The Goods and Services Tax (GST) framework in India has been constantly evolving to address various compliance and administrative challenges. GST Show Cause Notices (SCNs) issued under Sections 73 and 74 of the GST Act have long been a cornerstone of tax recovery. These sections have provided clarity on addressing cases of tax non-compliance. However, with the introduction of Section 74A in the Finance Act, 2024, the system now incorporates a more comprehensive mechanism for handling tax scrutinise, demands and penalties for transactions and tax periods from the financial year (FY) 2024-25 onwards. This article discuss the new introduced Section 74A and its implications for taxpayers and tax authorities alike.
Overview of Sections 73 and 74
Before we explore the newly introduced Section 74A, it is important to understand the existing framework of Sections 73 and 74 of the GST Act:
- Section 73:
- This section pertains to the determination of tax that has not been paid, has been short paid, has been erroneously refunded, or where Input Tax Credit (ITC) has been wrongly availed or utilized.
- These cases exclude instances involving fraud, willful misstatement, or suppression of facts.
- Section 74:
- This section addresses situations where non-payment, short payment, erroneous refund, or wrongful ITC utilization arises due to fraud, willful misstatement, or suppression of facts.
Both Sections 73 and 74 applied to tax periods up to FY 2023-24 and were instrumental in defining liability and penalties for non-compliance.
The Emergence of Section 74A
With the Finance Act, 2024, Section 74A has been introduced as a replacement framework for demand and recovery from FY 2024-25 onwards. The new section consolidates the processes for issuing SCNs and determining liabilities while introducing stricter timelines and penalties.
Key Scenarios for Issuing an SCN
Under Section 74A, the proper officer may issue an SCN for the following reasons:
- Tax has not been paid or has been short paid.
- Tax has been erroneously refunded.
- ITC has been wrongly availed or utilized.
The SCN serves as a formal notice requiring the taxpayer to provide justification for why they should not pay the specified tax amount, along with applicable interest under Section 50 and penalties.
Provided SCNs will not be issued if the total tax amount involved is less than Rs. 1,000.
Time Limits for SCN Issuance
The issuance of an SCN under Section 74A is bound by the following timelines:
- 42 months from the due date for furnishing the annual return for the relevant financial year.
- 42 months from the date of the erroneous refund, in cases involving refunded amounts.
Where a notice has been issued for any period under this section proper officer may serve a statement for subsequent year containing the details of tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilized for such periods other than those covered under sub-section (1). Service of statement to be deemed to be service of SCN if grounds relied upon are same as mentioned in earlier SCN
Penalty Provisions in Section 74A
Penalties under Section 74A vary based on whether the tax discrepancy involves fraud or other reasons:
- Non-Fraudulent Cases:
- A penalty amounting to 10% of the tax due or Rs. 10,000, whichever is higher, will be imposed.
- Fraudulent Cases:
- The penalty equals the total tax due from the taxpayer.
Issuance of GST Orders
After reviewing the taxpayer’s response to the SCN, the proper officer is required to issue a final order. The timeline for issuing such an order is as follows:
- Within 12 months of the SCN’s issuance.
- An extension of up to 6 months may be granted under certain conditions. Such an extension requires the approval of the Commissioner or an authorized senior officer, provided reasons for the delay are recorded.
Encouraging Voluntary Compliance
Section 74A encourages taxpayers to voluntarily rectify non-compliance before the issuance of an SCN. This provision aims to promote timely tax payments and reduce litigation.
The voluntary payment differ based on whether the case involves fraud or other reasons:
- Non-Fraudulent Cases:
- Taxpayers can settle their liabilities by paying the tax amount along with interest under Section 50. This payment can be based on self-assessment or the proper officer’s determination.
- If the payment is made before the SCN’s issuance, no penalty applies, and proceedings are deemed concluded.
- If an SCN has already been issued, the taxpayer must pay the tax and interest within 60 days of receiving the notice to avoid penalties.
- Fraudulent Cases:
- Taxpayers must pay the tax amount, interest, and a penalty equal to 15% of the tax before the SCN’s issuance.
- After SCN issuance, taxpayers must pay the tax, interest, and a penalty equal to 25% of the tax within 60 days to conclude proceedings.
- If an order has been issued, taxpayers must pay the tax, interest, and a penalty equal to 50% of the tax within 60 days of receiving the order.
Handling Shortfalls in Payment
If the proper officer finds that the voluntary payment made by the taxpayer falls short of the actual liability, they may issue an SCN for the shortfall. This ensures that the total due amount is recovered in full.
Addressing Non-Payment of Self-Assessed Tax
Under Section 74A, a penalty will be imposed if the taxpayer fails to pay self-assessed tax within 30 days from the due date. This provision underscores the importance of timely compliance with self-assessed tax obligations.
Implications of Section 74A
The introduction of Section 74A marks a significant shift in the GST compliance. By consolidating processes and emphasizing stricter timelines, the section aims to reduce delays and ambiguities in tax recovery. At the same time, it encourages voluntary compliance by providing opportunities for taxpayers to settle their liabilities with reduced penalties before formal proceedings are initiated.
For tax authorities, Section 74A offers a streamlined approach to handling non-compliance, ensuring that recovery efforts are efficient and transparent. For taxpayers, understanding these provisions is crucial to avoid unnecessary penalties and legal disputes.
Conclusion
Section 74A of the GST Act introduces a robust framework for addressing tax non-compliance from FY 2024-25 onwards. By defining clear timelines, penalties, and voluntary payment options, it seeks to balance the interests of tax authorities and taxpayers. As the GST regime continues to evolve, stakeholders must remain proactive in understanding and adhering to these provisions to ensure smooth compliance and minimize disputes.
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