Understanding Section 73 and 74 of the CGST Act: A Comprehensive Guide
India’s Goods and Services Tax (GST) regime has revolutionized the business operation. It has brought uniformity and transparency to the taxation system. However, with its complexities, it’s crucial for businesses to understand the provisions of the CGST Act to ensure compliance and avoid penalties.
Two such critical sections are Section 73 and Section 74 of the CGST Act, which deals with the determination and recovery of tax not paid, short-paid, or erroneously refunded. In this blog, we’ll break down these sections in detail, helping you navigate their implications effectively.
What is Section 73 of the CGST Act?
Section 73 of the CGST Act pertains to the determination of tax not paid, short-paid, or erroneously refunded or input tax credit wrongly availed or utilized in cases where there is no intent of fraud, willful misstatement, or suppression of facts. Here’s what you need to know:
Applicability of Section 73
This section applies when the tax authorities find discrepancies such as tax not paid or short-paid or erroneously refunded or input tax credit (ITC) wrongly availed or utilized for any reason other than fraud, willful misstatement, or suppression of facts.
Key Features of Section 73
No Fraud or Intent: Section 73 applies only when there is no evidence of fraud, willful misstatement, or suppression of facts.
Time Limit for Notice (SCN): As per Section 73(2), the GST department must issue a notice at least three months before the expiry of the time limit for passing the order under Section 73(10) (i.e. within 3 years from the due date of filing the annual return for the relevant financial year)
Adjudication Order: As per Section 73(10), the final demand order must be passed within three years from the due date for filing the annual return of the relevant financial year.
Let’s take an example to understand the Time Limit for Issuing Notices and Passing Orders:
- Financial Year (FY): 2020-21
- Due Date for Filing GSTR-9 (Annual Return): 31st December 2021
- In this case, the GST officer must issue the notice at least three months before the expiry of the time limit for passing the final order (31st December 2024).
- Last Date for Issuing Notice: 30th September 2024
- Last Date for Passing Final Order: 31st December 2024
Voluntary Payment: If the taxpayer pays the due tax, along with interest and penalty, before the issuance of a notice, no further proceedings will be initiated.
Penalty: A penalty of 10% of the tax amount (subject to a minimum of ₹10,000) is applicable if the taxpayer pays the dues after the notice is issued but before the order is passed.
If the taxpayer fails to pay the dues, the tax authorities will issue an adjudication order, demanding the payment of tax, interest, and penalty.
What is Section 74 of the CGST Act?
Section 74 of the CGST Act deals with cases involving fraud, willful misstatement, or suppression of facts to evade tax. This section is more stringent compared to Section 73 due to the involvement of intentional wrongdoing.
Applicability of Section 74
This section applies when the tax authorities find discrepancies such as tax not paid or short-paid or erroneously refunded or input tax credit (ITC) wrongly availed or utilized by reason of fraud, willful misstatement, or suppression of facts.
Key Features of Section 74
Time Limit for Notice (SCN): The tax authorities can issue a notice within 5 years and 9 months from the due date of filing the annual return for the relevant financial year.
Time Limit for Notice (SCN): As per Section 74(2), the GST department must issue a notice at least six months before the expiry of the time limit for passing the order under Section 74(10)
Adjudication Order: As per Section 74(10), the final demand order must be passed within five years from the due date for filing the annual return (GSTR-9) of the relevant financial year.
Let’s take an example to understand the Time Limit for Issuing Notices and Passing Orders:
- Financial Year (FY): 2020-21
- Due Date for Filing GSTR-9 (Annual Return): 31st December 2021
- In this case, the GST officer must issue the notice at least six months before the expiry of the time limit for passing the final order (31st December 2026).
- Last Date for Issuing Notice: 30th June 2026
- Last Date for Passing Final Order: 31st December 2026
Voluntary Payment: If the taxpayer pays the due tax, interest, and a penalty equal to 15% of the tax amount before the issuance of a notice, no further proceedings will be initiated.
Penalty: If the taxpayer pays the dues after the notice is issued but before the order is passed, the penalty increases to 25% of the tax amount.
If the taxpayer fails to pay the dues, the tax authorities will issue an adjudication order, demanding the payment of tax, interest, and a penalty equal to 100% of the tax amount.
Key Differences Between Section 73 and Section 74
| Aspect | Section 73 | Section 74 |
|---|---|---|
| Intent | No fraud or willful misstatement | Fraud, willful misstatement, or suppression |
| Time Limit (Notice) | Within 2 years and 9 months | Within 4 years and 6 months |
| Time Limit (Order) | Within 3 Years | Within 5 Years |
| Penalty (Pre-Notice) | No penalty if paid voluntarily | 15% penalty if paid voluntarily |
| Penalty (Post-Notice) | 10% penalty | 25% penalty |
| Maximum Penalty | 10% of the tax amount | 100% of the tax amount |
Why Are These Sections Important for Businesses?
- Compliance: Understanding these sections helps businesses ensure compliance with GST laws, avoiding unnecessary penalties and litigation.
- Dispute Resolution: Businesses can proactively resolve discrepancies by paying dues before the issuance of a notice.
- Risk Mitigation: By distinguishing between unintentional errors and intentional fraud, businesses can adopt better internal controls and audit mechanisms.
- Financial Planning: Knowing the penalties and interest involved helps businesses plan their finances better.
Tips for Businesses to Avoid Issues Under Section 73 and 74
- Maintain Accurate Records: Ensure all invoices, returns, credit notes and financial records are accurate and up-to-date.
- Regular Audits: Conduct internal and external audits to identify and rectify discrepancies.
- Timely Payments: Pay taxes, interest, and penalties on time to avoid notices and penalties.
- Stay Informed: Keep abreast of changes in GST laws and seek professional advice when needed.
- Voluntary Disclosure: If discrepancies are identified, consider voluntary disclosure to reduce penalties.
Conclusion
Sections 73 and 74 of the CGST Act play a pivotal role in ensuring tax compliance and deterring tax evasion. While Section 73 deals with unintentional errors, Section 74 addresses intentional fraud and misstatements. By understanding these provisions, businesses can take proactive steps to comply with GST laws, avoid penalties, and maintain a clean financial record. Staying informed and vigilant is the key to navigating the complexities of the GST regime successfully.
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