Budget 2024: The New Section 74A - An Analysis

The provisions for tax and penalty determination under the currently applicable Section 73 (Nonfraud cases) and Section 74 (Fraud cases) are proposed to be replaced by a new Section 74A for the financial year 2024-25. Sections 73 and 74 will now only apply to matters related to the financial year 2023-2024. For cases from the financial year 2024-25 onwards, Section 74A will come into effect.

In the financial year 2024-25, Section 74A will replace both Sections 73 and 74, consolidating the calculation of tax and penalty under a single section for both the fraud and non-fraud cases. This means that both fraud and non-fraud cases will fall under the new Section 74A starting from the financial year 2024-25 instead of separate sections 73 and 74. Though matters related to period up to the financial year 2023-24 section 73 and section 74 shall be applicable.

Let us understand what changes have been made through this new section 74A and how it differs from the current provisions of Sections 73 and 74, hence understanding Sections 73 and 74 is essential to comprehending the new provisions of Section 74A.

Let us first look at Sections 73 and 74 of the GST law, currently applicable until the financial year 2023-24 for the matters related to that period. By examining their titles, we can get an idea of the circumstances under which these sections apply and their meanings.

SECTION 73: Applicable up to Financial Year 2023-24

Section 73: Determination of tax not paid or short paid or erroneously refunded or input credit wrongly availed or utilized for any reason other than fraud or any wilful misstatement or suppression of facts.

Here, it should be noted that all cases mentioned under Section 73 can be understood as underpayment of tax, erroneous refund, or wrongful availing of input credit. However, the reasons for these actions are not due to fraud, wilful misstatement, or suppression of facts. Therefore, in this article, we will refer to such errors as Non-fraud cases.

Let's try to understand what provisions are there under Section 73:

Section 73 of GST relates to the determination of tax when the tax has not been paid, has been underpaid, has been refunded wrongly, or when input tax credit has been wrongly availed or utilized for reasons other than fraud, wilful misstatement, or suppression of facts. Under this section, the authority issues a statement or a show cause notice. The notice can be issued up to three months before the prescribed time for issuing the order. Now, let's look at the final date for issuing such an order. The order should be issued within three years from the due date for filing the annual return for that financial year. Thus, under this section, the order should be issued within three years from the due date for filing the annual return for the relevant period, and the notice should be issued three months prior to the prescribed time for issuing the order. Keep this period in mind as it has been modified under the new section 74A.

Section 73 provides relief from penalties in case of voluntary payment. If the payment is made at any time before the notice is issued or within 30 days of the issuance of the notice, only the tax and interest need to be paid. Failing to do so will result in the payment of tax, interest, and a penalty amounting to 10% of the tax or 10,000 rupees, whichever is higher. Take note of this payment timeline, as it has been modified under the new Section 74A.

Here, note that under Section 73, the notice issued under this section itself indicates that the tax and interest to be deposited relate to a Nonfraud Case. However, the new section that we will look at later does not indicate this in the notice issued under it.

SECTION 74: (Applicable up to Financial Year 2023-24)

Let us now look at Section 74, which is applicable for Fraud Cases until the financial year 2023-24:

Section 74: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful misstatement or suppression of facts.

Under this section, if the non-payment, short payment, erroneous refund, or wrongful availing/utilization of input tax credit is due to fraud, willful misstatement, or suppression of facts, the authority issues a show-cause notice. The notice for such cases can be issued up to six months before the prescribed time for issuing the order.

The final date for issuing such an order under Section 74 is five years from the due date for filing the annual return for the financial year. Thus, the order must be issued within five years from the due date for filing the annual return for the relevant period, and the notice should be issued six months before the prescribed time for issuing the order.

In terms of penalties under Section 74, if the taxpayer makes a voluntary payment before the notice is issued, they need to pay the tax, interest, and a penalty equal to 15% of the tax amount. If the payment is made within 30 days of the notice being issued, the penalty is 25% of the tax amount. If the taxpayer fails to make the payment within this period, the penalty increases to 100% of the tax amount.

This timeline and penalty structure under Section 74 is important to note, as they will be modified under the new Section 74A.

This section 74 of GST relates to the determination of tax when the tax has not been paid, has been underpaid, has been wrongly refunded, or when input tax credit has been wrongly availed or utilized, all due to fraud, willful misstatement, or suppression of facts. Under this section, the authority issues a show cause notice. The notice must be issued six months before the prescribed time for issuing the order. The order must be issued within five years from the due date for filing the annual return for the financial year. Thus, under this section, the notice must be issued six months before the five-year period ends, and the assessment order must be issued within five years from the due date for filing the annual return. Keep this period in mind, as it has been changed under the new Section 74A, which applies to cases from the financial year 2024-25 and onwards.

Under this section, tax, interest, and penalty amounting to 100% of the tax must be paid. However, there is a provision for reduced penalties in case of voluntary payment. If the taxpayer pays before the show cause notice is issued, the penalty is only 15%. If the payment is made within 30 days of issuing the notice, the penalty is reduced to 25% instead of 100%. The taxpayer has to pay interest in all cases.

If the payment of tax and interest is made within 30 days of the order issued under Section 74, the penalty is reduced to 50%. After this period, the penalty amount is equal to 100% of the tax amount.

Pay close attention to these provisions and their percentages regarding the penalty amounts, as it will help you understand the new section better. These provisions apply due to fraud, wilful misstatement, or suppression of facts, ensuring the security of revenue and prevention of fraud.

THE NEW PROPOSED SECTION 74A: (Applicable from Assessment year 2024-25)

Now, keep in mind that previously, Section 73 was related to errors made without fraud, such as underpayment of tax, excessive input credit, or excessive refunds, and Section 74 was related to similar errors made with fraud. The competent authority would mention the relevant section when issuing notices. However, now both types of errors or offenses will come under the same Section 74A, and whether the error was due to fraud or not will be determined during the case proceedings. Once determined, the tax and interest will have to be paid for both FRAUD and NONFRAUD cases, but the penalty amounts will differ. Let's see what the new Section 74A says.

First one should note that In the new provision, it is important to note that if the tax amount for which a notice is to be issued is less than Rs 1,000 in a financial year, no notice will be issued under this section.

Now, for both Fraud and non-fraud cases, a notice can be issued within 42 months from the due date of filing the annual return for the period. Note that when issuing the notice, the type of error does not need to be determined, so there can be no separate times limit for issuing notices. Previously, the time limit for Nonfraud Cases under Section 73 was three months prior to three years from the due date of filing the annual return, and for Fraud cases, it was Six months prior to five years from the due date of filing of the Annual return. This has now been changed to 42 months for both types of cases from the due date of filing of Annual return.

Studying the previous Sections 73 and 74, it is clear that all other provisions remain almost the same, but the Government has changed the time for determining the error or offense under the new section for its convenience or that of its officials. Now, the competent authority will have the full time and powers during the case proceedings to determine whether the case is a normal error or if the taxpayer intended to evade tax through fraud. However, it is also important to note that the dealer will have ample opportunity to present their side regarding the type of offense or error when the notice is issued.

Here, note that the competent authority must issue an order within 12 months from the date of issuing the notice. Under the current Sections 73 and 74, this time was three years or five years from the due date of filing the annual return, and the notice had to be issued three or six months before this time, respectively. Often, when notices were issued at the last moment, there was little time left for making a decision. Now, under Section 74A, the order must be issued within 12 months of issuing the notice.

If the competent authority cannot issue the order within this 12-month period, the Commissioner or Joint Commissioner can extend it by another six months, provided they record the reasons in writing for this extension before the original period ends.

Let's see the provisions related to tax, interest, and penalty in this new section:

For Non-Fraud Cases, the new provisions are

1. If you pay the tax and interest determined under Section 50 before the notice is issued, you will not have to pay any penalty.

2. If you pay the tax and interest within 60 days of issuing the notice (previously 30 days under Section 73), you will not have to pay any penalty.

3. In all other cases, if you do not avail of the benefits of points 1 or 2 above, the penalty will be 10% of the tax or Rs 20,000 (SGST+CGST), whichever is higher.

Note that while changes have been made to the section, there has been no improvement for taxpayers. For instance, if the tax amount is only Rs 2,500, the penalty will still be Rs 20,000, which is not logical. There has been a demand for improvement in this regard, but no changes have been made in the amended Section 74A.

For Fraud Cases, the new provisions are

1. If you pay the tax and interest before issuing the Show Cause Notice, the penalty will be only 15% of the tax amount.

2. If you pay the tax and interest within 60 days of issuing the notice, the penalty will be 25% of the tax amount.

3. If you pay the tax and interest within 60 days of issuing the order, the penalty will be 50% of the tax amount.

If all these periods lapse, the penalty will be 100% of the tax amount, which the dealer will have to pay.

Thus, in this article, we have discussed Sections 73 and 74 applicable until the financial year 2023-24 and the new Section 74A proposed in this budget. This will help you understand what changes have been made and what the entire new Section 74A states. Additionally, note that Sections 73 and 74 have not been removed from the legal books as cases related to the financial year 2023-24 are still pending, so you cannot forget Sections 73 and 74 yet.