SCNs Under Sections 73 & 74 of CGST Act: Practitioner’s Response & Defence

Show Cause Notices (SCNs) Under Sections 73 and 74 of the CGST Act, 2017: A Practitioner’s Approach to Response and Defence

Summary: A show cause notice under Section 73 or Section 74 of the Central Goods and Services Tax Act, 2017 is, for most registered persons, the opening move of what may become protracted litigation. The statutory distinction between the two provisions remains critical for legacy periods: Section 73 addresses tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts, while Section 74 applies where such conduct is alleged with intent to evade tax, carrying longer limitation and substantially higher penalty exposure. The Finance (No. 2) Act, 2024 introduced Section 74A for financial year 2024-25 onwards and also introduced Section 128A, providing a conditional waiver of interest and penalty for specified Section 73 demands relating to financial years 2017-18 to 2019-20. The Supreme Court’s August 2026 ruling in M/s Tata Steel Limited v. Union of India, read with G.R. Infra Projects Limited, Ratlam v. State of Madhya Pradesh and Ors., has particular significance for Section 74 notices: invocation of the extended limitation period cannot rest merely on formulaic recitals of fraud, wilful misstatement or suppression; the foundational facts supporting those allegations must emerge from the notice itself. A practitioner’s response should therefore begin with jurisdictional and limitation scrutiny, proceed to detailed factual reconciliation and a paragraph-by-paragraph reply, and address payment of genuinely admitted amounts, personal hearing, natural justice and subsequent appellate remedies. With Section 74A now governing newer periods while Sections 73 and 74 continue to govern earlier financial years, both frameworks will remain relevant to GST litigation for the foreseeable future.

I. Introduction

A show cause notice under Section 73 or Section 74 of the Central Goods and Services Tax Act, 2017 is, for most registered persons, the opening move of what may become protracted litigation. The manner in which the notice is met — within the statutory reply window, and on the correct legal footing — very often determines whether the matter concludes at the adjudication stage or migrates through the appellate hierarchy over several years. This article sets out the statutory architecture governing such notices, situates it against the material changes introduced by the Finance (No. 2) Act, 2024, and draws on a significant Supreme Court ruling delivered in August 2026 to outline a considered approach to response and defence.

II. The Statutory Scheme: Section 73 and Section 74 Distinguished

Sections 73 and 74 of the CGST Act occupy a common structural template — both address tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed or utilised — but they diverge sharply on the state of mind attributed to the taxable person, and consequently on limitation and penalty.

Section 73 applies to cases where the shortfall arises for reasons other than fraud, wilful misstatement or suppression of facts: bona fide interpretational disputes, classification errors, reconciliation mismatches and similar inadvertent lapses. The notice under Section 73(2) must be issued at least three months before the time limit prescribed for passing the order, and that order must, under Section 73(10), be passed within three years from the due date for furnishing the annual return for the relevant financial year. The penalty structure under Section 73 is calibrated to reward early compliance: no penalty at all where tax and interest are paid before issuance of notice or within thirty days of the notice under Section 73(8), with proceedings thereupon deemed concluded; failing that, an adjudication order under Section 73(9) attracts a penalty of 10% of the tax or ₹10,000, whichever is higher.

Section 74 applies where the shortfall is attributable to fraud, wilful misstatement or suppression of facts with intent to evade tax — a materially graver allegation carrying correspondingly harsher consequences. The notice under Section 74(2) must be issued at least six months before the time limit for passing the order, which under Section 74(10) extends to five years from the due date for the annual return. The penalty ladder is steeper: 15% of the tax if paid, along with interest, before issuance of notice, with proceedings deemed concluded under Section 74(6); 25% if paid within thirty days of the notice, again with proceedings deemed concluded under Section 74(8); 50% if paid within thirty days of the adjudication order under Section 74(11); and, failing all of these, a penalty equal to 100% of the tax under Section 74(9) where the officer proceeds to adjudicate.

III. The Transition to Section 74A and the Section 128A Amnesty

The Finance (No. 2) Act, 2024 inserted Section 74A with effect from the financial year 2024-25 onwards, consolidating the bifurcated fraud/non-fraud framework into a single procedural provision: a uniform look-back period of 42 months for issuance of notice, an order to be passed within twelve months of the notice, a de minimis threshold below which no notice need issue at all where the liability is under ₹1,000, and a cure window extended from thirty to sixty days at each stage of the penalty ladder — while preserving the underlying penalty quanta of 10%/₹10,000 for non-fraud conduct and the 15/25/50/100% structure for fraud. Critically, Sections 73 and 74 have not been repealed: they continue to govern all periods up to and including financial year 2023-24, meaning that a very substantial volume of notices presently in circulation, and likely to be issued over the next several years given the five-year look-back under Section 74, will continue to be tested against the old provisions for some time yet.

Parallel to this, Section 128A — inserted by Section 146 of the Finance (No. 2) Act, 2024 and operationalised through Rule 164 and connected notifications with effect from 1 November 2024 — offered a conditional waiver of interest and penalty for demands under Section 73 relating to financial years 2017-18, 2018-19 and 2019-20, subject to full payment of the tax component (in cash, other than by way of input tax credit for reverse-charge or erroneous-refund demands) by 31 March 2025, withdrawal of any pending appeal or writ, and application in Form GST SPL-01 or SPL-02. The scheme did not extend to fraud demands under Section 74, and the payment deadline having lapsed, its principal continuing relevance is in assessing whether a client’s earlier compliance decisions were made under its shadow, and in anticipating that similar conditional-waiver mechanisms may recur as the department works through the substantial backlog of pre-2020 demands.

IV. The Tata Steel Ruling: Foundational Facts as a Precondition to Extended Limitation

The Supreme Court’s decision in M/s Tata Steel Limited v. Union of India, 2026 INSC 920 : 2026 LiveLaw (SC) 862, delivered on 25 August 2026 by a Bench of Pardiwala and K. Vinod Chandran, JJ., in a civil appeal arising out of SLP (C) No. 16859 of 2026, bears directly on the drafting standard a Section 74 notice must meet, and deserves to be read closely by anyone advising on such notices. The show cause notice under challenge, issued on 13 June 2025 for the period FY 2018-19 to 2020-21, had its origin in audit observations of the office of the Comptroller and Auditor General of India, communicated in May 2024, concerning a mismatch of input tax credit for all three financial years and short payment of tax for FY 2019-20. The Assessing Officer was himself not persuaded by the objection and had consigned the matter to the “call book” — departmental parlance for keeping a matter in abeyance — while the Department contested the objection before the Public Accounts Committee. The ordinary three-year period under Section 73, computed with the benefit of the exclusion granted by the Court’s suo motu orders during the pandemic, expired for all three financial years on 28 February 2025; the proceeding was thereafter revived, avowedly as a “protective demand”. The Court held that the invocation of extended limitation under Section 74 cannot rest on “mere lip service” or the mechanical recitation of the words fraud, wilful misrepresentation or suppression: the foundational facts giving rise to the inference of such conduct must themselves be evident from the notice. Where a notice contains, in the Court’s words, only “a bland statement… of suppression of facts, merely to avail the extended period of limitation”, without any foundational facts validating that allegation, the notice cannot sustain the extended period and is liable to be set aside.

The Court went further, holding that the proper officer must record independent satisfaction before issuing a notice even where the trigger is an audit objection — mechanical reliance on the auditor’s finding, without the officer’s own application of mind to whether the shortfall is attributable to fraud or suppression as opposed to a mere mismatch, is insufficient. It also clarified that Explanation 2 to Section 74, which had earlier extended “suppression” to cover non-declaration of facts the assessee was obliged to declare, cannot be relied upon for notices issued after that Explanation stood omitted with effect from 1 November 2024. On the facts, the notice was held time-barred once the correct limitation computation was applied, the appeal was allowed, and both the notice and the consequential order-in-original were set aside — though with liberty reserved to the department to initiate fresh proceedings, provided the foundational facts are disclosed in the notice itself and an order passed within the residual limitation period.

For practitioners, the immediate utility of this ruling lies less in its facts than in the drafting and pleading standard it now authoritatively fixes: a Section 74 notice that recites the statutory formula without setting out the specific facts said to constitute fraud, wilful misstatement or suppression is vulnerable to challenge on limitation grounds alone, independent of the merits of the underlying tax demand.

Nor does the proposition rest on Tata Steel alone. One week earlier, in G.R. Infra Projects Limited, Ratlam v. State of Madhya Pradesh and Ors., 2026-VIL-86-SC (Civil Appeal No. 11277 of 2026, decided on 19 August 2026), the Court had set aside a notice under Section 74 issued after the ordinary period under Section 73 had run, holding that beyond a general allegation of “fraud or concealment of facts” the notice disclosed no circumstances from which fraud, wilful misstatement or suppression could be inferred. The distinction the Court drew there — between making an allegation and stating the facts which support it — is the same distinction that governs Tata Steel, and two concurring pronouncements within a week may fairly be taken to have settled the position. Counsel taking a preliminary objection to a Section 74 notice would be well advised to place both decisions on record.

V. A Practical Approach to Responding

The first task on receipt of a notice — whether under Section 73 or Section 74 — is to test its jurisdictional and limitational soundness before engaging with the merits. This involves verifying that the notice has in fact been issued within the time prescribed under Section 73(2) or Section 74(2), that the period covered corresponds to a financial year for which the relevant section (rather than Section 74A) is the applicable provision, and — where Section 74 is invoked — whether the notice discloses the specific factual basis for the allegation of fraud, wilful misstatement or suppression, tested now against the standard laid down in Tata Steel and G.R. Infra Projects. A notice invoking Section 74 on the strength of a bare assertion, without particularised facts distinguishing the case from an ordinary Section 73 mismatch, ought to be met with a preliminary objection on this ground, in addition to any response on merits.

The second task is factual reconciliation. Most Section 73 notices, and a good many Section 74 notices dressed in more serious language than the underlying facts warrant, originate in mismatches between GSTR-1, GSTR-3B, GSTR-2A/2B and the taxpayer’s own books of account. A disciplined reconciliation statement, annexed to the reply, addressing each head of demand individually with supporting invoices, e-way bills, payment records and correspondence, remains the single most effective instrument in reducing the eventual quantum of demand and, in appropriate cases, in demonstrating that the discrepancy is explicable on ordinary commercial grounds rather than concealment.

Where a portion of the demand is genuinely not in dispute, prompt payment of that portion through Form GST DRC-03, before the reply is filed, both limits the interest exposure that continues to accrue on the admitted amount and lends credibility to the taxpayer’s position on the balance. Conversely, contesting every head mechanically, including amounts that cannot realistically be defended, tends to weaken the reply’s overall persuasive force before the adjudicating authority.

The formal reply must be filed in Form GST DRC-06 within thirty days of the notice — a period that, particularly where the notice runs to many years or raises technically complex classification or valuation questions, is frequently insufficient, and an application for extension should be filed well before the deadline rather than at its expiry. The reply should engage with each paragraph of the notice on a numbered, corresponding basis; a response that argues only in the general register of the statute without meeting the specific allegations of the notice paragraph by paragraph invites an adverse order for want of a “considered reply”. A request for personal hearing should invariably be made, and recorded in writing, since several High Courts have in recent months set aside orders passed without affording an effective hearing — including cases where the hearing was fixed before the reply deadline had even expired, or where an adjudicating authority proceeded to pass an order without engaging with a reply already on file to a Form GST DRC-01A pre-notice intimation. Both scenarios amount to a breach of the principles of natural justice embedded in Section 75(4) of the Act and are independently sufficient grounds to impugn an adverse order in appeal or writ.

Where the adjudication nonetheless results in a demand order under Section 73(9) or Section 74(9), and the taxpayer elects to appeal, Section 107 requires the appeal to be filed in Form GST APL-01 within three months of the order (extendable by one further month on sufficient cause shown), accompanied by a mandatory pre-deposit of 10% of the disputed tax, subject to a cap of ₹20 crore each for CGST and for SGST/IGST, a figure revised with effect from 1 November 2024. A further appeal to the Goods and Services Tax Appellate Tribunal under Section 112 requires an additional pre-deposit of 10% of the disputed tax; with the Tribunal’s Principal Bench having commenced hearings in February 2026 and State Benches rolling out through the course of the year, this forum is now a live and increasingly relevant avenue rather than the theoretical remedy it remained for several years after the Act’s enactment.

VI. Concluding Observations

The distinction between Section 73 and Section 74 is not a matter of drafting convenience for the revenue but a jurisdictional threshold that determines limitation, penalty exposure and the burden the department must discharge — and the Supreme Court’s ruling in Tata Steel has now confirmed, at the highest level, that the burden is a real one requiring foundational facts rather than formulaic recital. For counsel and taxpayers alike, the sequence of response therefore properly begins with a rigorous examination of whether the notice meets that threshold, proceeds through careful factual reconciliation and a paragraph-by-paragraph reply within the statutory window, and only thereafter turns to the appellate remedies that the Act, now reinforced by an operational Tribunal, makes available. With Section 74A governing all periods from FY 2024-25 onwards and Sections 73 and 74 continuing to apply to a substantial residue of earlier years, this dual framework, and the jurisprudence developing around it, will remain central to GST practice for some years to come.

The law is stated as on 16 September 2026. This article is a general commentary on the provisions and authorities discussed and is not, and should not be relied upon as, advice on any particular matter; the position in any given case will turn on the terms of the notice, the record of the proceedings and the facts as verified from the underlying documents.

References

• Section 74A of CGST Act: A middle path between Section 73 and Section 74
• GST Major Amnesty Scheme under Section 128A: No Interest No Penalty
• “Section 73 vs Section 74 in CGST: Litigation Trends & Rulings,” DSRV India
• Kaustav Chowdhury, “How to Respond to a GST Show Cause Notice in India,” Sansa Legal
• M/s Tata Steel Limited v. Union of India through the Secretary, Ministry of Finance and Ors., 2026 INSC 920 : 2026 LiveLaw (SC) 862 (Supreme Court of India, 25 August 2026), arising out of SLP (C) No. 16859 of 2026
• G.R. Infra Projects Limited, Ratlam v. State of Madhya Pradesh and Ors., 2026-VIL-86-SC, Civil Appeal No. 11277 of 2026 (Supreme Court of India, 19 August 2026)