Determination of Tax Not Paid, Short Paid, or ITC Wrongly Availed (from FY 2024–25 Onwards) – Section 74A of GST

The Finance Act (No. 2) of 2024 introduced Section 74A to the CGST Act, bringing clarity and structured timelines to address instances where tax has not been paid, short paid, erroneously refunded, or where input tax credit (ITC) has been wrongly availed or utilised. This new provision is applicable for the financial year 2024–25 onwards and aims to streamline tax recovery proceedings while balancing taxpayers’ rights.

Let’s explore this provision in detail.

What is Section 74A?

Section 74A deals with the determination and recovery of tax dues arising from underpayment, incorrect refunds, or wrongly availed ITC. It outlines the procedure for issuing show cause notices (SCNs), levying penalties, and offering opportunities for voluntary compliance under different circumstances — whether due to inadvertent errors or willful misstatements.

Key Scenarios Covered Under Section 74A

This section applies when:

• Tax has not been paid or has been paid short.

• A refund has been erroneously issued.

• Input tax credit has been wrongly availed or utilised.

When is a Show Cause Notice Issued?

A proper officer may issue a notice if it appears that any of the above situations have occurred. The taxpayer will be asked to explain why they should not be liable for:

• The unpaid/short-paid tax amount,

• Interest under Section 50, and

• Penalty under the CGST Act.

However, no notice will be issued if the tax amount involved in a financial year is less than ₹1,000.

Time Limits for Issuance of Notice and Orders

• The notice must be issued within 42 months from:

  • The due date of the annual return for the relevant FY, or

  • The date of erroneous refund, whichever is applicable.

• The order determining the final liability must be passed within 12 months of the issuance of the notice.

• This time limit can be extended by up to 6 months by a senior officer (not below Joint Commissioner rank), provided the reasons for delay are recorded in writing.

Statement in Lieu of Notice

If the department wants to include tax periods not covered in the initial notice, it can do so by issuing a statement, provided the grounds are the same as those in the original notice. This statement will be treated as an extension of the initial notice.

Penalty Structure Under Section 74A

The section distinguishes between bonafide errors and fraudulent intent:

1. In Case of Bonafide Errors (No fraud/wilful misstatement):

• Penalty: 10% of tax due or ₹10,000, whichever is higher.

2. In Case of Fraud or Wilful Misstatement:

• Penalty: 100% of the tax due.

Voluntary Compliance: A Taxpayer-Friendly Approach

Taxpayers can opt for voluntary compliance before or shortly after the issuance of a notice:

For Non-Fraud Cases:

• Before Notice: Pay tax + interest. No penalty.

• Within 60 Days After Notice: Pay tax + interest. No penalty. Proceedings concluded.

For Fraudulent Cases:

• Before Notice: Pay tax + interest + 15% penalty. No further action.

• Within 60 Days After Notice: Pay tax + interest + 25% penalty.

• Within 60 Days of Order: Pay tax + interest + 50% penalty.

This staggered penalty system incentivizes early payment and cooperation.

Short Payment Despite Voluntary Payment:

If the proper officer finds that the voluntarily paid amount is less than actually payable, a fresh notice can still be issued for the shortfall.

Penalty on Delayed Self-Assessed Tax:

A penalty will be imposed even if the tax is self-assessed but not paid within 30 days from the due date.

Final Determination and Conclusion of Proceedings

Upon consideration of the taxpayer’s response, the proper officer will issue an order specifying the final tax, interest, and penalty payable. If the taxpayer pays according to the conditions laid out, the proceedings will be considered concluded.

However, this conclusion does not apply to proceedings under Section 132 of the CGST Act (which deals with prosecution for serious offences).

Who Else Is Covered?

If a notice under this section is issued to a main person and other associated persons (like directors or partners), and the proceedings against the main person conclude, the others’ proceedings are also deemed concluded under Sections 122 and 125.

Definition of Suppression

“Suppression” includes:

• Not declaring required facts in returns, statements, or reports.

• Failing to furnish information even when specifically asked in writing by the department.

Applicability Timeline

This provision, Section 74A, is effective for the financial year 2024–25 and onward.

Final Thoughts

Section 74A introduces a balanced framework for dealing with GST defaults. It recognizes the difference between bonafide mistakes and intentional tax evasion, and promotes early resolution through voluntary compliance. Businesses and tax professionals should familiarize themselves with this section to avoid penalties and ensure compliance within prescribed timelines.

If you’re a taxpayer or a business owner, timely reconciliation of returns, proper documentation of ITC claims, and proactive communication with GST authorities will help you stay compliant under the new provisions of Section 74A.

Need Help with GST Compliance?

If you’re looking for expert assistance with GST audits, show cause notices, or voluntary compliance under Section 74A, call us at +91 9769647582.