goods and service tax
Published on 10 April 2025
Understanding Section 74A: Changes to the GST Demand Regime
Introduction to Section 74A: The New GST Demand Regime
Since the financial year 2024-25, there has been a significant amendment in the Central Goods and Services Tax (CGST) Act with the introduction of Section 74A. From November 1, 2024, Section 74A is a consolidating and replacement of the previous Sections 73 (for non-fraud cases) and 74 (for fraud cases) for all recovery, penalty, and demand proceedings concerning non-payment, short payment, wrongful refund, or erroneous utilization of input tax credit (ITC).
Observe that Sections 73 and 74 will still hold good only up to the case of financial year 2023-24.
Key Features and Provisions of Section 74A
1. Harmonized Time Limit for Demand Notices
- Show Cause Notice (SCN): Should be issued within 42 months from the due date of the annual return of the aforesaid financial year, irrespective of fraud considerations.
- Order Issuance: The conclusive order should be given within 12 months from the SCN date. It can be extended by 6 months by the Joint Commissioner or Commissioner, provided it is made justified in writing.
- Exemption if Minor Amount: No notice will be given when the arrear amount is less than ₹1,000.
2. Consolidation of Fraud and Non-Fraud Cases
- Single Procedure: Both fraud and non-fraud cases are now handled under Section 74A, abolishing the necessity of finding the case type prior to issuance of notice.
- Determination During Proceedings: Classification (fraud or non-fraud) will be found during adjudication rather than at the SCN stage.
3. Penalty Structure Under Section 74A
| Situation | Penalty (Non-Fraud) | Penalty (Fraud/Willful Misstatement) |
|---|---|---|
| Payment before SCN | No penalty | 15% tax |
| Payment within 60 days from SCN | No penalty | 25% of tax |
| Payment within 60 days of order | 10% of tax or ₹20,000 (whichever is greater) | 50% of tax |
| Payment within 60 days of order | 10% of tax or ₹20,000 (whichever is higher) | 100% of tax |
- Interest: In all cases, interest under Section 50 is applicable.
- Note: The minimum non-fraud penalty of ₹20,000 (SGST + CGST) has been faulted as being disproportionately high for small defaults.
4. Additional Key Points
- Encouraging Voluntary Compliance: A prolonged 60-day window for transactions on a lower rate of penalty induces voluntary compliance.
- Threshold for Action: Proceedings will not be initiated for differences less than ₹1,000 during a financial year.
- No SCN Format Difference: No indication will be provided in the SCN whether the case is a fraud case or non-fraud case; this will be during the proceedings.
Comparison: Section 74A vs. Sections 73 & 74
| Feature | Section 73 (Old) | Section 74 (Old) | Section 74A (New) |
|---|---|---|---|
| Applicability | Non-fraud cases | Fraud cases | Both, starting FY 2024-25 |
| SCN Time Limit | 3 years (order), 3 months before order | 5 years (order), 6 months before order | 42 months from the date of annual return due |
| Order Time Limit | 3 years from annual return | 5 years from annual return | 12 months from SCN (extendable by 6 months) |
| Penalty (if not paid before SCN) | 10% of tax or ₹10,000 | 100% of tax | 10% of tax |
Conclusion
Section 74A's introduction is a drastic shift from the GST demand regime. By way of simpler procedures and consolidation of fraud and non-fraud cases, it tries to implement a more efficient and transparent tax compliance and enforcement system. Taxpayers are advised to stay informed and follow the new regulations to escape punishment.