Demand Under Sections 73 and 74 of the CGST Act: Overview for CA Final

Understand Demand Under Sections 73 and 74 - Overview

Key rules to remember

Cases covered

Tax not paid | short paid | erroneously refunded | ITC wrongly availed or utilised

Same four situations under both sections 73 and 74. The reason for the default decides the section.

Section 73 trigger

Default without fraud, wilful misstatement or suppression

Applies to FY 2017-18 to FY 2023-24 demands.

Section 74 trigger

Default by reason of fraud, or wilful misstatement, or suppression of facts to evade tax

Applies to FY 2017-18 to FY 2023-24 demands. The department must have grounds to allege the intent.

Section 73 time limits

Notice: at least 3 months before the last date for order | Order: within 3 years from the due date of annual return

So the latest notice date is 2 years 9 months from the due date of annual return.

Section 74 time limits

Notice: at least 6 months before the last date for order | Order: within 5 years from the due date of annual return

So the latest notice date is 4 years 6 months from the due date of annual return.

Section 73 penalty

Higher of 10% of tax due or ₹10,000

No penalty is payable only if tax and interest are paid before the notice (section 73(5)) or within 30 days of the notice (section 73(8)). Proceedings are then concluded. Once the order is passed, the penalty of the higher of 10% of tax or ₹10,000 applies.

Section 74 penalty

Penalty equal to the tax due (100% of tax)

The 100% penalty applies where an order is passed and the relief is not availed. To close proceedings, pay tax, interest and penalty at the stated rate: 15% before notice, 25% within 30 days of notice, or 50% within 30 days of the order.

Interest

Payable under section 50 on the tax short paid, wrongly availed or wrongly refunded

Interest is charged on the tax in all cases. It is separate from penalty.

Section 74A

Single demand section for FY 2024-25 onwards, for fraud and non-fraud cases

Replaces the 73/74 split for these years. Notice within 42 months (non-fraud) or 54 months (fraud) from the due date of the annual return; order within 12 months of the notice. Penalty: higher of 10% of tax or ₹10,000 for non-fraud, nil only if tax and interest are paid before notice or within 60 days of notice; if payment is made within 60 days of the order, this penalty must be paid along with tax and interest. For fraud, 100% of tax, reduced to 15%, 25% or 50% of tax if tax, interest and that penalty are paid early.

How to solve Demand Under Sections 73 and 74 - Overview questions

1. 1Note the financial year of the default. If it is FY 2024-25 or later, say section 74A applies and use its 42-month or 54-month limit. If it is FY 2017-18 to FY 2023-24, go to step 2.
2. 2Identify the type of default: tax not paid, short paid, erroneously refunded, or ITC wrongly availed or utilised.
3. 3Read the facts for the reason. Look for words like fraud, forged invoices, concealment, false statement or suppression. If you find them, choose section 74. If the facts show a bona fide error or a difference of view on law, choose section 73.
4. 4Fix the time limit. Take the due date of the annual return for that year. Add 3 years (section 73) or 5 years (section 74) for the order, and subtract 3 or 6 months for the last date of notice.
5. 5Compute the demand: tax plus interest under section 50 plus penalty (the higher of 10% or ₹10,000 under section 73; equal to the tax under section 74).
6. 6Apply the relief for early payment. Under section 73, if tax and interest are paid before notice (section 73(5)) or within 30 days of the notice (section 73(8)), no penalty is payable and proceedings are concluded. If payment is made only after the order, the higher of 10% or ₹10,000 applies. Under section 74, pay tax, interest and 15% penalty before notice, 25% within 30 days of notice, or 50% within 30 days of the order. Show the amount payable in each case.
7. 7Write the conclusion in provision-facts-conclusion form. State the section, link the facts, and give the amount payable and the last date.

Quickest way: Four-question check: Year, Reason, Time, Penalty

Common mistakes in Demand Under Sections 73 and 74 - Overview

• Applying section 74 whenever the amount is large.

  Students link big amounts to fraud.

  Fix: The amount does not decide the section. Only the reason (fraud, wilful misstatement or suppression) does. Without such facts, apply section 73.

• Counting the time limit from the end of the financial year.

  It feels natural to start from the year-end.

  Fix: For 73, 74 and 74A, count from the due date of the annual return for that financial year. For erroneous refund, count from the date of refund.

• Ignoring section 74A for recent years, or treating it as only a year-based switch.

  Older notes only discuss sections 73 and 74.

  Fix: Check the financial year first. For FY 2024-25 onwards, name section 74A and apply its own limits: 42 months for non-fraud and 54 months for fraud for the notice, then 12 months for the order. Sections 73 and 74 apply to earlier years.

• Dropping interest while computing the amount payable.

  Students focus on tax and penalty.

  Fix: Interest under section 50 is charged on the tax in every case. Add it as a separate line in your working.

• Mixing up the penalty relief percentages under section 74, or forgetting that tax and interest must also be paid.

  There are three slabs (15%, 25%, 50%) and they look alike.

  Fix: Link each percentage to its stage: 15% before notice, 25% within 30 days of notice, 50% within 30 days of order. Each relief needs tax, interest and that penalty paid. Without payment, an order imposes a penalty equal to the tax.

• Saying the department can demand under section 73 or 74 without a notice and hearing.

  Students skip the procedure.

  Fix: State that a show cause notice and an opportunity of hearing come first, then an order is passed. Early payment may avoid the notice altogether.

Worked examples