What is Section 74 of the CGST Act?
Section 74 of the CGST Act 2017 deals with cases where a taxpayer knowingly evades GST. It covers:
- Non-payment of GST
- Short payment of GST
- Wrong availment or utilisation of Input Tax Credit
- Obtaining a refund by fraud
- Misclassification, suppression of facts or falsified records
The key element that triggers action under Section 74 is intent to defraud the government. This distinguishes it from Section 73, which applies to unintentional and genuine mistakes.
Applicability of Section 74 in FY 2024-25?
For FY 2024-25, Section 74 remains applicable in cases involving:
- Fraudulent ITC claims made through fake invoices
- Shell companies created for issuing fake bills
- Manipulation of turnover to reduce GST liability
- Misreporting of outward supplies
- Wrong refund claims
With increased digitisation and data matching by GSTN, the department is actively issuing notices under Section 74 for mismatch cases, especially relating to GSTR-3B vs. GSTR-2A/2B.
Time Limit of Section 74 of the CGST Act
The department must issue the notice within the following timelines:
- 5 years from the due date of the annual return for the relevant financial year
or
- 5 years from the date of the erroneous refund
This is longer than the 3-year limit provided under Section 73 because cases under Section 74 involve fraud.
The order must be issued at least 6 months before the expiry of the limitation period.
Procedure for Issuing a Notice Under Section 74
The process generally includes the following steps:
1. Detection of Potential Fraud
Through data analytics, audits, inspections or third-party information, officers detect discrepancies.
2. Issue of Show Cause Notice (SCN)
The department issues a detailed SCN explaining:
- The alleged fraud
- Tax amount short-paid or wrongly availed
- Evidence collected
- Penalty proposed
3. Opportunity for Reply
The taxpayer can submit explanations and documents to defend the case.
4. Personal Hearing
A hearing is granted before a final order is passed.
5. Final Order
The officer issues the final order confirming the demand if the explanation is not satisfactory.
Options Available for Taxpayers Regarding Demand Notice u/s 74
To reduce penalties and close the matter early, the law provides settlement options:
Before SCN
- Pay full tax + interest + 15% penalty
- No SCN will be issued thereafter.
Within 30 Days of SCN
- Pay full tax + interest + 25% penalty
- Proceedings will be concluded.
Within 30 Days of Final Order
- Pay full tax + interest + 50% penalty
- No further recovery proceedings.
If the taxpayer pays beyond this period, the full penalty of 100% applies.
Section 74 of the CGST Act Penalty
Penalties under Section 74 are stringent:
- Minimum penalty: 15% (when paid voluntarily before SCN)
- After SCN: 25%
- After order: 50%
- Maximum penalty for non-payment: 100% of the tax amount
The penalty structure is designed to discourage fraudulent practices and encourage early settlement.
Wrong availing or utilising of ITC is one of the most common triggers for notices under Section 74 of the CGST Act.
Cases typically include:
- ITC taken on fake invoices
- ITC claimed without receipt of goods/services
- ITC claimed on ineligible items
- Mismatch between GSTR-3B and GSTR-2A/2B
Some key judgments that guide the application of Section 74 include:
1. Bharti Airtel Ltd. v. Union of India
The court held that ITC must be backed by valid invoices and actual receipt of goods/services.
2. M/s NKAS Services Pvt. Ltd.
Emphasised that fraud must be proven with evidence; mere mismatch cannot automatically lead to penalties under Section 74.
3. Suncraft Energy Pvt. Ltd.
Highlighted that suppression of facts or falsified records can directly attract Section 74 proceedings.
4. Fake Invoice Cases
Multiple high-court judgments support strict action under Section 74 for fake ITC claims.
These decisions underline that intent is a crucial factor in invoking Section 74 of the CGST Act 2017.
Need help with GST registration or GST filing? Get in touch with our GST experts who can not only help you register and file your GST, but also assist with GST notice assistance. Connect with an expert today!
