GST Show Cause Notices Under Sections 73 and 74

A GST show cause notice is the point at which a disagreement with the department becomes a demand. It quantifies tax the officer believes you did not pay, or input tax credit you should not have taken, and asks you to explain why that amount, with interest and penalty, should not be recovered. Which section the notice is issued under decides how long the department had to issue it, how large the penalty can be, and how much of that penalty you can still avoid by paying early. This guide covers sections 73, 74 and the newer 74A, the forms that carry each step, and how to write a reply that an officer can actually act on.

Where a demand notice comes from

Show cause notices rarely arrive out of nowhere. The usual trigger is a mismatch the system or an officer has already spotted: a scrutiny of returns under section 61 that ended with an unanswered or unconvincing ASMT-10, an audit under section 65 or 66, an inspection, or an automated gap between what you declared and what your suppliers reported. The portal-generated DRC-01B and DRC-01C intimations are a common precursor for liability and credit mismatches.

Input tax credit is the most frequent subject. Credit claimed on invoices from a supplier who never filed, or whose registration was later cancelled with a back date, is a standard demand item. The mechanics of that second case are in supplier GST cancelled retrospectively.

Whatever the trigger, the demand itself is raised under one of three sections. The choice is the officer’s, but it is not free: section 74 carries a heavier burden because it needs a factual basis for the allegation of fraud or suppression.

Section 73: the non-fraud route

Section 73 covers tax not paid, short paid or erroneously refunded, and input tax credit wrongly availed or utilised, for any reason other than fraud, wilful misstatement or suppression of facts. A misclassified supply, a missed reversal, an arithmetic error in a return: these are section 73 cases.

Time limit. The order must be issued within three years from the due date for furnishing the annual return for the financial year to which the demand relates (for an erroneous refund, from the date of the refund). The notice itself must be issued at least three months before that three-year limit runs out. Because the clock runs from the annual return due date, not from the end of the year, the GSTR-9 due date is the anchor for every limitation calculation.

Penalty. Ten per cent of the tax, or ₹10,000, whichever is higher. Interest under section 50 is payable on top in every case; how it is computed is covered in GST late fee and interest.

Avoiding the penalty. Section 73 gives you two exits:

• Pay the tax with interest before the notice is served, on your own ascertainment or the officer’s, and inform the officer. No notice is issued for the amount paid, and no penalty applies.
• Pay the tax with interest within 30 days of the notice. No penalty is payable and the proceedings for that notice are deemed concluded.

Both payments are made through Form DRC-03, from the electronic cash ledger for interest and penalty.

Section 74: fraud, wilful misstatement or suppression

Section 74 covers the same defaults when they arise because of fraud, a wilful misstatement or suppression of facts to evade tax. The words matter. An error is not a misstatement, and a disclosure you made in a return is hard to call suppression. A notice that invokes section 74 should say which of these it alleges and on what facts.

Time limit. The order must be issued within five years from the due date for furnishing the annual return for the relevant year, and the notice at least six months before that limit.

Penalty. A penalty equal to the tax. The statute reduces it the earlier you settle:

• Pay tax, interest and a penalty of 15% of the tax before the notice is served.
• Pay tax, interest and a penalty of 25% within 30 days of the notice.
• Pay tax, interest and a penalty of 50% within 30 days of the order being communicated.

Settling under section 74 concludes the proceedings, but it also accepts the characterisation. If you believe there was no fraud or suppression, the better course is often to contest the invocation of section 74 itself, which would bring the matter back to section 73 limits and penalties.

Section 74A: one framework from 2024-25

The Finance (No. 2) Act, 2024 inserted section 74A into the CGST Act. It applies to demands relating to the financial year 2024-25 onwards; demands for earlier years continue under sections 73 and 74. Instead of two sections with two timelines, it uses one limitation period for all cases and keeps the fraud distinction only for the penalty.

As the section reads:

• The notice must be issued within 42 months from the due date for furnishing the annual return for the year (or from the date of an erroneous refund).
• The order must be issued within 12 months from the date of the notice, extendable by a senior officer for a limited further period.
• Where fraud, wilful misstatement or suppression is not alleged, the penalty is 10% of the tax or ₹10,000, whichever is higher. Where it is alleged, the penalty is equal to the tax.
• The early-payment reductions carry over in the same shape: no penalty for a non-fraud case settled before or soon after the notice, and graded reductions for a fraud case settled before the notice, after it, or after the order.

The post-notice and post-order payment windows under section 74A are not identical to the 30-day windows in sections 73 and 74. Read the exact period from the bare Act on cbic-gst.gov.in before you rely on it, and read your notice carefully: a demand for 2024-25 issued under section 73 or 74 rather than 74A is worth questioning.

Sections 73, 74 and 74A side by side

The forms, from DRC-01A to APL-01

Each step of a demand is recorded in a prescribed form on the GST portal, under the Demands and Recovery (DRC) series in rule 142 and the appeal forms under section 107.

1. DRC-01A: pre-notice intimation. Before issuing a notice, the officer may communicate the tax, interest and penalty as ascertained. It is discretionary, not mandatory. Part B is where you accept in full, accept in part, or file submissions. This is the cheapest stage to resolve a demand.
2. DRC-01: the show cause notice. The electronic summary of the notice, uploaded with the notice itself. It carries the section, the period, and the amounts under each head.
3. DRC-03: payment. Used for any voluntary or notice-prompted payment. After a notice, it must be linked to the notice so the officer can conclude proceedings; that conclusion is recorded in DRC-05.
4. DRC-06: your reply. Filed online within the period stated in the notice, commonly 30 days, with your written submissions and documents attached.
5. DRC-07: the order. The summary of the adjudication order, stating the tax, interest and penalty confirmed. The limitation for appeal runs from its communication.
6. APL-01: the first appeal. Filed within three months of the order being communicated, under section 107. The pre-deposit is the full admitted amount plus 10% of the disputed tax, subject to a ceiling that has been amended; the detail is in the APL-01 appeal process.

Two protections apply to the whole sequence. Section 75(4) gives you an opportunity of personal hearing where you request it in writing or where any adverse decision is contemplated. Section 75(7) bars the order from confirming more than the amount in the notice or relying on grounds the notice did not state.

How to draft a reply to a show cause notice

An officer reading your reply needs to be able to drop each allegation, or reduce it, and write down why. A reply built for that purpose has a predictable shape.

1. Facts and chronology. Your registration, the period, the notices received, and anything already paid, with DRC-03 references.
2. Preliminary objections. Limitation, wrong section, missing DRC-01 summary, a notice that does not state its grounds, or a section 74 notice with no factual basis for fraud or suppression. Raise these first; if one succeeds, the merits do not need to be reached.
3. Point-by-point response. Take each paragraph of the notice in order, quote it, and answer it. Accept what is correct and say so; an admitted amount paid through DRC-03 narrows the dispute and the interest.
4. Reconciliation. For any mismatch-driven demand, attach a reconciliation that walks from the department’s figure to yours: GSTR-1 against GSTR-3B, GSTR-3B against GSTR-2B, books against returns, with every difference explained and evidenced.
5. Legal submissions. The sections and rules you rely on, and any binding judgment on the same point, briefly.
6. Request for hearing. Ask expressly for a personal hearing under section 75(4).

Attach what proves each point: tax invoices, e-way bills, transport and payment records, ledger extracts, contracts, and credit notes. For input tax credit on a supplier’s invoice, show that the supplier was registered and active on the invoice date and had filed its returns for the period. A dated snapshot of the supplier’s registration status and GSTR filing history, which one GSTIN verification call returns together, is useful evidence here. You can check a handful of suppliers free at GST number search.

Frequently asked questions