Introduction
The Goods and Services Tax law provides a detailed mechanism for recovery of taxes that are either not paid, short paid, or wrongly availed as input tax credit. For cases involving fraud, willful misstatement, or suppression of facts, Section 74 of the CGST Act, 2017 is invoked. However, in practice, many taxpayers are receiving Section 74 notices even for very small mismatches and low-value demands. This raises a question whether such cases should rightly fall within the ambit of fraud provisions or whether they should be covered under Section 73, which deals with bona fide and non-fraud cases.
Understanding Section 74
Section 74 is specifically designed to deal with situations where tax shortfall arises because of deliberate intent to evade tax. It provides for stringent penalties, starting from 15% of tax if paid before issuance of notice, and going up to 100% if tax and interest are not paid within the prescribed timelines. Clearly, the intent of this provision is deterrence against tax evasion. Therefore, its invocation in small-value clerical or reconciliation errors appears disproportionate to the object of the law.
The Issue of Small Value Demands
In recent months, several taxpayers, including small and medium businesses, have reported notices under Section 74 for demands as low as ₹2,000 to ₹10,000. Most of these demands arise due to minor mismatches between GSTR-1 and GSTR-3B, or differences in ITC appearing in GSTR-2A/2B versus what is claimed. Such cases are typically reconciliation issues and not deliberate fraud. Yet, the department is treating them as cases of suppression and invoking Section 74. This not only burdens taxpayers with unnecessary litigation but also adds to the compliance cost, which in many cases exceeds the demand amount itself.
Burden of Proof and Legal Position
Section 74 places the burden on the department to prove that the tax shortfall is a result of fraud, willful misstatement, or suppression of facts. Courts have time and again clarified that such allegations cannot be presumed; they must be established through specific evidence. The Allahabad High Court in Continental Cement Company v. Union of India held that mere non-payment or short payment of tax does not automatically imply suppression or fraud unless there is clear intent to evade.
In practice, however, it has been noticed that Section 74 is sometimes invoked not because there is evidence of fraud, but simply to avail the extended time period for issuance of notice and order available under Section 74 as compared to Section 73. This practice is legally unsustainable because the invocation of a penal provision cannot be justified merely to overcome limitation. Without cogent evidence, the application of Section 74 is contrary to the principles of natural justice and settled judicial interpretation.
Practical Challenges for Taxpayers
The issuance of Section 74 notices for small-value demands creates multiple difficulties. Taxpayers are forced to engage professionals, draft replies, and sometimes even file appeals, all of which cost several times more than the disputed tax amount. Further, such notices adversely affect business reputation, as allegations of fraud and suppression create an impression of deliberate wrongdoing. The compliance burden becomes disproportionate, particularly for MSMEs who already struggle with limited resources.
Suggested Approach for Taxpayers
When faced with a Section 74 notice for a small demand, the taxpayer should carefully examine the allegations. If the notice does not contain evidence of fraud or suppression, it should be contested by highlighting that the issue is only a clerical or reconciliation difference and falls within Section 73. Wherever possible, taxpayers should make use of pre-notice consultation to resolve the matter. For very small amounts, where the cost of litigation is much higher than the tax, taxpayers may consider making voluntary payment under protest while recording their objection in the reply, to safeguard themselves from allegations of fraud.
Need for Administrative Relief
It is high time that the CBIC issues clear instructions to field officers that Section 74 should not be invoked in cases of small-value mismatches or clerical errors. A reasonable monetary threshold should be prescribed, below which proceedings should only be initiated under Section 73. This will not only reduce unnecessary litigation but will also allow officers to focus their efforts on genuine fraud and high-risk cases. Such an approach would strike a balance between revenue protection and ease of doing business.
Conclusion
Section 74 is a powerful anti-evasion tool, but its misuse for small-value demands dilutes its very purpose. Taxpayers must be vigilant and assert their rights where fraud is wrongly alleged. At the same time, policy-level clarity from CBIC can go a long way in preventing harassment of honest businesses. A balanced and proportionate application of Section 73 and Section 74 will strengthen trust in the GST system and promote voluntary compliance.
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