Analysis of provisions of determination of tax liability under section 73 and 74 of CGST Act, 2017

Section 73 and 74 of CGST act deals with determination of tax liability and adjudication of case in respect of normal and fraud/ suppression case respectively. In this article we will discuss provisions of section 73 and 74 of CGST Act, 2017.

Scheme of the CGST Act, 2017

Under Scheme of CGST act, persons who are to liable for registration requires to obtain registration. Every registered person has to determine his tax liability by making self-assessment, and after making of payment of tax, is required to furnish correct and complete prescribed returns, as per provisions of the act and rules. Correctness and completeness of such returns will examined by the proper officer, by way of scrutiny of returns, audit, survey and other proceeding and short payment of taxes if any is recovered from the registered person, by passing such adjudication order under the provisions of the act. These are important stages in the implementation of the act. In this background, furnishing of prescribed returns is key factor. Under the GST act main thrust is on self compliance by taxpayers. However, where a taxable person who is liable to register and failed to obtain registration, best judgment assessment of such registered person required to be completed u/s 63 of the act. Separate section 59 inserted in the act for self assessment by registered persons. Accordingly, every register person is required to self assess the tax payable as per provisions of law and to furnish prescribed valid returns for each tax period within prescribed time limit. Various provisions has been inserted in the act, to compel defaulting registered person to furnish valid returns. One of the provision in section 62 is made to make unilateral assessment of return defaulting person. Return is the foundation for every proceeding under GST act and therefore importance has been given to its correctness and accordingly provisions has been made to examine its correctness.

Basis for initiation of proceeding under section 73 and 74

Department examine correctness and completeness of self assessment and returns of taxable person by of

a) matching, reversal and reclaim of input tax credit u/s 42.

b) matching, reversal and reclaim of reduction in output tax liability u/s 43.

c) scrutiny of returns u/s 61.

d) audit by the Department us 65.

e) special audit u/s 66.

f) inspection / survey by the Department u/s 67.

f) summary assessment u/s 64.

where no discrepancy noticed in the returns (self-assessment ) it will accepted as correct and complete and no order will be passed and proceeding deemed to be concluded. However, if during the course of above referred proceeding, non payment of tax or short payment of tax or erroneously amount refunded or wrongfully availment or utilisation of input tax credit by taxable person are noticed, then Proper Officer is required to determine such tax liability and to pass adjudication order u/s 73 or 74 of the act, to recover dues if any.

Section 73 of CGST Act, 2017

73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts.—

(1) 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, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

(2) The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order.

(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.

(4) The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1) or, as the case may be, the statement under sub-section (3), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.

(9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order.

(10) The proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund.

(11) Notwithstanding anything contained in sub-section (6) or sub-section (8), penalty under sub-section (9) 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.

Section 74 of CGST Act, 2017

74. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful- misstatement or suppression of facts.—

(1) 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 by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

(2) The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order.

(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.

(4) The service of statement under sub-section (3) shall be deemed to be service of notice under sub-section (1) of section 73, subject to the condition that the grounds relied upon in the said statement, except the ground of fraud, or any wilful-misstatement or suppression of facts to evade tax, for periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five percent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.

(9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty equivalent to ten percent of tax or ten thousand, whichever is higher, due from such person and issue an order.

(10) The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of erroneous refund.

(11) Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded.

Scope of section 73 & 74 of CGST Act, 2017

Section 73 and 74 provides mechanism to determine tax liability of taxable person and to adjudicate the case, to recover amount of tax, applicable interest and amount of penalty due as per provision of law. Section 73 is applicable to normal cases and 74 covers fraud/tax evasion cases. In order to initiate proceeding u/s73, Proper Officer must satisfy on the basis of findings of verification of returns in any proceeding, that taxable person has

a) not paid tax or

b) paid short tax or

c) erroneously granted refund or

d) wrongly availed or utilised input tax credit for any reason

other than fraud, or any wilful misstatement or suppression of facts.

Thereafter, Proper Officer should determine tax liability and pass order to recover amount of tax, interest and penalty, by giving opportunity of hearing by way issuing Show cause notice. Detailed procedure regarding issuance of notice and consequences of early payment and amount of penalty payable and passing of order, has been prescribed in section 73 and rule 142. Similarly, time limit for issue of notice and passing of order also been prescribed. Section 74 is applicable where proposed demand of tax is due to fraud or wilful-misstatement or suppression of facts and provisions are similar except amount of penalty and time limit for issuance of notice and adjudication of cases. These sections are very important, since all cases are adjudicated and orders are passed under these sections, except few order like orders u/s 60, 62, 63 64 and 76. It provides for final determination of tax liability and adjudication of orders by adjudicating authority. It is pertinent to note that in other proceeding proper officer has already noticed detection of tax not paid or short paid or input tax credit wrongly availed or utilised, which is main basis for initiate action u/s 73 and 74. Proper officer is required to issue show cause notice on the basis of such finding to the person chargeable with tax, within prescribed time.He should determine tax liability by considering reply to such notice and pass order raising demand of tax, applicable interest and amount of applicable penalty by considering payments made during the course of proceeding.penalty.

Intimation of ascertainment of tax by Proper Officer ( FORM- GST -DRC -01A)

Section 73 (5) and 74 (5 ) allow person chargeable with under subsection 1, to pay amount of tax and interest payable u/s 50, before service of SCN on the basis of own ascertainment or tax ascertained by Proper Officer. If such amount has paid before service of SCN no penalty will attract u/s 73 However in case of fraud case penalty equivalent to 15 % of such tax will be applicable u/ 74. In order to provide manner of ascertainment of tax by Proper Officer, intimation in FORM – GST- DRC -01 A has been prescribed in rule 142 (1A). Earlier, issuance of such intimation to the person was mandatory. However, due to amendment in the rule it is optional. Thus,if in response to such intimation u/s 74 (5) person pays such ascertained tax and interest, then he will required to pay penalty equivalent to 15 % of the such tax in fraud case. And no penalty is payable under section 73 (5) for normal case.

Applicability of section for adjudication

Before initiating action under section 73 and 74, Proper officer has to first decide which section is applicable, by taking into accounts all relevant facts and circumstances of the case. If proposed demand is due to fraud or wilful-misstatement or suppression of facts, then section 74 will be applicable and notice is required to be issue u/s said section. Suppression has been defined in explanation 1 to section 74 (11) as under

“Suppression shall means non- declaration of facts or information which taxable person is required to declare in return, statement, report or any other documents furnished under the act or rule made thereunder,or failure to furnish information on being asked for, in writing by Proper Officer “

Accordingly in view of above it is necessary to determine applicable section before issue of notice. In other normal cases section 73 will apply. It is pertinent to note that different time limit and different amount of penalty prescribed in these sections. Wrong applicability of section may create dispute regarding limitation periods also.

Issuance of notice (SCN) u/s 73(1) & 74 (1) of CGST Act, 2017

Show cause notice ( in short SCN ) has great significance in adjudication proceeding for mandatory compliance of principle of natural justice. Show cause notice is mandatory requirement for raising any demand under GST act except payment of interest u/s 50 and assessment of non filer of returns u/s 62 of the act. SCN is the foundation on which PO has to build up case. It is the document served by PO on the taxable person asking him to explain with reason as to why a particular course of action should not be taken against him. It must be speaking and well reasoned. It is mandatory to issue detailed SCN to person chargeable with tax along with summary of notice in FORM – GST -DRC-01 to initiate of action u/s 73 and 74 of the act.It should contain brief facts of case, ground relied upon and amount of tax and interest. It should be issued within prescribed time limit u/s 73 (2) and 74 (2).Where notice u/s 73 (1) or 74 (1) already issued for any tax period to person chargeable with tax, proper officer may issue statement in lieu of notice for other tax period subject to condition that ground relied upon are same as are mentioned in earlier notice. Proper officer should correctly determine tax liability and grounds and specify accordingly in SCN. It is clearly provided in section 75 (7) that amount of tax, interest and penalty demanded in the order shall not be in excess of amount specified in notice and no demand shall be confirmed on the grounds other than grounds specified in the notice. However, he has discretion to reduce the amount of tax, interest after considering representation to SCN if there is merit.

Benefits of payment before issue of notice

As discussed in earlier para, section 73 (5) and 74 (5) provides for voluntary payment of tax on his own ascertainment or on receipt of intimation from proper officer and eligible for concession in penalty. After making payment person is required to inform /intimate to the PO regarding such payments in FORM-GST- DRC-03. Thereafter Proper officer shall issue acknowledgment accepting payment made by such person in f FORM – GST- DRC- 04.Thereafter,proper officer should not serve any notice in respect of tax so paid or penalty payable if any. However, where proper officer is of opinion that person made short payment than amount actually payable, he may issue notice in respect of of such short payment ( rule 142 ).

Implications of payment made after issue of notice

Few incentives given to the person chargeable with tax under section 73 (1 ) and 74 (1) to encourage early payment and voluntary compliance. Where taxable person,after receipt of SCN u/s 73 (1) of the act,pays amount of tax and applicable interest, within 30 days from issue of notice no penalty shall be payable. However, in case of notice is u/s 74 (1), payment made within 30 days from the date of issue of SCN,in view of section 74 (8), person shall be liable to pay penalty equivalent to 25 % of such tax. Thereafter, proceeding in respect of said notice shall be deemed to be concluded. Accordingly. Proper office shall issue intimation of concluding of proceeding in form FORM-GST-DRC-05.

Importance of proper reply to notice

Sometimes taxable person accept the tax liability as per notice and make the payments. However, if taxable person is not agree with the tax liability and grounds specified in SCN, he has option to submit representation along with documentary evidences, by way of reply in FORM-GST- DRC- 06. Proper officer should consider such representation while determining tax liability and passing order. It is an opportunity to taxable person to prove that amount of tax shown in SCN is not payable.He may also request to for personal hearing. If no reply given to the notice order may passed ex-party.

Applicability of principle of natural justice

Now it is well settled that principle of natural justice should be followed while passing any order by judicial and quasi judicial authorities. Principle of natural justice are those rules which have been laid down by the court being the minimum protection of right of the individual against the arbitrary procedure that may be adopted by judicial, quasi judicial and administrative authorities while making an order affecting those right. As per provision section 75 (4) of the act, after submission of reply to SCN, if such person request in writing for personal opportunity of hearing, then proper officer should grant such opportunity of hearing. It is further provided in section 75 (5) that during the course of proceeding he should grant adjournment for sufficient cause. However, no such adjournment shall be granted for more than three times during the course of proceeding. All these provision have been made considering principle of natural justice.

Order U/S 73 (9) or 74(9) of CGST Act, 2017

After considering representation and documents submitted by such person proper officer should determine amount of tax payable, interest applicable and amount of penalty as per provision of the law and pass order u/s 73 (9) or u/s 74 (9) of the act within prescribed time limit. Where order is passed in normal case u/s 73 (9) penalty equivalent to ten percent of tax or ten thousand whichever is higher shall attract. However, penalty equivalent to 100 % of tax shall attract in fraud case where order is passed u/s 74 (9) of the act. Proper officer should pass detailed order and no form is prescribed for order. However, summary of such order should electronically uploaded in FORM-GST-DRC-07 specifying therein issue involved and details of demands. It is clearly provided in section 75 (6 ) that PO should pass speaking order by stating relevant facts and basis for each decision. It is expected that he must give basis and reason for decision and it should be sufficient to to indicate the application of mind. Taxable person has to know why decision has gone against him. Now it is well settled that non speaking order are not tenable in the eyes of law. This may be reason for making specific provision made in the act for speaking order.

General provisions relating determination of tax

General provisions has been prescribed in the section 75 of CGST act for determination of tax. These guidelines and principles are mandatory and required to be followed by proper officers while determining tax liability and adjudicating cases. These are as under.

75. General provisions relating to determination of tax.— (1) Where the service of notice or issuance of order is stayed by an order of a court or Appellate Tribunal, the period of such stay shall be excluded in computing the period specified in sub-sections (2) and (10) of section 73 or sub-sections (2) and (10) of section 74, as the case may be.

(2) Where any Appellate Authority or Appellate Tribunal or court concludes that the notice issued under sub-section (1) of section 74 is not sustainable for the reason that the charges of fraud or any wilful-misstatement or suppression of facts to evade tax has not been established against the person to whom the notice was issued, the proper officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73. (3) Where any order is required to be issued in pursuance of the direction of the Appellate Authority or Appellate Tribunal or a court, such order shall be issued within two years from the date of communication of the said direction.

(4) An opportunity of hearing shall be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person.

(5) The proper officer shall, if sufficient cause is shown by the person chargeable with tax, grant time to the said person and adjourn the hearing for reasons to be recorded in writing: Provided that no such adjournment shall be granted for more than three times to a person during the proceedings.

(6) The proper officer, in his order, shall set out the relevant facts and the basis of his decision. (7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.

(8) Where the Appellate Authority or Appellate Tribunal or court modifies the amount of tax determined by the proper officer, the amount of interest and penalty shall stand modified accordingly, taking into account the amount of tax so modified.

(9) The interest on the tax short paid or not paid shall be payable whether or not specified in the order determining the tax liability.

(10) The adjudication proceedings shall be deemed to be concluded, if the order CHAPTER XV DEMANDS AND RECOVERY 112 is not issued within three years as provided for in sub-section (10) of section 73 or within five years as provided for in sub-section (10) of section 74.

(11) An issue on which the Appellate Authority or the Appellate Tribunal or the High Court has given its decision which is prejudicial to the interest of revenue in some other proceedings and an appeal to the Appellate Tribunal or the High Court or the Supreme Court against such decision of the Appellate Authority or the Appellate Tribunal or the High Court is pending, the period spent between the date of the decision of the Appellate Authority and that of the Appellate Tribunal or the date of decision of the Appellate Tribunal and that of the High Court or the date of the decision of the High Court and that of the Supreme Court shall be excluded in computing the period referred to in sub-section (10) of section 73 or sub-section (10) of section 74 where proceedings are initiated by way of issue of a show cause notice under the said sections.

(12) Notwithstanding anything contained in section 73 or section 74, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.

(13) Where any penalty is imposed under section 73 or section 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.

Consequences of payment after issue of order u/s 74 (9) of CGST act.

In view of provision of section74 (9), proper officer while passing order shall impose penalty equivalent to 100 % of tax in the case of fraud/suppression case. However, if such person pay whole amount of tax and applicable interest and penalty equivalent to fifty percent of tax, within thirty days from date of service of order, remaining fifty percent penalty will be waived and all proceeding in respect of said notice shall be deemed to be concluded.No concession in penalty is available for order u/s 73 (9).

Penalty u/s 73 and 74 of CGST Act, 2017

The incidence of short payment of tax or erroneous refund or wrong availment or utilisation of input tax credit may be due to inadvertent bona fide mistake is covered u/s 73. Cases of fraud or suppression with deliberate attempt to evade are covered under section 74. Since, nature of offence is different, separate penalty provision made for such type of cases. In section 126 (2) it is stated that penalty imposed depend on the facts and circumstances of each case and shall commensurate with the degree and severity of breach. In view of this principle and to encourage voluntary compliance amount of penalty has been prescribed section 73 and 74 of the act as under

Sr no Action by Taxable person Amount of penalty payable Normal case Amount of penalty payable Fraud case
1 Tax amount paid with interest before issuance of notice. No penalty.

and no notice shall be issued.

15 % of tax amount and no notice shall be issued.
2 Tax amount paid with interest within 30 days of issuance of notice. No penalty.

All proceeding deemed to be closed.

25 % of tax amount.

All proceeding deemed to be closed

3 Tax amount paid with interest within 30 days from service of order. 10 % of tax amount or

Rs 10,000/ whichever is higher

50 % of tax amount.

All proceeding deemed to be closed.

4 Tax amount paid after 30 days of service of order. 10 % of tax amount or Rs 10,000/ whichever is higher. 100 % of tax amount.

No penalty shall be imposed in cases where self-assessed tax or any amount collected as tax paid with interest within 30 days from due date of payment of such tax, Where any penalty imposed u/s 73 and 74 no penalty for the same act or omission shall be imposed on the same person under any other provision of the act.

Time limit for notice and orders

Section 73 (2) and section 74 (2) speaks about time limit to issue notice. Section 73 (10) and section 74 (10 ) provides time limit to issue orders. Considering nature of cases, different time limit has been prescribed for issuance of notice & order for normal and fraud case and it is as under

Sr no Nature of case Time for issuance of notice Time for issuance of order
1 Normal case

 

 

Within 2 years and 9 months from due date of filing of Annual return for the financial year to which demand pertains or from date of erroneous refund Within 3 years from due date of filing of Annual return for the financial year to which demand pertains or from date of erroneous refund
2 Fraud case

 

 

 

Within 4 years and 6 months from due date of filing of Annual return for the financial year to which demand pertains or from date of erroneous refund Within 5 years from due date of filing of Annual return for the financial year to which demand pertains or from date of erroneous refund

Conclusion

Provision of section 73 and 74 are almost similar except applicability, limitation period and amount of penalty. Provision has been made in such manner that at every stage opportunity is given to the taxable person to settle dispute by paying tax, interest and applicable penalty before passing order or after passing order. Action initiated under these section may not always result in passing of order. After passing order, taxable person has option to make payment of dues within thirty days of service of order to avail waiver of 50 % penalty (if order is u/s 74 ). However no such concession in amount of penalty admissible where order is u/s 73. Aggrieved taxable person has option either to file an application u/s 161 for rectification of error apparent on the the face of record or to file appeal to the Appellate authority u/s 107 to redress the grievance within three months. Otherwise after three month dues will available for recovery and Proper officer will initiate recovery proceeding to recover dues

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