or reduction of the penalty if the tax, interest, and penalty are paid within thirty days of the issuance of the order. The full penalty as determined in the order must be paid.

Aspect	Section 73 (Bonafide Errors)	Section 74 (Malafide Cases)
Post Issuance of Order	No provision for waiver or reduction of penalty. Full penalty as determined in the order must be paid.	If tax, interest, and 50% penalty are paid within 30 days of the order All proceedings are deemed concluded Penalty is reduced to 50% of the tax.

Impact of Non Payment of Self Assessed Liability Under Section 73

• Section 73(11): Imposes a mandatory penalty for non-payment of self-assessed tax or tax collected but not deposited with the government within 30 days of the due date. The penalty is the greater of INR 10,000 or 10% of the tax due.
• Circular No. 76/50/2018-GST: Specifies that a show cause notice (SCN) is required under Section 73(1) for non-payment, short payment, erroneous refunds, or incorrect ITC usage. This section is triggered only when there is a delay in filing or errors in GSTR-3B that are not rectified in time. However, the general penalty under Section 125 may apply, which allows for a discretionary penalty up to INR 25,000 for CGST and SGST each.

Penalty Application:

• If tax collected as GST is not paid within 30 days, the penalties under Section 73(11) are automatically applicable.

Example

Suppose a business has a gross GST liability of INR 20,00,000 with eligible ITC of INR 8,00,000, leading to a net GST liability of INR 12,00,000. The due date for filing GSTR-3B is April 20, 2024.

• Penalty without Circular Relaxation: The higher of INR 10,000 or 10% of INR 12,00,000 (INR 1,20,000).
• Penalty with Circular Relaxation: If the business complies with the directives of Circular No. 76/50/2018-GST and meets all conditions before the due date, the specific penalties under Section 73(11) might not apply, but a general penalty under Section 125 could still be imposed, depending on the discretion of the tax authorities.

Rule 142 of CGST Rules, 2017- Relevant Forms

Rule 142 of CGST Rules, 2017 – Relevant Forms Rule 142 outlines the forms used for various notices and orders under the CGST Act, 2017:

• FORM GST DRC-01: Summary of notice issued.
• FORM GST DRC-02: Summary of the statement.
• FORM GST DRC-01A: Details of tax, interest, and penalty before serving notice.
• FORM GST DRC-03: Payment of tax and interest/penalty.
• FORM GST DRC-04: Acknowledgement of payment.
• FORM GST DRC-05: Order concluding proceedings upon payment.
• FORM GST DRC-06: Reply to the show-cause notice.
• FORM GST DRC-07: Summary of the order specifying the amount payable.
• FORM GST DRC-08: Rectification or withdrawal of order

Conclusion

Navigating the CGST Act’s stringent requirements, especially the stipulations of Section 73, is crucial for ensuring seamless tax compliance and avoiding hefty penalties. This guide aims to empower businesses and tax professionals with the knowledge to effectively manage their GST obligations.

For further queries or personalized guidance, please feel free to reach out to us at taxationteam@gmail.com. We are here to assist you in navigating these complexities with expert advice tailored to your unique needs.