GST Notices Must State the Case, and Orders Must Answer the Defence

Summary: CBIC Circular No. 258/04/2026-GST sets out guidance for GST demand notices, adjudication and first appeals. This article examines pre-notice intimation, evidence-based show cause notices, the distinction between fraud and non-fraud demands, the applicable provisions for different financial years, overlapping Central and State proceedings, hearing safeguards, and speaking orders that address taxpayers’ submissions. It explains limitation and penalty implications under Sections 73, 74 and 74A, the limited scope of rectification under Section 161, and first-appeal procedure. Hypothetical illustrations show how taxpayers can prepare reconciliations, respond to alleged ineligible ITC or fraud, document hearings, identify discrepancies between notices and orders, and maintain remedy deadlines.

GST Notices Must State the Case, and Orders Must Answer the Defence
A practical reading of CBIC Circular No. 258/04/2026-GST, with illustrations for taxpayers and professionals

A taxpayer should not have to guess why a demand has been proposed. Equally, after filing a detailed reply, the taxpayer should not receive an order which merely says that the reply has been considered and the demand is confirmed.

These are not minor drafting complaints. A notice which does not disclose the case prevents an effective reply; an order which does not explain its findings leaves the taxpayer unable to understand why the defence has failed.

CBIC Circular No. 258/04/2026-GST dated 26 October 2026 addresses these concerns through guidelines issued under Section 168(1) for demand, adjudication and appeal proceedings (Circular, paragraphs 1.2–1.3). Its stated purpose includes improving the examination of taxpayers’ submissions, evidence and judicial authorities, and reducing avoidable litigation arising from vague or non-speaking orders (Circular, paragraphs 1.2–1.3).

The practical value of the Circular lies in how it is used. It should help taxpayers prepare a better defence and require officers to explain the proposed liability and the final determination with reference to the actual record.

All illustrations below are hypothetical. Unless otherwise stated, the amounts illustrate the disputed tax component without separately dividing CGST and SGST; the actual computation must follow the applicable enactment, tax head and records.

Pre-notice intimation is an opportunity, not a compulsory first step in every case

Paragraph 2 states that Part A of FORM GST DRC-01A may be issued, wherever feasible, under Rule 142(1A), before a formal notice under Sections 73, 74 or 74A (Circular, paragraph 2). It should therefore not be described as an invariably mandatory preliminary notice whose absence, by itself, invalidates every subsequent proceeding (Circular, paragraph 2).

For the taxpayer, the sensible course is to use this stage properly. A reconciliation supported by invoices, return extracts and payment records is more useful than a general denial.

Illustration: A mismatch of ₹90,000 may require more than one answer

Assume that DRC-01A identifies a difference of ₹90,000 between the liability reported in GSTR-1 and GSTR-3B. On checking the records, the taxpayer finds that ₹30,000 arises from duplicate reporting in GSTR-1, while ₹60,000 represents an actual short payment.

The reply should separate the two amounts. It should identify the duplicated invoice and the lawful correction position, explain the genuine short payment, and examine the applicable payment and interest requirements.

Neither “the entire difference is clerical” nor “the portal shows ₹90,000, so pay everything” is an adequate professional response. The explanation must establish what the difference actually represents.

The notice must disclose the allegation, not merely quote the section

The Circular treats the SCN as the foundational document which sets the framework for adjudication (Circular, paragraphs 3–3.1). Its suggested structure covers the taxpayer’s particulars, background, evidence, legal provisions, charges, quantification, adjudicating authority and reply deadline (Circular, paragraphs 4–4.6).

Paragraph 4 describes the structure as one which a well-drafted notice should ideally contain, allowing variation according to the case; paragraph 4.5 asks officers to make efforts to demarcate multi-year demands financial year-wise (Circular, paragraphs 4 and 4.5). These qualifications should be respected rather than converted into a claim that every departure from a preferred layout automatically nullifies the notice.

The more important question is whether the taxpayer can understand and answer the proposed case. A useful review asks:

• Transaction: Which invoices, supplies, credits or payments are disputed?
• Period: Which tax periods and financial years are involved?
• Evidence: What material supports the proposed conclusion?
• Provision: How does the alleged conduct contravene the provision invoked?
• Computation: How has the demand been calculated?
• Response: What explanation and documents are required?

For demand proceedings, the Circular requires the prescribed electronic summary in DRC-01 or DRC-02 to accompany the notice or statement, as applicable (Circular, paragraph 3.2). The summary should not be confused with a complete statement of the allegations merely because it contains a demand figure.

Illustration: “Supplier is non-existent” does not answer every factual question

Assume that an SCN proposes denial of ₹4,00,000 ITC on purchases made in May 2024 because an inspection in 2026 found the supplier absent from its registered premises. The notice should explain the material connecting that finding with the disputed purchases, consistently with the Circular’s requirements for factual particulars and supporting evidence (Circular, paragraphs 4.1–4.4).

The taxpayer should ask for the inspection date, report, relevant statements, invoice schedule and the basis for alleging non-receipt. At the same time, the taxpayer should assemble its own evidence of movement, receipt, accounting, payment and subsequent disposal; attacking the inspection report is not a substitute for proving the transactions.

The Circular cites Nice Enterprises and G.R. Infra Project Ltd. in explaining the need for adequate particulars and the inability to cure fundamental notice deficiencies later (Circular, paragraphs 4.1 and 4.4). Before relying independently upon either judgment in litigation, the professional should examine its full text and applicability instead of reproducing a case name from a summary.

A tax discrepancy and a fraud allegation require different examinations

The Circular states that non-payment of GST, or a discrepancy noticed during scrutiny, does not by itself justify invocation of Section 74(1) or Section 74A(5)(ii) (Circular, paragraphs 5.3–5.4). The notice must disclose material supporting fraud, wilful misstatement or suppression with intent to evade tax, rather than mechanically repeating those expressions (Circular, paragraphs 5.1–5.4).

Paragraph 5.2 distinguishes an incorrect statement from a knowingly false statement and emphasises the deliberate character of suppression relied upon for evasion (Circular, paragraph 5.2). This distinction matters both to the officer framing the allegation and to the professional preparing the reply.

Illustration: A disclosed accounting difference is not the same as fabricated purchases

In the first situation, turnover is recorded in the books and reported in GSTR-1, but part of the tax is omitted from GSTR-3B because of an identified posting error. The professional should explain the error, establish the reporting trail and separately examine the actual tax default.

In the second situation, assume that the investigation produces material indicating fabricated invoices, no movement of goods and circular payments. That material would require a substantially different factual answer; it cannot be met merely by saying that every mismatch is innocent.

The Circular’s safeguard is against an automatic inference of fraud, not against a properly evidenced investigation (Circular, paragraphs 5.1–5.4). The taxpayer should therefore answer the evidence rather than rely only on the label attached to the proceeding.

In an ITC dispute, two separate submissions should be prepared. One should establish entitlement to credit; the other should address the allegation of deliberate evasion, without assuming that success on either question necessarily resolves the other.

The financial year determines the demand framework

Sections 73 and 74 apply to determination of tax pertaining to periods up to FY 2023–24, whereas Section 74A expressly applies from FY 2024–25 onwards (Section 73(12); Section 74(12); Section 74A(12)). Paragraph 6 recognises the common notice-issuance timeline under Section 74A while requiring separate grounds and quantification for fraud and non-fraud allegations (Circular, paragraph 6).

The distinction between the time for issuing a notice and the time for passing an order must not be overlooked. The basic Central statutory framework is:

This table is a starting point, not a substitute for a case-specific limitation working. Before pleading a time bar, check the relevant due date, applicable notifications, exclusions, extensions, service records, judicial directions and corresponding State provisions.

Most importantly, Section 74A does not provide a shorter notice limitation merely because fraud is not established; its 42-month notice period covers both categories, while the penalty provisions distinguish them (Section 74A(2) and (5)). The older extended-period argument under Section 74 must therefore not be copied indiscriminately into a FY 2024–25 dispute.

Illustration: The penalty distinction remains substantial

Assume that ₹10,00,000 is finally determined as tax due under one applicable enactment and that no payment concession applies. Under Section 74A(5), the ordinary non-fraud penalty would be ₹1,00,000, being 10% of that tax and exceeding ₹10,000, while the fraud-related penalty would be ₹10,00,000 (Section 74A(5)).

The consequence is significant even though the notice limitation is common. The reply should therefore contest an unsupported fraud allegation without confusing that objection with the separate dispute over the principal tax.

Section 74A also contains its own payment concessions, including a sixty-day post-notice window for the specified non-fraud payment and separate reduced-penalty arrangements for fraud cases (Section 74A(8)–(9)). These require examination of their precise conditions and exceptions; an old Section 74 concession table should not be used mechanically for a Section 74A case.

Later-period notices and mixed demands must be examined issue by issue

Paragraph 5.5 states that a subsequent-period notice on the same facts and grounds should not ordinarily repeat the fraud allegation without fresh and independent grounds, and refers to the applicable non-fraud route (Circular, paragraph 5.5). It is not a blanket prohibition against every later-period demand.

Illustration: The Department already knows the disputed accounting treatment

Assume that an earlier notice specifically examines an openly recorded accounting treatment. A later notice concerns the same treatment for the next year, with no new material showing deliberate concealment.

The taxpayer should place both notices side by side and ask what fresh and independent basis supports the repeated fraud allegation, applying paragraph 5.5 (Circular, paragraph 5.5). If the later case instead involves independently discovered unreported supplies, the factual position must be answered on that additional material.

For a notice combining Section 73 and Section 74 demands, the Circular requires reasons for the classification and separate quantification (Circular, paragraph 6). For multi-year notices, it also calls for efforts to show the demand financial year-wise (Circular, paragraph 4.5).

Illustration: One total can conceal different disputes

Assume that a notice for earlier years proposes ₹3,50,000 as follows:

The professional should prepare an answer against each row, not only against the aggregate. A combined amount should not hide different factual explanations, limitation questions or penalty consequences.

Parallel proceedings: compare the liability, not merely the year

Paragraph 7 addresses the restriction on Central and State proceedings on the same subject matter and refers to Armour Security (Circular, paragraph 7). In that judgment, the Supreme Court distinguished formal adjudicatory proceedings initiated by an SCN from summons, search and investigation, and examined identical or overlapping liability arising from the particular contravention (Armour Security, 2025 INSC 982).

Consequently, an earlier summons should not be presented as automatically invalidating every later inquiry (Armour Security). Equally, the same taxpayer and financial year should not replace a careful comparison of the alleged contravention, transactions and liability.

Illustration: Two ITC demands on the same invoices

Assume that a State SCN proposes denial of ₹2,00,000 ITC on twenty identified invoices and a Central SCN later proposes the same denial on those invoices for the same alleged defect. Those facts call for a specific objection identifying the overlapping liability, rather than a general statement that two departments have contacted the taxpayer.

Attach a comparison of the notices, invoice numbers, grounds and amounts. Where the second matter concerns a different contravention, explain that distinction instead of claiming duplication merely because both matters relate to the same year.

Armour Security also directs taxpayers to respond and notify the later authority in writing of an overlapping inquiry, with coordination between the authorities to verify and resolve the position (Armour Security, paragraph 97). A jurisdictional objection is therefore a reason to make a documented response, not to ignore the communication.

A hearing must be effective, but adjournments are not unlimited

The Circular reiterates that Section 75(4) requires a hearing where requested in writing or where an adverse decision is contemplated (Circular, paragraph 10.1). It refers to the statutory ceiling of three adjournments and describes up to four hearing opportunities, while requiring judicious consideration and recorded reasons for declining an adjournment (Circular, paragraph 10.1(i)).

This does not create an unconditional entitlement to insist upon four hearings regardless of sufficient cause or conduct (Circular, paragraph 10.1(i)). Taxpayers should attend when ready and seek an adjournment promptly, with a specific explanation and supporting record where needed.

Illustration: A genuine adjournment request

Assume that the authorised representative is unexpectedly hospitalised shortly before the hearing. The taxpayer should promptly submit the request, identify the hearing date, attach available supporting material and ask for a fresh date.

The hearing file should preserve the request and its acknowledgement. If the request is declined, the recorded reason can then be examined against the Circular’s guidance rather than reconstructed later from oral recollection.

The Circular encourages virtual hearings and requires proper hearing records; it also requires a fresh hearing by a succeeding adjudicating authority where the earlier authority is transferred during the proceedings (Circular, paragraph 10.1(ii)–(vii)). The taxpayer should keep its own brief record of submissions and documents tendered so that the hearing can be connected with the final order.

The preferred communication of an order within one month after hearing is procedural guidance, while the Circular also reproduces the Saheli Leasing passage concerning early pronouncement and a three-month period after arguments (Circular, paragraphs 10.1(v) and 11.1). These passages should not be converted into an automatic statutory cancellation of every order issued after one month; the applicable statutory deadline must be examined separately.

The final order must answer the material defence

Paragraph 11.5 requires examination of submissions and findings on whether the material is accepted, partly accepted or rejected, with reasons; it expressly cautions against generic wording such as “reply has been considered” (Circular, paragraph 11.5). Paragraph 11.6 also reiterates the restriction under Section 75(7) against confirming amounts beyond the notice or demands on grounds outside it (Circular, paragraph 11.6).

Illustration: A payment already made must be dealt with

Assume that an SCN proposes ₹5,00,000 and the taxpayer produces a payment record for ₹2,00,000 relating to the same liability. The reply should establish the connection through the tax period, tax head, payment reference and issue-wise working.

The order should then explain the treatment of the proved payment and the remaining liability, consistently with the Circular’s requirement for clear appropriation and adjustment (Circular, paragraph 11.9.3). Reproducing the original ₹5,00,000 without addressing that evidence would leave a material question unanswered.

Illustration: A new allegation cannot simply appear in the order

Assume that an SCN concerns only ITC on specified purchase invoices, but the final order also confirms a separate demand for unreported sales not proposed in that notice. That additional issue must be tested against Section 75(7); the Circular says a newly identified issue may be pursued through a separate SCN (Circular, paragraph 11.6).

The reply and appeal should identify the actual difference between the notice and order. A side-by-side schedule of allegations and findings is more effective than a broad allegation that the officer has exceeded jurisdiction.

Interest requires equal care. For wrongly availed ITC, Rule 88B(3) links interest to the amount wrongly availed and utilised and the relevant utilisation period, rather than treating every availment as immediate utilisation (Rule 88B(3)).

Similarly, although the Circular refers to the discipline of Section 126, subsection (6) excludes penalties specified as a fixed sum or fixed percentage from that section’s operation (Circular, paragraph 11.10; Section 126(6)). Section 126 should therefore not be presented as a general power to waive every statutory percentage-based penalty.

Technology can assist drafting; it cannot supply missing findings

Paragraph 11.7 requires verification of the accuracy, relevance and current legal status of judgments cited, and reasons where a taxpayer’s authority is distinguished (Circular, paragraph 11.7). Paragraph 11.7.1 separately requires human oversight and independent verification of AI-derived information, leaving responsibility for the order with the issuing authority (Circular, paragraph 11.7.1).

The same professional discipline is sensible when preparing a taxpayer’s reply. Before citing a judgment, verify the case, court, date, proposition and relevance to the disputed year; a convenient quotation is not enough.

Illustration: An impressive citation may still be wrong

Assume that a drafting tool supplies a judgment said to allow ITC whenever an invoice appears in GSTR-2B. Before using it, the professional should read the actual decision and check whether it concerns the same statutory period and issue.

If the citation cannot be verified, omit it. A reply supported by the correct records and provisions is stronger than one burdened with authorities which do not establish the proposition claimed.

Rectification and appeal serve different purposes

The Circular explains rectification under Section 161 as a limited remedy for an error apparent on the face of the record, not a rehearing of disputed facts or merits (Circular, paragraphs 14–14.2.2). It states the three-month period for bringing the error to notice, the six-month rectification limit and the exception to that six-month limit for specified accidental clerical or arithmetical corrections (Circular, paragraph 14).

Illustration: Addition error versus disputed receipt of goods

Assume that an order accepts two figures of ₹1,00,000 and ₹50,000 but accidentally totals them as ₹1,80,000. If the slip is apparent from the record, it is a suitable matter to examine for rectification.

By contrast, asking the officer to re-evaluate transport documents and reverse a contested finding of non-receipt is a request to reconsider the merits. The Circular distinguishes that exercise from rectification and places such decisional disputes within the appellate mechanism (Circular, paragraphs 14.2–14.2.2).

The first-appeal period ordinarily runs for three months from communication of the order, with a further one month potentially condonable for sufficient cause; the Circular also calls for disposal, as far as possible, within one year, excluding the specified stayed period (Circular, paragraphs 15.2 and 15.7). The one-year disposal objective should not be confused with the much shorter period available to the taxpayer for filing.

Maintain a separate limitation diary even if rectification is being pursued. Do not assume that a pending request protects the appeal deadline without identifying the legal basis for that assumption.

At the filing stage, the Circular distinguishes procedural scrutiny from a decision on merits, while requiring limitation and condonability to be considered as a preliminary issue (Circular, paragraphs 15.1–15.2). It does not direct admission of a time-barred appeal merely because the taxpayer appears to have a strong case.

For additional evidence, the Circular requires examination of the Rule 112 circumstances, recorded reasons and an opportunity to the Department, and cautions against turning an appeal routinely into a fresh investigation (Circular, paragraph 15.6). A taxpayer who did not produce documents earlier should therefore explain why, identify each record and establish its relevance instead of simply attaching a large bundle to the appeal.

How taxpayers and professionals should use the Circular

Paragraph 17 says that the guidelines are illustrative and non-exhaustive and must not be cited by proper officers in SCNs, final orders or appellate orders (Circular, paragraph 17). Its wording does not impose the same prohibition upon a taxpayer’s representation; nevertheless, a professional should support the objection with the applicable provision, evidence and precedent rather than rely on the Circular alone.

The Circular is issued under the CGST Act and addressed to Central formations (Circular, opening address and paragraph 1.3). In a State-tax matter, distinguish the corresponding statutory duty from the question of State adoption or administrative applicability; do not assume that every CBIC direction binds every State officer in precisely the same manner.

A practical case file should contain:

• Complete notice: The substantive SCN, electronic summary, annexures and service records.
• Issue-wise working: The year, transaction, amount, provision and taxpayer’s explanation for each disputed item.
• Evidence trail: Invoices, movement and receipt records, books, returns, payments and reconciliations relevant to the allegation.
• Fraud response: A separate answer to any allegation of deliberate evasion, without treating it as a substitute for proving the substantive claim.
• Hearing record: The written request, authority letter, adjournment requests, submissions and acknowledgements.
• Order comparison: A schedule showing what was proposed, what was answered and how the final order dealt with it.
• Remedy diary: Communication date, appeal deadline, pre-deposit working and any separately pursued rectification.

The purpose of this file is not to collect paper for its own sake. It is to make each material proposition traceable to a document and each objection capable of verification.

Conclusion

Circular No. 258/04/2026-GST should be read as a demand for better adjudication, not as an assurance that every notice will fail. Its central requirements concern a clear allegation, supporting evidence, meaningful consideration of the defence and a reasoned determination (Circular, paragraphs 3–5 and 11).

The taxpayer has a corresponding responsibility. A notice must be answered with facts, reconciliations and records; the words “genuine transaction,” “clerical error” or “no intention to evade” should introduce an explanation, not replace one.

For the professional, the sound approach is to separate the questions which are often mixed together: whether tax or ITC is substantively disputed, whether fraud is established, whether the correct provision and period have been applied, and whether the procedure has afforded a fair opportunity. Each question should receive its own factual and legal answer.

The Department should state the case it proposes to establish, and the taxpayer should place the defence on record. The final order should explain, issue by issue, why that defence succeeds or fails.

That is the practical standard by which this Circular should be understood and used. It is also the discipline most likely to prevent an avoidable demand from becoming prolonged litigation.