Section 73 or Section 74? How to tell which applies to your GST demand, what changes on time limits and penalty, and how to contest the notice step by step.
Under the CGST Act, 2017 a demand for tax not paid or short paid, tax erroneously refunded, or input tax credit wrongly availed or utilised, is raised under Section 73 in the normal course, and under Section 74 where the proper officer is of the view that the short payment is by reason of fraud, wilful misstatement or suppression of facts to evade tax. The section under which the show cause notice has been issued thus decides the period of limitation, the quantum of penalty and the burden which lies on the department, and is the first thing to be looked at when such a notice is received.
Under Section 73, the notice is required to be issued at least three months prior to the time limit for passing the order, which is three years from the due date of filing the annual return for the year to which the demand relates, so that in effect the notice must be issued within two years and nine months. The penalty, where the tax is not paid within 30 days of the notice, is 10 per cent of the tax or Rs. 10,000, whichever is higher, and no penalty is payable where the tax and interest are paid before the issue of notice or within 30 days thereof. Under Section 74, the order can be passed within five years from the due date of the annual return and the notice within four years and six months, and the penalty is equal to 100 per cent of the tax, reducible to 15 per cent if the tax, interest and penalty are paid before the notice, 25 per cent if paid within 30 days of the notice and 50 per cent if paid within 30 days of the order. Further, in a Section 74 case the burden is on the department not only to establish the short payment but also the intention to evade tax.
In respect of Section 74A, the notice is to be issued within 42 months from the due date of the annual return and the order within 12 months from the date of notice, with a penalty of 10 per cent of tax or Rs. 10,000, whichever is higher, in non-fraud cases and 100 per cent in cases involving fraud, subject to reduction for early payment as provided therein. It may also be noted that no notice is to be issued under Section 74A where the amount of tax involved is less than Rs. 1,000.
Read More: Section 74A GST Explained
Take the case of two traders in Gurugram, each of whom receives a show cause notice in the same week demanding reversal of input tax credit of Rs. 12 lakh for FY 2019-20, one notice having been issued under Section 73 and the other under Section 74. If the demand is confirmed, the penalty in the first case would be 10 per cent of the tax i.e. Rs. 1.2 lakh, whereas in the second case it can be equal to the tax itself i.e. a further Rs. 12 lakh, apart from the longer period of limitation available to the department and the allegation of fraud on record.
It is pertinent to note that Section 73 is the general provision applicable in all cases other than those involving fraud, wilful misstatement or suppression of facts to evade tax, and Section 74 can be invoked only where the department is in a position to allege and establish such conduct. For tax periods from FY 2024-25 onwards, both these sections have been replaced by Section 74A inserted vide the Finance Act, 2024, which provides a common procedure with separate consequences for fraud and non-fraud cases.
For invoking Section 74, the show cause notice itself must set out the facts constituting fraud, wilful misstatement or suppression, and the bare use of the word "suppression" is not sufficient. Suppression, as held by the courts in a long line of decisions under the erstwhile Central Excise and Service Tax laws, means a deliberate act with the intention to evade tax, and where the mismatch is evident from the returns filed or the data already with the department, or the dispute is one of bona fide interpretation such as classification, the matter would ordinarily fall within Section 73.
Also Read: Fighting a Suppression Allegation in a Section 73 vs 74 Case
As per Section 75(2), where the charge of fraud or suppression is not established, the officer is to redetermine the tax as if the notice had been issued under Section 73, and the CBIC has clarified the manner of doing so vide Circular No. 254/11/2025-GST. Whether a demand otherwise time barred under Section 73 can be revived in this manner is a matter presently pending before the courts, and the plea of limitation should therefore be taken in the reply itself.
The notice is first to be examined for any defect, in that it is required to quantify the demand, state the grounds for each allegation and be accompanied by the documents relied upon, and a vague or unquantified notice is liable to be set aside on that ground alone. The Hon'ble Supreme Court has examined the requirements of a valid show cause notice in its rulings of August 2026, which we have discussed in a separate case study. The question of limitation is thereafter to be examined with reference to the due date of the annual return for the relevant year, keeping in mind that the time limits for the earlier years were extended by notifications issued from time to time.
On the merits, a decision has to be taken whether the tax is to be paid, the demand contested in full, or a part paid and the balance contested, inasmuch as payment of the undisputed portion stops the running of interest and in an appropriate case avoids or reduces the penalty. The reply in Form DRC-06, which is ordinarily to be filed within 30 days, should be accompanied by a reconciliation linking the demand with the returns and books of account, copies of the relevant invoices and proof of payment, and the legal submissions on limitation and on the inapplicability of Section 74, and should also contain a request for personal hearing, care being taken that nothing in the reply can be read as an admission of suppression. Since an opportunity of hearing is required to be granted before an adverse order is passed and the number of adjournments is restricted under the Act, the hearings ought to be attended and written submissions filed on each occasion.
Read More: 10 Key Points When Replying to a GST Notice
Where the order goes beyond the notice, ignores the reply or has been passed without granting a hearing, an appeal lies before the Appellate Authority within three months from the date of communication of the order, upon payment of a pre-deposit of 10 per cent of the tax in dispute subject to the prescribed ceiling, and thereafter before the GST Appellate Tribunal, and on payment of the pre-deposit the recovery of the balance amount is deemed to be stayed.
Also Read: GST Appeal Procedure, GSTAT Complete Guide and GST Bank Account Freeze and Your Recovery Rights
Disclaimer: The contents of this article are for general information only.
Section 73 applies in cases not involving fraud, wilful misstatement or suppression of facts and provides for a shorter period of limitation and a penalty of 10 per cent of tax, whereas Section 74 applies where such conduct is alleged and provides for a longer period and a penalty which can extend to 100 per cent of the tax.
For tax periods from FY 2024-25 onwards the demand is to be raised under Section 74A, though Sections 73 and 74 continue to govern the earlier periods.
The extended period can be invoked only where there is material to show fraud, wilful misstatement or suppression with intent to evade tax, and a notice which does not disclose such material is liable to be challenged.
In a Section 73 case no penalty is payable where the tax and interest are paid before the notice or within 30 days thereof, and under Section 74 the penalty stands reduced depending on the stage at which the payment is made.
An appeal can be filed before the Appellate Authority within three months alongwith the pre-deposit, and where the order contains an error apparent on the face of the record a rectification application under Section 161 may also be considered.
DSRV & Co. LLP has handled tax disputes since 1987, from the excise era through GST. We're an ICAI-registered, peer-reviewed CA firm in Gurugram. Send us the notice and we'll check limitation, the choice of section and the numbers, and tell you plainly what can be cut.
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