The introduction of Section 74A in the GST law standardizes the time limits for issuing show cause notices and passing orders, providing a more taxpayer-friendly approach. However, the new penalty provision for delayed tax payments post 30 days from due date is harsh and may lead to disproportionate penalties for minor mistakes.
Brief History:
The GST law previously had two sections for determining tax paid and penalties. These sections empowered proper officers to collect tax and impose penalties on unpaid, short-paid, erroneously refunded tax, or wrongly availed/utilized ITC.
- Section 73: Addressed cases where the demand was determined for reasons other than fraud, willful misstatement, or suppression of facts to evade tax.
- Section 74: Addressed cases where the demand was determined due to fraud, willful misstatement, or suppression of facts to evade tax.
The timeline for dealing with these cases was 3 years from the due date of filing the annual return under Section 73 and 5 years under Section 74. The SCN was to be issued at least three months before passing the order, making the time limit for issuing SCN 2 years 9 months for Section 73 cases and 4 years 9 months for Section 74 cases.
The penalty provisions under Section 73 were mild due to the absence of fraud, whereas the penal provisions under Section 74 were harsh to discourage fraudulent practices. However, officers often covered cases genuinely within the scope of Section 73 under Section 74, leading to defeats in appeals and technical challenges. Officers also represented that the time limit under Section 73 was too short for adjudication proceedings, affecting the quality of the process.
To address these issues, the Hon’ble Finance Minister of India introduced Section 74A through the Finance (No 2) Act 2024, replacing Sections 73 and 74 for the financial year 2024-25 onwards. The section became effective from 1.11.2024 via notification no. 17/2024 – Central Tax dated 27.09.2024.
Key Changes:
- The time limit for issuing show cause notices for both non-fraud and fraud cases was standardized to 42 months (3 years 6 months). This increased the window for SCN of non-fraud cases by 9 months and decreased the time limit for fraud cases by 15 months, making it a taxpayer-friendly amendment.
- The time limit to pass orders after SCN is now defined as 12 months, which was previously absent. This change is positive for taxpayers, providing sufficient time to explain their case to proper officers and reducing the burden on officers to adjudicate cases in bulk.
- The penalty provisions for both fraud and non-fraud cases remain unchanged.
- Penalty waiver or reduction provisions are relaxed from 30 days to 60 days, favoring taxpayers. There is a penalty waiver for non-fraud cases where the demand is paid within 60 days from the date of SCN. For fraud cases, the penalty is 15% if the tax is paid before SCN issuance, 25% if paid within 60 days of SCN, or 50% if paid within 60 days of the order communication.
Despite these minor amendments, penalty provision in sub-section (11) of Section 74A which is also borrowed from section 73(11) states:
“(11) Notwithstanding anything contained in clause (i) or clause (ii) of sub-section (8), penalty under clause (i) of sub-section (5) shall be payable where any amount of self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.”
This sub-section covers all cases where any amount of “self-assessed tax” or “amount collected as tax” is “not paid within 30 days” from the due date, including:
- Cases where GSTR-3B is filed after 30 days from the due date.
- Cases where the outward liability is shown in any month other than the original month in GSTR-1 and GSTR-3B.
- Cases where there is short payment of tax in GSTR-3B, settled in a subsequent period.
The sub-section starts with “notwithstanding anything contained in clause (i) or clause (ii) of sub-section (8),” meaning waiver provisions of penalty for non-fraud cases are not available. The penalty is fixed as per sub-section (5)(i), which is 10% of the total tax.
Consequently, if there is a default in return filing, taxpayers face double penalties: interest (acceptable and reasonable) and a 10% penalty (unacceptable and unreasonable). Moreover, the 10% penalty is imposed on gross liability, not just liability paid through the cash ledger.
In my opinion, sub-section (11) is too harsh for taxpayers and needs reconsideration. However, taxpayers and consultants are advised to be cautious in filing returns, as even a small unintentional mistake could invite a harsh penalty of 10%, disproportionate to the interest loss to revenue or the intensity of the mistake.
Alternate and Practical view on subsection (11):
1. The essence for invocation of section 74A as per sub-section (1) is that there has to be “any tax not been paid or short paid or erroneously refunded, or some input tax credit been wrongly availed or utilised”.
2. When self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax but such default is done good by payment through Form GSTR-3B on a later date, the primary condition of sub-section (1) cease to exist and provisions of section 74A cannot be invoked.
3. Further, CIRCULAR NO. 76/50/2018-GST – CENTRAL TAX, DATED 31-12-2018 may be put to used which clarifies whether penalty in accordance with section 73 (11) of the CGST Act should be levied in cases where the return in FORM GSTR-3B has been filed after the due date of filing such return?
4. The clarification given in circular on this issue is as under:
a. As per the provisions of section 73(11) of the CGST Act, penalty is payable in case self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.
b. It may be noted that a show cause notice (SCN for short) is required to be issued to a person where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised for any reason under the provisions of section 73(1) of the CGST Act. The provisions of section 73(11) of the CGST Act can be invoked only when the provisions of section 73 are invoked.
c. The provisions of section 73 of the CGST Act are generally not invoked in case of delayed filing of the return in FORM GSTR-3B because tax along with applicable interest has already been paid but after the due date for payment of such tax. It is accordingly clarified that penalty under the provisions of section 73(11) of the CGST Act is not payable in such cases. It is further clarified that since the tax has been paid late in contravention of the provisions of the CGST Act, a general penalty under section 125 of the CGST Act may be imposed after following the due process of law.
5. This circular may for sure convince the proper officer that penalty u/s 74A(11) cannot be imposed for late filing of GSTR-3B or for late reflection of invoice in GSTR-1 and GSTR-3B.
6. However, using this circular may open gates for levy of general penalty u/s 125 which may also be unjust for the low magnitude of default.
7. Further use of words “generally not invoked” also hint that penalty may be invoked in case of delayed filing of GSTR-3B in certain circumstances.
Opinions and other views welcome.
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