KSCAA (R) submits representation on issuance of Notice under section 74

Karnataka State Chartered Accountants Association (R) writes to Smt. Nirmala Sitharaman, Hon. Union Minister of Finance and Chairperson of GST Council, Government of India on 28th July 2025 vide their letter bearing Ref No: 19/2024-25.

The letter reads as –

SUBJECT: REPRESENTATION REGARDING ISSUANCE OF NOTICES UNDER SECTION 74 FOR SMALL VALUE DEMANDS BEYOND THE LIMITATION UNDER SECTION 73

The Karnataka State Chartered Accountants Association (KSCAA), a premier representative body of Chartered Accountants in Karnataka, submits this representation to address critical concerns regarding the issuance of notices under Section 74 of the Central Goods and Services Tax (CGST) Act, 2017, particularly in cases where the limitation period under Section 73 has lapsed, and the demands involved are of minor monetary value. We aim to highlight practical and legal issues, supported by relevant statutory provisions and judicial precedents, to promote fair enforcement aligned with the GST framework.

We fully support the department’s efforts to ensure compliance and safeguard revenue under the CGST Act, 2017. However, we respectfully submit that invoking Section 74, which addresses cases involving fraud, wilful misstatement, or suppression of facts, may not be appropriate for routine or clerical discrepancies, especially when the limitation period under Section 73 has expired.

Key Concerns

1. Small Value Disputes Do Not Justify Allegations of Fraud: Notices under Section 74 are frequently issued for demands of insignificant monetary value. It is highly improbable that genuine businesspersons would engage in fraud or suppression for trivial sums, as the cost and effort of litigation far outweigh any potential benefit. The threshold for invoking Section 74 should align with the gravity of the offense, as implied by the provision’s intent.
2. Mens Rea as a Precondition for Section 74: Section 74(1) of the CGST Act, 2017, explicitly applies to cases where tax is not paid or short-paid due to “fraud, or any wilful misstatement or suppression of facts.” The requirement of mens rea (fraudulent intent) is a settled legal principle, that suppression or misstatement must be deliberate to attract penal provisions. Invoking Section 74 without cogent evidence of intent undermines the legislative framework and burdens compliant taxpayers.
3. Penalising Dealers for Supplier Defaults: Notices under Section 74 are often issued to recipient dealers for mismatches arising due to suppliers’ failures, such as not uploading invoices in GSTR-1 or not filing GSTR-3B returns, as per Sections 37 and 39 of the CGST Act, 2017. Penalising a bonafide purchaser for the supplier’s lapses is unjust, as supported by judicial precedents wherein the courts have ruled that a bonafide purchaser cannot be penalised for the supplier’s non-compliance.
4. Inter-State Supply Vs Intra-State supply: Often notices have been issued under Section 74 where the taxpayer has paid IGST instead of CGST/SGST and vice versa. These notices are normally issued based on the HSN summary uploaded by the taxpayer in Form GSTR-1. When the notice itself is issued based on data uploaded by the taxpayer, then invoking Section 74 may not be warranted. Further, the taxpayer has already paid the tax, albeit, under a different head. In view of this, notice under the harsher provisions of Section 74 may be unreasonable.
5. Litigation Costs and Disruption to Genuine Businesses: Allegations under Section 74 impose significant compliance and litigation burdens, particularly on small and medium enterprises, contrary to the ease of doing business envisioned under GST. The prolonged litigation process disrupts operations and erodes the trust-based framework promoted by the GST Council.

Our Humble Submissions

To ensure equitable enforcement, we respectfully propose the following, grounded in statutory provisions and judicial guidance:

1. Restrict the issuance of Section 74 notices to cases with demonstrable evidence of fraud, suppression, or wilful misstatement, as required under Section 74(1) of the CGST Act, 2017. These notices should not be used as a default mechanism when the limitation period under Section 73(5).
2. Direct departmental officers to record explicit findings establishing wilful intent and to quantify the alleged suppression, thereby emphasizing the need for clear evidence of intent before invoking penal provisions.”

We earnestly request your esteemed office to issue clarifications or administrative directions, possibly through a circular under Section 168 of the CGST Act, 2017, to prevent the misapplication of Section 74, particularly in cases involving minimal values or no fraudulent intent. Such measures will bolster taxpayer confidence and promote the ease of doing business.

The KSCAA remains committed to supporting the GST department’s objectives and is available for further consultations or to provide additional inputs to facilitate fair and balanced enforcement.

Thanking you,
Yours sincerely,
For Karnataka State Chartered Accountants Association ®