Like any other law, if any person does not comply with GST law, then he shall be liable to pay the demand raised by the GST department through by the Notices.
In this article, we will study, the scenarios under which a person may have to face the notices of demand from the GST department and other penalties if such demand has not been paid within the prescribed time as specified in the notice.
Section 73 to 75 of CGST Act, 2017 deals with the demand and recovery under GST law, where
Section73
when a person fails to comply with the provisions of GST law for a reason other than fraud or willful misstatement or suppression of facts. Let’s say, section 73 shall apply in case of Bonafide cases
Section 74
shall apply when a person fails to comply with the provisions of GST law for a reason of fraud or will full misstatement or suppression of facts. Let’s say, section 74 shall apply in case of Mala fide cases.
Section 75 is a supportive section of section 73 and section 74, which explains further provisions of notice and demand order.
Scenarios of facing notice or demand order
A Person may face the notice or demand order under section 73 or section 74 if he has:
- Not paid the taxes
- Short paid the taxes
- Erroneously takes the refund
- Input tax credit wrongly availed or utilized
Although, the language of the sections is a little bit complicated but I’ll try to explain the whole provisions in simple language
Section 73: Bonafide Cases
If the person does not comply with the GST provisions and falls in any of the above scenario then the department shall serve the notice and order him to pay the demand along with interest within the prescribed time.
Under section 73, the department gives 2 offers, before sending the demand order, to settle the demand.
1st Offer: Voluntary Payment
Before sending a legal show-cause notice to the assessee, the department shall communicate the assesse and order him to pay the demand along with interest @ 18% as defined under section 50 of CGST Act, 2017.
If after such communication, the assessee has paid the tax amount along with the interest and information to the department in writing of such payment then no penalty shall be levied and no show cause notice shall not be served to the assessee.
However, if the assessee has not paid the tax along with the interest or short paid the amount then the proper officer shall initiate the proceeding for the rest of the amount by sending the show cause notice and require him to pay the tax amount, interest as per section 50 and the Penalty amount.
The Penalty amount shall be higher of the following:
10% of the Tax Amount or Rs.10,000/-
2nd Offer: 30 days from show-cause notice
If the assesse has paid the tax and interest amount as specified in the show cause notice within 30 days of the issue of such showcase notice then no penalty shall be levied and such notice shall be deemed to be concluded.
Note:
In the 1st offer, if the assessee has paid the tax and interest as per the communication with the proper officer then no penalty shall be levied and
In the 2nd offer, if the assessee has paid the tax and interest within 30 days of serving the show cause notice, then also no penalty shall be levied.
The conclusion is that whether the assessee goes for 1st offer or 2nd offer, the penalty amount shall get nil.
Hence, it will discourage the assessee from paying the tax along with interest under 1st offer and all persons wait for 2nd offer.
Show Cause Notice and Demand Order:-
- As per section 73, the department shall have to send the show cause notice at least 3 months before sending the demand order.
- The maximum time within which demand order is to be issued is 3 years from the due date of furnishing the annual return for the financial year in which the tax is not paid or short paid or ITC wrongly availed or utilized or 3 years from erroneously refund.
As we know that the last date for filing of annual return is 31st December of the succeeding financial year.
For Example: For the FY 18-19, the due date for filing of annual return is 31st December 2019 and demand order relating to FY 18-19 shall be issued within 3 years from 31st December 2019, which is 31st December 2022. Also the as per section 73, the notice shall be required to be issued within 3 months prior to the issue of demand order i.e. 30th September 2022 in our example.
In other words, the notice shall require to be issued within 2 years and 9 months from the due date of annual return.
Section 74: Mala Fide Cases
This section is very much similar to section 73. However, the key difference between section 73 and section 74 is that section 73 deals with bona fide cases and section 74 deal with mala fide cases.
In simple words, if the assesse fails to pay the taxes or short paid or ITC wrongly availed or utilized or erroneously refunded due to fraud, then provisions of section 74 shall apply.
Under this section, there are 3 offers are available to the assesse:
1st Offer: Voluntary Payment:
Before sending a legal show-cause notice to the assesse, the department shall communicate the assesse and order him to pay the demand along with interest @ 18% as defined under section 50 of CGST Act, 2017 and 15% of Penalty.
If after such communication, the assesse has paid the tax amount along with the interest and 15% Penalty and inform to the department in writing of such payment then no penalty shall be levied and no show cause notice shall not be served to the assesse.
However, if the assesse has not paid the tax along with the interest and 15% Penalty or short paid the amount then the proper officer shall initiate the proceeding for the rest of the amount by sending the show cause notice and require him to pay the tax amount, interest as per section 50 and the Penalty amount.
The Penalty amount shall be equivalent to the tax amount.
2nd Offer: 30 days from show-cause notice
If the assesse has paid the tax along with interest amount and the 25% of Penalty as specified in the show cause notice within 30 days of the issue of such showcase notice then such notice shall be deemed to be concluded.
However, If the assesse still fails to pay such amount within 30 days, then the proper officer shall issue the demand order
3rd Offer: 30 days from demand order
If the assesse has paid the tax along with interest amount and the 50% of Penalty as specified in the demand order within 30 days of the issue of demand order then such notice and demand order shall be deemed to be concluded.
Note:
- As per section 74, the department shall have to send the show cause notice at least 6 months before sending the demand order.
- The maximum time within which demand order is to be issued is 5 years from the due date of furnishing the annual return for the financial year in which the tax is not paid or short paid or ITC wrongly availed or utilized or 3 years from erroneously refund.
For Example: For the FY 18-19, the due date for filing of annual return is 31st December 2019 and demand order relating to FY 18-19 shall be issued within 5 years from 31st December 2019, which is 31st December 2024. Also the as per section 74, the notice shall be required to be issued within 6 months prior to the issue of demand order i.e. 30th June 2024 in our example.
In other words, the notice shall require to be issued within 4 years and 6 months from the due date of annual return.
Section 75: General Points relating to section 73 and Section 74
The following points shall be applicable for both sections i.e. 73 and 74 of the CGST Act, 2017
- While calculating the period, if the stay period has been granted by the department then such stay period shall be excluded in computing the period of demand order.
- Before issuing the order, an opportunity of being heard shall be given to the assesse.
- In total 3 adjournments are possible to a party that means the case may be adjourned due to any reason from the assesse side or department side.
- The above provisions shall also be applicable when the interest is in dispute.
Summary of Section 73 and Section 74
These sections shall apply to the assesse when tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilized by the reason of fraud (Section 74) or otherwise (Section 73).
| S.No. | Particulars | Section 73 | Section 74 |
| 1 | Application | Default due to any reason other than fraud i.e. Bonafide Case | Default due to fraud i.e. Mala fide Case |
| 2 | Notice Time Period | At least 3 months prior to the issue of demand order | At least 6 months prior to the issue of demand order |
| 3 | Demand Order Time Period | Within 3 years from the due date of annual Return | Within 5 years from the due date of annual Return |
| 4 | Offer 1 | Before serving of SCN, Pay Tax + Intt @ 18%. Then No penalty and SCN will not be issued |
Before serving of SCN, Pay Tax + Intt @ 18% + 15% Penalty. Then No penalty and SCN will not be issued |
| 5 | Offer 2 | If Tax + Intt@ 18% U/s 50 paid within 30 days of SCN then No penalty and SCN shall be deemed to be concluded |
If Tax + Intt@ 18% U/s 50 +25% Penalty paid within 30 days of SCN then SCN shall deem to be concluded |
| 6 | Offer 3 | __ | If Tax + Intt@ 18% U/s 50 +50% Penalty paid within 30 days of Demand Order then SCN and demand order shall be deemed to be concluded |
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