Does Payment of GST During Audit under Section 65 Automatically Attract Section 74? – A Legal Analysis
Summary: Payment of GST during an audit under Section 65 of the CGST Act does not automatically attract proceedings under Section 74. Section 65 is a fact-finding mechanism intended to verify tax compliance and, where discrepancies are detected, Section 65(7) permits initiation of proceedings under either Section 73 or Section 74, depending on the facts. Section 73 applies to cases involving bona fide errors, interpretation issues, computational mistakes, or omissions without fraud or suppression, whereas Section 74 can be invoked only where non-payment or short payment is caused by fraud, wilful misstatement, or suppression of facts with intent to evade tax. The department bears the burden of proving these statutory ingredients through cogent evidence, and payment made during audit cannot be treated as an admission of fraud. Taxpayers should record that such payments are made without prejudice to their legal rights. The distinction between Sections 73 and 74 is substantive and must be determined on evidence, not merely on audit recovery.
Introduction
One of the most common misconceptions among taxpayers and even tax professionals is that once a taxpayer accepts an audit objection and pays the tax during an audit conducted under Section 65 of the Central Goods and Services Tax Act, 2017 (“CGST Act”), the case automatically falls within the ambit of Section 74 on the presumption of fraud, wilful misstatement or suppression of facts.
This assumption is legally incorrect.
An audit under Section 65 is merely a statutory mechanism for verification of records and determination of tax compliance. The fact that an audit results in detection of unpaid tax or wrongly availed input tax credit does not, by itself, establish fraud or suppression of facts. The nature of subsequent proceedings depends upon the facts of each case and the existence (or absence) of the statutory ingredients required under Section 74.
This article analyses the legal position.
Objective of Audit under Section 65
Section 65 empowers the GST department to conduct an audit of a registered person with the objective of verifying:
- correctness of turnover declared;
- taxes paid;
- refunds claimed;
- input tax credit availed; and
- compliance with the provisions of the GST law.
An audit is therefore a fact-finding and verification exercise. It is not an adjudication proceeding and does not determine liability by itself.
What Happens After Audit?
Section 65(7) provides that where the audit results in detection of:
- tax not paid;
- tax short paid;
- erroneous refund; or
- wrongly availed or utilized input tax credit,
the proper officer may initiate action under Section 73 or Section 74, as applicable.
The legislature has consciously used the expression “Section 73 or Section 74”, indicating that audit itself does not predetermine the applicable provision.
The proper officer must independently examine whether the facts satisfy the requirements of Section 73 or those of Section 74.
Difference Between Section 73 and Section 74
Section 73
Section 73 applies where tax has not been paid or has been short paid without:
- fraud;
- wilful misstatement; or
- suppression of facts with intent to evade tax.
These generally include:
- interpretational disputes;
- computational mistakes;
- reconciliation differences;
- clerical errors;
- bona fide omissions.
Section 74
Section 74 is an exceptional provision.
It can be invoked only where non-payment or short payment is by reason of:
- fraud;
- wilful misstatement; or
- suppression of facts with intent to evade tax.
The burden lies upon the department to establish these ingredients through cogent evidence.
Mere non-payment of tax is insufficient.
Does Payment During Audit Amount to Admission of Fraud?
The answer is No.
A taxpayer may deposit tax during audit for several legitimate reasons:
- to avoid accumulation of interest;
- to demonstrate cooperation;
- to avoid unnecessary litigation;
- because the issue is revenue neutral;
- because the amount involved is insignificant compared to litigation costs.
None of these circumstances establishes fraud or suppression.
Payment is merely a discharge of tax liability.
It cannot automatically be treated as an admission of intention to evade tax.
Can Every Audit Objection Result in Section 74? Certainly not.
If this proposition were accepted, every audit recovery would automatically become a fraud case.
Such an interpretation would make Section 73 virtually redundant in audit matters.
The legislature has intentionally preserved both Sections 73 and 74 because all audit objections are not consequences of fraud.
Requirement of Independent Satisfaction
Before invoking Section 74, the department must independently establish:
- deliberate concealment;
- conscious misstatement;
- intentional suppression of material facts; and
- intention to evade payment of tax.
Unless these ingredients are specifically pleaded and proved, invocation of Section 74 is legally unsustainable.
Importance of the Words “By Reason Of”
Section 74 uses the expression:
“…tax has not been paid or short paid by reason of fraud, wilful misstatement or suppression…”
Thus, fraud or suppression must be the cause of non-payment.
Merely discovering unpaid tax during audit does not establish that the tax remained unpaid because of fraud.
The causal connection must be proved.
Burden of Proof
The burden to establish fraud never shifts merely because:
- audit detected a discrepancy; or
- taxpayer deposited tax.
The department must produce evidence showing intentional evasion. In taxation jurisprudence, fraud cannot be presumed. It must be proved.
Practical Advice for Taxpayers
Where payment is made during audit, taxpayers should:
- clearly mention that payment is made without prejudice to legal rights;
- avoid language amounting to admission of fraud;
- record that payment is made to avoid further interest and litigation;
- preserve correspondence explaining the bona fide nature of the dispute.
Such documentation may become important if proceedings are subsequently initiated under Section 74.
Judicial Principles
Indian courts have consistently held that:
- fraud cannot be presumed;
- suppression requires deliberate withholding of material facts;
- intention to evade tax must be established through evidence;
- extended limitation or penal consequences cannot be invoked merely because tax has become payable.
These principles continue to guide interpretation under GST as well.
Conclusion
An audit under Section 65 is only a mechanism to verify compliance.
Detection of tax liability during audit, or even voluntary payment thereof, does not automatically attract Section 74.
Section 65(7) itself recognises that proceedings may be initiated under either Section 73 or Section 74, depending upon the facts and evidence.
Unless the department establishes fraud, wilful misstatement or suppression of facts with intent to evade tax, invocation of Section 74 merely because tax was paid during audit would be contrary to the statutory scheme.
The distinction between Sections 73 and 74 is substantive, not procedural. Audit may identify a tax liability, but the character of the liability must always be determined in accordance with the statutory requirements—not by the mere fact that payment was made during audit.
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