Simplified Overview of Section 74A – New Framework for Tax Demand under GST from FY 2024-25

Introduction

The introduction of Section 74A in the CGST Act, 2017 marks a significant shift in the process of determining tax not paid or short paid, or input tax credit wrongly availed or utilised. Applicable from the financial year 2024–25 onwards, this section provides a consolidated procedure that simplifies the assessment and adjudication of tax liabilities while clearly bifurcating between cases involving fraud and those without fraudulent intent. This article breaks down the provision in an easy-to-understand manner with thematic headings for each aspect of the section.

Initiation of Proceedings by Proper Officer

Section 74A(1) empowers the Proper Officer to initiate proceedings where it appears that tax has not been paid, short paid, refunded erroneously, or input tax credit has been wrongly availed or utilised. In such cases, the officer is required to issue a show cause notice to the concerned person.

However, no notice shall be issued if the disputed tax or input tax credit amount is less than Rs.1,000 for a financial year.

Time Limit for Issuance of Notice

As per Section 74A(2), the Proper Officer must issue the notice within 42 months from the due date of furnishing the annual return for the relevant financial year, or from the date of erroneous refund.

Supplementary Statement for Other Periods

Section 74A(3) allows the officer to issue a supplementary statement for periods not covered in the original notice, provided the grounds remain the same. As per Section 74A(4), such a statement will be treated as if it were a notice under sub-section (1).

Quantum of Penalty Based on Nature of Default

Section 74A(5) bifurcates the penalty structure into two categories:

• In cases without fraud, wilful misstatement, or suppression, the penalty is 10% of tax due or Rs.10,000, whichever is higher.

• In cases involving fraud, wilful misstatement, or suppression, the penalty equals 100% of the tax due. 

Issuance of Order After Hearing

According to Section 74A(6), the officer must consider any reply filed and then issue an order determining the tax, interest, and penalty.

Time Limit for Passing the Order

Section 74A(7) requires that such an order be passed within 12 months from the date of the notice. However, this period can be extended by a maximum of 6 months by a senior officer (Joint Commissioner or above) after recording the reasons in writing.

Voluntary Payment in Non-Fraud Cases

Section 74A(8) provides an opportunity to avoid penalty in non-fraud cases:

(i) If tax and interest are paid before service of notice and informed in writing, no notice or penalty shall follow.

(ii) If paid within 60 days of notice, penalty is waived, and proceedings conclude.

Voluntary Payment in Fraud Cases

Section 74A(9) offers three stages of reduced penalty in fraud cases:

(i) Before notice – pay tax, interest, and 15% penalty: no notice is issued.

(ii) Within 60 days of notice – pay tax, interest, and 25% penalty: proceedings conclude.

(iii) Within 60 days of order – pay tax, interest, and 50% penalty: proceedings conclude.

Shortfall in Voluntary Payment

If the officer finds the voluntary payment under clause (i) of sub-sections (8) or (9) is less than actually payable, he may issue notice for the remaining amount under Section 74A(10).

Special Penalty Condition for Self-Assessed Tax

Section 74A(11) clarifies that even if voluntary payment is made, penalty under clause (i) of sub-section (5) will still apply if self-assessed tax or collected tax is not paid within 30 days from its due date.

Applicability Period

Section 74A(12) specifies that the provisions of this section apply only for cases pertaining to financial year 2024–25 and onwards.

Explanation for Closure of Proceedings and Suppression

Explanation 1 provides two key clarifications:

(i) “All proceedings in respect of the said notice” do not include prosecution under Section 132.

(ii) If the main person’s case is concluded under this section, proceedings against other persons under Sections 122 and 125 are also deemed to be concluded.

Explanation 2 defines “suppression” as failure to declare required information in returns or failure to furnish such information on written request.

Practical implications of Section 74A of the CGST Act, 2017, with focus on how it will affect taxpayers, consultants, and the GST department in real-life scenarios:

1. Applicable Only from FY 2024–25 Onwards

This section will only apply to cases starting from FY 2024–25. For earlier years, Sections 73 and 74 will continue to govern disputes regarding tax shortfall, ITC misuse, or excess refunds. Hence, consultants must carefully check the relevant year before applying this section.

2. Unified Procedure for Both Fraud and Non-Fraud Cases

Unlike earlier where Sections 73 and 74 were separately invoked based on presence or absence of fraud, Section 74A combines both situations, but differentiates through penalty slabs. This will simplify drafting and responding to notices, as only one provision applies.

3. Time Limit of 42 Months to Issue Notice

The department gets a clear, extended time frame of 42 months from the due date of annual return or from the erroneous refund date. This provides greater room to initiate action, especially in complex cases, but also increases uncertainty for taxpayers due to longer exposure period.

4. No Action for Amounts Less Than Rs.1,000

Minor mismatches or shortfalls below Rs.1,000 in a financial year will not attract any notice. This threshold will help reduce compliance burden for small taxpayers and save departmental effort on trivial issues.

5. Voluntary Payment Option Before or After Notice

Taxpayers are given a clear opportunity to avoid notices and penalty by paying tax and interest voluntarily in non-fraud cases or by paying tax, interest, and reduced penalty in fraud cases. This promotes a self-compliance environment and allows early resolution.

Example:

A taxpayer who discovers a shortfall in ITC availed due to a clerical mistake in FY 2024–25 can pay tax and interest before receiving notice and inform the officer. No penalty will apply, and no notice will be issued.

6. Graduated Penalty in Fraud Cases

There is a tiered penalty system in fraud cases — 15%, 25%, and 50% — depending on the stage of payment. This incentivizes early settlement, even in fraud cases, by offering reduced penal consequences.

7. Statement in Lieu of Notice

Where a notice is already issued for a period, the department can issue a statement for other periods based on the same grounds. This simplifies proceedings and prevents multiple show cause notices, thereby reducing litigation volume.

8. Department Can Proceed for Short Payment Even After Voluntary Payment

If a taxpayer pays voluntarily but the amount is found insufficient, the department can still issue notice for the balance amount. So, careful calculation before voluntary payment is crucial to avoid further proceedings.

9. Mandatory Penalty for Late Payment of Self-Assessed Tax

Even in non-fraud cases, if self-assessed tax or collected tax is not paid within 30 days from due date, penalty under sub-section (5)(i) applies mandatorily. Businesses must ensure timely payment of GSTR-3B liabilities to avoid penal exposure.

10. Deemed Conclusion of Proceedings for Related Parties

If proceedings against the main person are concluded under Section 74A, penalty proceedings against other related persons (e.g., directors, brokers, suppliers) under Sections 122 and 125 are also deemed concluded. This helps in group settlements and reduces multiple litigation fronts.

11. Proceedings Exclude Prosecution

Even if penalty and tax dues are settled under Section 74A, criminal prosecution under Section 132 can still be initiated where applicable. This distinction must be understood while advising clients in high-value or willful default cases.

12. Practical Impact on GST Audits and Assessments

With this section in force, departmental officers and consultants must change their assessment templates and standard replies, especially for the years from 2024–25 onward. Pre-drafted formats based on Section 73/74 would no longer be sufficient.

Conclusion

Section 74A introduces a streamlined, self-compliance-based approach for recovery of short paid taxes, wrongly availed ITC, and erroneous refunds from FY 2024–25. While it gives taxpayers more clarity and options for voluntary resolution, it also increases the responsibility for accurate tax payments and timely response. Legal practitioners, accountants, and GST officers must train themselves afresh for handling notices and payments under this new framework.