Smeet Sanghvi & Rishabh Mehta
In India’s changing financial tide, the ever-evolving Goods and Service Tax Act (‘GST’) brings yet another change. The advent of the new Section 74A for the 2024-25 financial year. It will replace the old guard of Sections 73 and 74. These sections handle tax decisions in non-fraud and fraud cases. To understand what Section 74A means and its implications, you must know about the retiring Sections 73 and 74. Let’s look at these sections and see how the new rules will change things for taxpayers.
Analysis of the Retrieving Guard: Sections 73 and 74
Section 73: Non-Fraud Cases
Sect. 73 of the GST Act is about figuring out the tax when it has yet to be paid, hasn’t been paid enough, has been given back by mistake, or when input tax credit has been wrongly used. This happens when it’s not because of lies, purposeful improper statements, or hiding facts. In other words, this section deals with cases that aren’t fraud.
According to Sect. 73, the tax authority sends a show-cause notice to the taxpayer. They can send this notice up to three months before the set time to issue the order. They need to issue the final order within three years from the day the annual return is due for that financial year.
One crucial feature of Sect. 73 is the penalty waiver for voluntary payment. Taxpayers can avoid penalties by paying the tax and interest before they get a notice or within 30 days of receiving one.
In this case, they need to pay the tax and interest. They’ll face a penalty if they don’t pay within this time. This penalty is either 10% of the tax or ₹10,000, whichever is more.
Section 74: Fraud Cases
Sect. 74 covers situations where tax issues stem from dishonest actions. These include not paying tax, underpaying it, getting the wrong refunds, or misusing input tax credits. This happens when people lie, hide facts, or commit fraud. This section applies to cases involving fraud.
Like Section 73, Section 74 requires the tax authority to send a show-cause notice. However, they can send this notice up to six months earlier than usual for fraud cases. They must give the final order within five years. This five-year period starts from the day the annual return for that financial year was due.
Section 74 has harsher penalties than Section 73. Taxpayers who pay before getting a notice must pay the tax, interest, and a 15% penalty on the tax amount. If they pay within 30 days of the notice, the penalty goes up to 25% of the tax. If they don’t pay within this time, the penalty jumps to 100% of the tax.
What changes does Section 74A propose?
This change aims to simplify things by putting rules for non-fraud and fraud cases in one place.
Acting as a unifying Section, the following changes can be observed:
Unified Timelines for Issuing Notice
Section 74A brought about a big change in the time allowed to send notices in regular and fraud cases. Now, the tax department can send a notice up to 42 months (3.5 years) after the due date for filing the yearly return for that period. This new rule replaces the old system, which gave different time limits for regular cases (three years) and fraud cases (five years).
Determination of the Nature of Error During Proceedings
Under the new section, the nature of the error—whether it is due to fraud or not—will be determined during the case proceedings. This means that the notice issued will not specify whether the case is a fraud or non-fraud. This determination will be made based on the evidence presented during the proceedings.
The new section states that the case proceedings will determine if the error is due to fraud. This means the notice won’t say if it’s a fraud or non-fraud case. The evidence shown during the proceedings will help make this decision.
Timeline for Issuing Orders
The competent authority must give the order within 12 months of issuing the notice. If they can’t do this in time, the Commissioner or Joint Commissioner can add six more months. But they need to write down why they’re doing this.
Penalty Provisions for Non-Fraud Cases
For cases that don’t involve fraud, the new section lays out these penalty rules:
– No Penalty When You Pay: You won’t face a penalty if you pay the tax and interest before you get a notice.
– No Penalty When You Pay on Time After Getting a Notice: You won’t face a penalty if you pay the tax and interest within 60 days.
– Regular Penalty for Late Payment: If you don’t pay within the given time, you’ll have to pay a penalty. This penalty will be 10% of the tax amount or ₹20,000 (SGST+CGST), whichever is more.
Penalty rules for cases involving Fraud:
– Early Payment Discount: The penalty drops to 15% of the tax if you pay the tax and interest before getting a show-cause notice.
– On-Time Payment After Notice: You’ll face a 25% penalty if you pay within 60 days of receiving the notice.
– Late Payment After Order: The penalty jumps to 50% of the tax if you pay within 60 days of getting the order.
– Maximum Penalty for Further Delays: If the taxpayer doesn’t pay within these periods, the penalty goes up to 100% of the tax amount.
What does it mean for Taxpayers – The Impact
The Positives of Section 74A
Putting the rules for fraud and non-fraud cases in one section simplifies the process, making things less complicated for taxpayers and tax authorities. The single timeframe to issue notices gives clarity and consistency, helping taxpayers better grasp and handle their tax duties.
The new rule gives tax officials extra time to determine what mistake was made during case proceedings. This helps ensure a complete investigation and a fair decision. The law spells out the penalties for both fraud and non-fraud cases. This encourages people to follow tax laws and avoid heavy fines. Taxpayers get plenty of chances to tell their side of the story and pay up to avoid penalties. This makes the tax system fairer and more open.
The concerns of Section 74A
While it’s meant to simplify things and boost effectiveness, Sect. 74A has come under fire for several reasons. Let’s look into the main issues people have with this new section.
i) No Clear Separation Between Fraud and Non-Fraud Cases
A major critique of Sect. 74A is its failure to differentiate between fraudulent and non-fraudulent cases from the start. The previous sections stated the nature of the error—whether it stemmed from fraud or an honest mistake—when issuing the notice. This clear-cut approach allowed taxpayers to grasp how serious the claims against them were right from the beginning.
On the other hand, Section 74A intends to send out notices without pinpointing the exact mistake, leaving this decision to be made during the hearings. This can make taxpayers feel unsure and worried, as they don’t know if they’re being blamed for fraud until much later. This lack of clarity might result in unfair handling and worry for taxpayers who’ve made honest errors.
ii) Inconsistent Penalty Provisions
The penalty provisions now are inconsistent and might lead to unfair fines. In cases that don’t involve fraud, a literal understanding of this new section suggests that one has to pay a fine of 10% of the tax amount or ₹20,000 (SGST+CGST), whichever is more if you don’t pay on time. This flat fine of ₹20,000 can hit small tax bills too hard. For example – the tax bill is ₹2,500. In this case, a ₹20,000 fine seems too high and unfair without accounting for the original worth of the bill itself.
Even though Section 74A offers reduced penalties for early payment in fraud cases, the overall penalty structure is still tough for small taxpayers. The penalties increase from 15% for early payment to 100% if payments aren’t made on time. This sharp increase might be seen as too much when taxpayers face money problems or have other good reasons for paying late.
iii) Extra Work and Too Much Power
The prima facie intent to make life simple for the scrutinisers, on an in-depth understanding, shows that the scrutinisers are effectively taking a big burden at the outset since they now have to figure out what kind of mistake happened during the process. This means they must dig deep and check everything, which takes time and resources. There’s a possibility that the tax office gets swamped, causing holdups and applying the law in different cases. Therefore, the authors express a fear of inefficiency creeping in.
An uncalled-for Problem or a Needed Change?
Section 74A of the GST Act 2017 tries to simplify tax and penalty determination. It does this by combining rules for fraud and non-fraud cases. Before, under Sections 73 and 74, taxpayers got a push to come clean and fix their mistakes, with the promise of lower or no fines. But now, the strict fine system in Section 74A could scare taxpayers from admitting errors on their own, as they worry about harsh punishments.
The fresh rules in Section 74A, such as the tough fines for late payments, might prevent people from following the law. This could hurt the main goal of building a culture where people follow tax laws and are open about their finances. Instead of giving taxpayers a reason to fix mistakes alone, the tough fines might make them want to hide things, leading to an intended tax avoidance.
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Article is Jointly Authored by Smeet Sanghvi and Rishabh Mehta.
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Good Article