Section 74 GST: Impact on Genuine Dealers and Need for Amnesty

Preface: Section 74 Litigation – An Expanding Storm

Since the implementation of GST, one of the most aggressively enforced provisions has been Section 74 of the CGST/State GST Acts—dealing with cases where input tax credit (ITC) is wrongly availed or utilized due to fraud, willful misstatement, or suppression of facts. Intended to address tax evasion and circular trading, the practical consequence has been the entrapment of many genuine dealers in expensive, time-consuming, and often arbitrary litigation.

Across India, multiple show cause notices have been issued for bogus or non-genuine supplies, especially involving transactions where the supplier failed to deposit tax or was later found non-existent. The result? Innocent recipients who made payments through banking channels and held valid invoices are being prosecuted, penalized, and their ITC denied—without any mechanism to protect themselves.

Legal Anchor: Malik Traders v. State of U.P. (2023)

The Hon’ble Allahabad High Court’s decision in Malik Traders v. State of U.P. and Others (Writ Tax No. 1237 of 2021) typifies this situation. The Court held that the burden of proving genuineness of supply lies entirely on the recipient, who must establish:

• Physical movement of goods;
• Payment through banking channels;
• Freight documentation;
• Acknowledgement of delivery;
• Reflection in GSTR‑2A.

Failure to produce these leads to ITC denial—even if the transaction was bona fide. The ruling, along with the Supreme Court’s judgment in Ecom Gill Coffee Trading Pvt. Ltd. (2023), underscores that evidence outweighs intent.

Compliance Mismatch: Law vs. Ground Reality

Despite stringent evidence requirements on the recipient, no real-time tool or mechanism exists to:

• Verify whether a supplier has filed GSTR‑3B or paid tax;
• Monitor compliance under Rule 37A (mandating reversal of ITC if supplier defaults);
• Detect fraudulent suppliers before transactions occur.

Small dealers lack backend visibility on GSTN, can’t anticipate future supplier default, and despite all due diligence, the liability is unfairly shifted to them, creating disproportionate compliance burdens.

Practical Burden on Dealers

• No visibility on supplier’s actual tax payment.
• GSTR‑2A matching doesn’t guarantee tax remittance.
• Lack of alerts for supplier non-compliance.
• Challenges in retaining freight and toll documents.
• Risk of severe penalties and litigation under Section 74—even for honest dealers.

This regulatory structure effectively criminalizes commercial oversight, discouraging honest trade and overwhelming courts and GST authorities with disputes.

Documentation Blueprint for ITC Defence

To safeguard against allegations of bogus supply, dealers must maintain a robust documentary trail:

• Tax Invoice (as per Rule 46)
• E‑way Bill
• Lorry Receipt / Transport documents
• Toll and Freight Receipts
• Proof of Delivery (signed delivery challans, inward registers)
• Bank Payment Proof (NEFT/RTGS/Cheque)
• GSTR‑2A/2B matching
• Vehicle details, GPS logs if applicable

Archival in both physical and digital formats is essential for fast retrieval during audits or inquiries.

Proposal: A Rational Amnesty Scheme

In light of widespread hardship and systemic gaps, the Government must launch a targeted Amnesty Scheme for Section 74 disputes, offering:

1.Penalty waiver in absence of proven fraud.

2. One-time settlement for disputed ITC with minimal proof.

3. No prosecution for first-time defaults.

4. Installment-based tax payment and interest relief.

5. Safe harbour relief for registered-compliant taxpayer transactions.

Such a scheme will decongest litigation, restore business confidence, and relieve MSMEs from undue scrutiny—mirroring successful past initiatives like “Sabka Vishwas”.

Conclusion

GST was implemented to simplify indirect taxation, but Section 74’s execution has become punitive towards compliant taxpayers, penalizing them for systemic lapses. To uphold principles of fairness and ease of doing business, an amnesty scheme, enhanced GSTN toolkit, and legal clarity are imperative. For GST to truly be “Good and Simple Tax”, the system must empower honest taxpayers—not penalize them for infrastructural shortcomings.

Key Judicial Citations

• Malik Traders v. State of U.P. – 2023 (78) G.S.T.L. 465 (All.)
• Ecom Gill Coffee Trading Pvt. Ltd. – [2023] 37 TUD-CD 087 (SC)
• Aastha Enterprises v. State of Bihar– [2023] 63 TAXLOK.COM 027 (Patna)
• Commissioner Commercial Tax v. Ramway Foods Ltd. – [2023] 39 TUD-CD 005 (Allahabad)

“Justice under taxation laws must not only penalize the evaders, but must also protect the honest from systemic deficiencies.”
— CA. Savan Subhash Mehta