The CGST Act, 2017, provides two distinct pathways for the recovery of tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed. Section 73 deals with demands where there is no fraud, wilful misstatement, or suppression of facts. Section 74 deals with demands where fraud, wilful misstatement, or suppression of facts is alleged. The distinction is critical because it determines the penalty, the limitation period, and the burden of proof.
This article explains the differences between Section 73 and Section 74, and the implications for taxpayers.
The Core Distinction
Both sections deal with the same default: tax not paid, short paid, erroneously refunded, or ITC wrongly availed or utilised. The difference lies in the mental element — the presence or absence of fraud, wilful misstatement, or suppression of facts.
- Section 73: Applies where the default is not attributable to fraud, wilful misstatement, or suppression of facts.
- Section 74: Applies where the default is attributable to fraud, wilful misstatement, or suppression of facts.
Penalty Exposure
The penalty exposure varies significantly between the two sections:
- Section 73: Penalty is 10% of the tax or ₹10,000, whichever is higher . If the taxpayer pays the tax with interest before the show cause notice is issued, no penalty is payable. If paid within 30 days of the SCN, the penalty is reduced to 15%.
- Section 74: Penalty is 100% of the tax . If the taxpayer pays the tax with interest before the SCN is issued, the penalty is 15%. If paid within 30 days of the SCN, the penalty is 25%.
Limitation Period
The limitation period for passing an order also differs:
- Section 73: Order must be passed within three years from the due date for filing the annual return for the relevant financial year.
- Section 74: Order must be passed within five years from the due date for filing the annual return for the relevant financial year.
The show cause notice under Section 74 must be issued at least six months before the time limit for passing the order.
The New Section 74A
From FY 2024-25 onwards, a new Section 74A replaces Sections 73 and 74 for tax periods beginning on or after 1st April 2024. Section 74A consolidates the demand provisions into a single section while retaining the distinction between fraud and non-fraud cases for penalty and limitation purposes.
Judicial Developments
The courts have consistently held that proceedings under Section 74 cannot be converted into proceedings under Section 73 at the appellate stage. The GST Appellate Tribunal has held that when fraud allegations under Section 74 fail, the proceedings cannot be converted into a Section 73 proceeding and decided at the appellate stage. The Gujarat High Court has held that an order passed under Section 74 cannot be reclassified to avail amnesty schemes.
Practical Implications for Taxpayers
- If the department alleges fraud under Section 74, the taxpayer must contest the allegations at the earliest stage.
- The burden of proving absence of fraud lies on the taxpayer in Section 74 proceedings.
- Voluntary payment before SCN under Section 73 eliminates penalty entirely; under Section 74, it reduces penalty to 15%.
- The limitation period is shorter under Section 73 and longer under Section 74, giving the department more time in fraud cases.
Conclusion
The distinction between Section 73 and Section 74 is critical for taxpayers. The section invoked determines the penalty, limitation, and procedural burden. Taxpayers should engage professional representation early to challenge any allegation of fraud and to ensure that proceedings are conducted under the correct section.
At Anuj Desai & Associates, we provide expert representation services for GST demand proceedings under Sections 73, 74, and 74A. Our team can help you challenge fraud allegations and protect your interests.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.