Introduction
Under the self-assessment taxation regime, where tax is either not paid, short-paid, erroneously refunded, or Input Tax Credit ("ITC") is wrongly availed or utilised intentionally or unintentionally-then the proper officer may initiate action against the said registered person for the determination of tax and recovery of the said tax from the registered person.
Under the Central Goods and Services Tax Act, 2017 ("the CGST Act"), the provisions for determining tax and penalty are governed by Section 73 for non-fraud cases and Section 74 for fraud-related cases. These sections mandate the issuance of a Show Cause Notice ("SCN") and provide the taxpayer an opportunity to be heard before an order is passed, demanding the tax, along with applicable interest and penalty.
In cases involving fraud, willful misstatement, or suppression of facts, a tax demand can be raised for a period of five years from the due date for filing the Annual Return for the relevant financial year. In contrast, for non-fraud cases, the demand can only be raised for a period of three years from the same due date.
Under the earlier Central Excise and Customs laws, the time limit for serving a notice invoking the normal period was prescribed as two years, while under Service Tax (effective from May 14, 2016), the time limit was extended to 30 months. The extended time limit of five years is applied in cases involving fraud, suppression of facts, or similar contraventions.
Important recommendations of the 53rd GST Council Meeting
The 53rd GST Council Meeting held on June 22, 2024 recommended amendments in Section 73 and Section 74 of the CGST Act and the insertion of a new Section 74A in the CGST Act, to provide for common time limit for issuance of demand notices and orders irrespective of whether case involves fraud, suppression, willful misstatement etc., or not.
Earlier, there was a different time limit for issuing demand notices and demand orders, in cases where charges of fraud, suppression, willful misstatement etc., are not involved, and in cases where those charges are involved but now to simplify the implementation of those provisions, the GST Council recommended to provide for a common time limit for issuance of demand notices and orders in respect of demands for FY 2024-25 onwards, irrespective of whether case involves fraud, suppression, willful misstatement etc., or not.
Also, the time limit for the taxpayers to avail the benefit of reduced penalty, by paying the tax demanded along with interest, was recommended to be increased from 30 days to 60 days in Section 74A of the CGST Act.
Effective Changes Proposed in the Union Budget (No. 2), 2024
Based on the recommendations of the council, Section 74A was introduced in the CGST Act,which deals with the determination of tax not paid, short-paid, erroneously refunded, or input tax credit wrongly availed or utilized for any reason, applicable from the Financial Year 2024-25 onwards. The introduction of Section 74A reflects the Government's intent to streamline the time limits for the issuance of show cause notices and the passing of orders for both fraud and non-fraud cases, by prescribing a uniform time limit for both.
For any tax determination relating to periods up to FY 2023-24, the provisions of Sections 73 or 74 of the CGST Act will continue to apply. However, for tax periods beginning from FY 2024-25, the provisions of Section 74A will govern the proceedings.
The Finance Bill (No. 2), 2024 also inserted the word 'Section 74A' in the following sections, which provide the determination of tax in one way or other-
- Section 21 - Manner of recovery of credit distributed in excess;
- Section 35- Accounts and Records;
- Section 49 - Payment of tax, interest and penalties;
- Section 50 -Interest on delayed payment of tax;
- Section 51 - Tax deduction at source;
- Section 61 -Scrutiny of returns;
- Section 62 - Assessment of non-filers of returns;
- Section 63 - Assessment of unregistered persons;
- Section 64 - Summary assessment in certain cases;
- Section 65 - Audit by tax authorities;
- Section 66 -Special audit;
- Section 75 - General provisions relating to the determination of tax;
- Section 104 - Advance Ruling to be void in certain circumstances;
- Section 107 -Appeals to Appellate Authority;
- Section 127 - Power to impose penalty in certain cases.
Notified Section 74A of the CGST Act
The CBIC vide Notification No. 17/2024-Central Tax dated September 27, 2024,notified the commencement dates for various provisions of the Finance (No. 2) Act, 2024.
Thus, Section 138 of Finance (No.2) Act, 2024, which inserts the new Section 74A into the CGST Act, will come into force from 1st November 2024.
Section 74A is reproduced below:
Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onward.
74A. (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, 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 under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder:
Provided that no notice shall be issued, if the tax which has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised in a financial year is less than one thousand rupees.
(2) The proper officer shall issue the notice under sub-section (1) within forty-two months 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 forty-two months from the date of erroneous refund.
(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.
(4) The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.
(5) The penalty in case where any tax which has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised,--
(i) for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, shall be equivalent to ten per cent. of tax due from such person or ten thousand rupees, whichever is higher;
(ii) for the reason of fraud or any wilful-misstatement or suppression of facts to evade tax shall be equivalent to the tax due from such person.
(6) 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.
(7) The proper officer shall issue the order under sub-section (6) within twelve months from the date of issuance of notice specified in sub-section (2):
Provided that where the proper officer is not able to issue the order within the specified period, the Commissioner, or an officer authorised by the Commissioner senior in rank to the proper officer but not below the rank of Joint Commissioner of Central Tax, may, having regard to the reasons for delay in issuance of the order under sub-section (6), to be recorded in writing, before the expiry of the specified period, extend the said period further by a maximum of six months.
(8) The person chargeable with tax where 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 wilful-misstatement or suppression of facts to evade tax, may,--
(i) before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment, and the proper officer, on receipt of such information shall not serve any notice under sub-section (1) or the statement under sub-section (3), as the case may be, in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder;
(ii) pay the said tax along with interest payable under section 50 within sixty days of issue of show cause notice, and on doing so, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.
(9) The person chargeable with tax, where 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 wilful-misstatement or suppression of facts to evade tax, may,--
(i) before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment, and the proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder;
(ii) pay the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within sixty days of issue of the notice, and on doing so, all proceedings in respect of the said notice shall be deemed to be concluded;
(iii) pay the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within sixty days of communication of the order, and on doing so, all proceedings in respect of the said notice shall be deemed to be concluded.
(10) Where the proper officer is of the opinion that the amount paid under clause (i) of sub-section (8) or clause (i) of sub-section (9) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.
(11) Notwithstanding anything contained in clause (i) or clause (ii) of sub-section (8), penalty under clause (i) of sub-section (5) shall be payable where any amount of self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.
(12) The provisions of this section shall be applicable for determination of tax pertaining to the Financial Year 2024-25 onwards.
Explanation 1.--For the purposes of this section,--
(i) the expression "all proceedings in respect of the said notice" shall not include proceedings under section 132;
(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under this section, the proceedings against all the persons liable to pay penalty under sections 122 and 125 are deemed to be concluded.
Explanation 2.--For the purposes of this Act, the expression "suppression" shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.
Meaning thereby
Limitation for Issuance of Show Cause Notice
Section 74A of the CGST Act effectively consolidates the provisions of Sections 73 and 74. Section 74A introduces a unified provision for the issuance of a show cause notice, irrespective of whether fraud, willful misstatement, or suppression of facts is involved, with a higher penalty applicable in cases of fraud or willful misstatement.
Under Section 73, a show cause notice must be issued at least 3 months prior to the issuance of an order, which is to be passed within 3 years from the due date for filing the annual return for the financial year to which the tax deficiency relates, or 3 years from the date of the erroneous refund. Section 74 requires the show cause notice to be issued at least 6 months prior to the issuance of an order, which must be passed within 5 years from the due date for filing the annual return or 5 years from the date of the erroneous refund.
Section 74A prescribes that the show cause notice must be issued within 42 months from the due date for furnishing the annual return for the financial year to which the tax deficiency relates or within 42 months from the date of the erroneous refund.
Threshold Limit
Section 74A introduces a threshold limit, stating that no show cause notice shall be issued if the tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed or utilized in a financial year is less than Rs. 1,000. Such a threshold limit is not prescribed under Sections 73 or 74 of the CGST Act.
Payment of Penalty
Section 74A(5) provides that the penalty, in cases where tax is not paid, short paid, or input tax credit is wrongly availed or utilized:
- For reasons other than fraud, willful misstatement, or suppression of facts, shall be 10% of the tax due or Rs. 10,000, whichever is higher.
- For reasons involving fraud, willful misstatement, or suppression of facts, the penalty shall be equivalent to the tax due.
Additionally, a penalty is payable where any self-assessed tax or any collected tax remains unpaid for more than 30 days from the due date of payment.
Time Limit for Passing the Order
Section 74A mandates that the proper officer must pass an order within 12 months from the date of issuance of the show cause notice. If the order cannot be issued within the prescribed time, the Commissioner, or an officer authorized by the Commissioner senior in rank to the proper officer but not below the rank of Joint Commissioner, may extend the period by a maximum of 6 months, recording the reasons for such delay in writing.
In contrast, Section 73 requires that the order be issued within 3 years from the due date for filing the return or erroneous refund, while Section 74 prescribes a time limit of 5 years.
Statement
All three Sections 73, 74, and 74Aempower the proper officer to issue a Statement in lieu of a notice for subsequent periods. The service of such a statement shall be deemed to be the service of a notice, provided the grounds relied upon for the subsequent periods are the same as those in the original notice.
No Notice
Section 73(5) allows the taxpayer to pay the tax and interest before the service of the notice or statement, based on self-assessment or the officer's determination, and inform the officer of such payment. In such cases, no notice shall be served for the tax so paid or for any applicable penalty.
Section 74(5) allows the taxpayer to pay the tax, interest, and a penalty of 15% before the service of the notice and notify the proper officer. Upon receipt of such information, no notice shall be served for the tax so paid or for any penalty.
Section 74A(8) allows the person chargeable with tax to pay the amount of tax along with interest under Section 50, either on their own ascertainment or based on the proper officer's determination, before the service of the notice. Upon notifying the proper officer in writing of such payment, no notice under sub-section (1) or statement under sub-section (3) shall be served regarding the tax so paid or any penalty.
Further Notice
If the proper officer believes that the amount paid before service of notice is less than the amount due, a further notice may be issued for the shortfall. This provision is present in Sections 73(7), 74(7), and 74A(10).
Deemed Closure of Show Cause Notice
Section 73(8) provides that if the person liable for tax pays the tax along with interest within 30 days of the issue of the show cause notice, no penalty shall be payable, and all proceedings in respect of the notice shall be deemed concluded.
Section 74(11) provides that if the taxpayer pays the tax, interest, and a penalty of 50% of the tax within 30 days of the communication of the order, all proceedings in respect of the notice shall be deemed concluded.
Similarly, Section 74A(8) allows the taxpayer, in cases not involving fraud, to pay the tax and interest before the notice is served or within 60 days of its issuance, and no penalty shall be payable, concluding the proceedings.
In cases involving fraud, Section 74A(9) allows the taxpayer to pay the tax, interest, and a penalty of 15% before the notice is served or a penalty of 25% within 60 days of the notice issuance, or a penalty of 50% within 60 days of the communication of the order, concluding all proceedings accordingly.
Conclusion
The introduction of Section 74A in the CGST Act marks a significant step towards simplifying the legal framework surrounding the determination and recovery of tax dues under the GST regime. By consolidating and streamlining the provisions of Sections 73 and 74, Section 74A removes the distinction between fraud and non-fraud cases for issuing SCN, implementing a uniform timeline of 42 months from the due date of furnishing the Annual Return.
Additionally, this section provides clearer guidelines for penalty payments, introduces a threshold limit for tax demands, and establishes specific timelines for passing orders, thus fostering greater certainty for taxpayers and tax authorities alike. Importantly, Section 74A balances the compliance burden on taxpayers, extending the time limit for availing reduced penalties in fraud cases from 30 to 60 days, ensuring more time for voluntary compliance. With its insertion into several key sections of the CGST Act, Section 74A reflects the government's intent to make tax administration more efficient while ensuring prompt recovery of taxes due.
Way Forward
As Section 74A comes into effect from November 1, 2024, taxpayers and tax authorities alike must align their procedures with the newly introduced provisions. Businesses must stay vigilant in maintaining accurate records, timely filing of returns, and addressing any discrepancies early to avoid penalties or litigation under the newly inserted section.To ensure smooth implementation, it will be crucial for the government to conduct awareness campaigns, workshops, and training sessions for taxpayers and GST officers. Simplified compliance with more predictable timelines will likely improve tax collection efficiency, reduce disputes, and ultimately contribute to a smoother administration of GST across the country.
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