The CGST Act mandates that any order for tax recovery under Section 74 must be issued within 5 years from the due date for filing the annual return for the relevant financial year.
Under the Central Goods and Services Tax (CGST) Act, Section 74 deals with situations where tax has not been paid, has been short-paid, has been erroneously refunded, or where input tax credit (ITC) has been wrongly availed or utilized due to fraud, wilful misstatement, or suppression of facts with the intent to evade tax.
Show Cause Notice (SCN) Issuance
If the proper officer finds any instance of tax irregularities arising from fraudulent activities, deliberate misstatement, or suppression of facts, they are empowered to issue a Show Cause Notice (SCN) under Section 74. The SCN requires the person liable for such tax discrepancies to explain why they should not pay the specified tax, along with interest under Section 50 and a penalty equivalent to the tax amount.
Penalties Under Section 74
In cases where tax evasion is suspected due to fraud, wilful misstatement, or suppression of facts, penalties are levied under Section 74. This differs from Section 73, which deals with non-fraudulent cases.
Suppression of Facts
Suppression of facts refers to intentionally withholding information that a person is legally required to disclose. Merely omitting information is not considered suppression unless it is done deliberately to evade tax. Suppression involves a failure to provide full and accurate information with the intent to avoid paying taxes.
Wilful Misstatement
A wilful misstatement occurs when a statement is made that does not fairly represent the facts and is likely to mislead. Such a statement is considered ‘wilful’ if it is made intentionally to deceive, not accidentally or inadvertently. The misstatement becomes wilful if it is designed to evade tax liability.
Fraud
While the CGST Act does not explicitly define fraud, it generally involves deceit, as described under Section 17 of the Indian Contract Act. Fraud includes knowingly suggesting something as fact when it is not believed to be true or actively concealing the truth.
Payment and Settlement Provisions
The CGST Act under Section 74 provides opportunities for taxpayers to settle their liabilities before and after receiving the Show Cause Notice:
Before the SCN: If the person pays the tax, interest, and a penalty equal to 15% of the tax liability before the issuance of the SCN, the notice will not be served.
Within 30 Days of SCN: If the person pays the tax, interest, and a penalty equal to 25% of the tax within 30 days of receiving the SCN, the proceedings will be concluded.
After SCN but Before Order: If the tax, interest, and a penalty equal to 50% of the tax liability are paid within 30 days of the issuance of the final order, the proceedings will be considered settled.
Form GST DRC-01
The proper officer must issue the notice under Section 74(1) using Form GST DRC-01. This form outlines the demand for tax, interest, and penalties due from the taxpayer.
Time Limit for Issuance of Orders
The CGST Act mandates that any order for tax recovery under Section 74 must be issued within 5 years from the due date for filing the annual return for the relevant financial year. If no order is issued within this five-year period, the proceedings are considered null due to the expiration of the limitation period. Any order issued after this limitation period is invalid and ineffective.
Provision under Section 75(2) of the CGST Act
If an Appellate Authority, Appellate Tribunal, or court determines that a notice issued under Section 74(1) is not valid because the charges of fraud, wilful misstatement, or suppression of facts with intent to evade tax have not been proven, the proper officer must reassess the tax liability. In such cases, the officer will treat the notice as if it had been issued under Section 73(1), which addresses cases without the element of fraud or wilful misstatement.
Conclusion
Section 74 of the CGST Act serves as a mechanism to address tax discrepancies arising from fraudulent activity, wilful misstatements, or suppression of facts. With clear guidelines for issuing notices and settling liabilities, this section ensures that taxpayers are held accountable while also offering opportunities for timely resolution of disputes.
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