Demand and Recovery under GST: A Detailed Guide
Updated: Aug 28
Under the Goods and Services Tax (GST) system, an individual assesses their own tax liability and pays it. If the tax is paid through self-assessment, there is probably a probability that it will be paid insufficiently without any malicious intent or that the assessees may pay it insufficiently with knowledge or intention. The authority to reclaim taxes that assessees knowingly or inadvertently fail to pay under certain circumstances is vested with certain laws. The provisions pertaining to Demand and Recovery under the Goods and Services Tax (GST) have been examined within Chapter XV, Sections 73 to 84 of the Central Goods and Services Tax Act, 2017. The show-cause notice is the first step in the GST recovery process, which culminates in the adjudication hearings. In this article, we will discuss the concepts of demand and recovery under GST in detail.
Table of content
What is Demand under GST?
GST must be paid by self-assessment. There won't be any issues if the assessee accurately pays the tax on self-assessment. The GST authorities would start demand and recovery procedures against the assessee if there is any underpayment or improper use of input tax credit. The requirements of the former Central Excise and Service Tax legislation are comparable to the provisions of the GST Act's demand provisions and the recovery provisions that follow.
Section 73 of the CGST Act: When There is No Fraud
This clause is applicable in the following situations when there is no intent to dodge taxes and the purpose for the action is not fraud:
Unpaid taxes, underpaid taxes, or
Refund is issued incorrectly or
Input tax credit has been incorrectly claimed or used.
The taxpayer will receive a show-cause notice from the appropriate officer, or the GST authorities. They will have to pay the outstanding balance plus interest and penalties. On December 27, 2022, Circular 185/17/2022-GST was released, providing clarification on the process and deadline for tax officials to reevaluate the tax, interest, and penalty demand in a no-fraud case—one in which there is insufficient proof of fraud.
Illustration: Due to incorrect data entry in the GSTR-1, Mr. A was notified via GSTR-3B of a deficiency in tax paid for January 2021. On January 13, 2022, he was given a show-cause notice asking him to explain why he shouldn't have to pay taxes on the difference. The show-cause notice is sent out no later than three months before the end of the three years that follow the deadline for filing annual returns.
Time Limit
Three months before the deadline, the appropriate officer must provide the show-cause notice. Three years from the date of the annual return filing deadline for the year to which the amount pertains is the maximum period of time allowed for the order of payment. The appropriate official may serve a statement containing information about any unpaid taxes, incorrect refunds, etc. for further periods not included in the notice after the aforementioned notice has been issued. It is not necessary to send out a fresh notice for every tax period.
Potential Penalty
After taking into account the taxpayer's representation, the tax officer will compute interest and penalties. 10% of the taxes owed, with a minimum of Rs. 10,000, shall be the penalty. Three years after the applicable annual return filing deadline, the tax officer will issue an order. The 53rd meeting of the GST Council has proposed that interest and penalties for demand letters issued under section 73 of the CGST be waived in circumstances where there is no fraud, suppression, or misrepresentation. This is relevant for fiscal years 17–18, 18–19, and 19–20. It is applicable in situations where the taxpayer pays the total amount on the notice by March 31, 2025. A notice of the new Section 128A shall be given.
The penalty won't apply if the taxpayer pays all outstanding debts within 60 days after receiving the notice. All actions pertaining to the notification shall be closed, with the exception of prosecution actions under section 132.
Voluntary Tax Payment
Before the notice or statement is released, a person can pay tax and interest, either on their own estimates or the officer's computations, and they can notify the officer in writing of their payment. In this instance, the officer will not provide a notice. On the other hand, the officer may issue a notice for the outstanding amount if they discover that there is a short payment.
Section 74 of the CGST Act: When There is a Wilful Fraud
This section covers the following types of tax evasion cases:
Fraud
Suppression of facts
Wilful misstatement
This results in:
Overdue or underpaid taxes
Incorrect reimbursements or
Incorrectly obtained or used input tax credit
In these situations, the appropriate officer will provide the taxpayer a show-cause notice. The sum owed, including interest and penalties, must be paid by the taxpayers.
Illustration: Fraudulent input tax credit claims discovered by the tax authorities resulted in a notification of deficiency in tax paid via GSTR-3B for July 23, 2019, addressed to Mr. B. On April 13, 2021, he was sent a show-cause notice asking him to explain why he shouldn't have to pay taxes on the difference. The show-cause notice is sent out during the allotted six months of the five-year period ending on the 31st of March, 2021, for the fiscal year 2019–20, which is the deadline for filing annual returns.
Time Limit
The appropriate officer must notify the parties involved in fraud six months before the deadline. Five years is the maximum period of time that can pass after the annual return filing deadline for the year that the amount pertains to. The appropriate official may serve a statement containing information about any unpaid taxes, incorrect refunds, etc. for further periods not included in the notice after the aforementioned notice has been issued. It is not necessary to send out a fresh notice for every tax period.
Issue of Order for Penalty
After taking into account the taxpayer's representation, the tax officer will compute interest and penalties and issue an order. The applicable annual return filing deadline must have passed five years before the order being issued. Orders for incorrect refunds must be fulfilled within five years of the incorrect refund date. The notice will not be prosecuted and all related actions will end if the taxpayer pays all outstanding fees and a 50% penalty within 30 days of the order date.
Voluntary Tax Payment
The officer will not issue a notification if the individual pays the tax, interest, and a 15% penalty, as determined by their own or the officer's calculations, and notifies the officer in writing before the notice or statement is sent. On the other hand, the officer may issue a notice for the outstanding amount if they discover that there is a short payment. If the taxpayer settles all outstanding debts and a 25% penalty within 60 days of the notice date, all related processes will be concluded (except criminal proceedings under Section 132).
Interest on GST Demand
When taxes are underpaid or liabilities are under-assessed, there is an annual interest charge of 18% for the tax gap. Additionally, this is the interest penalty in cases where the input tax credit is merely obtained but not utilised. However, under Section 50 of the CGST Act, there is an annual interest charge of 24% for obtaining and using input tax credits above what is available.
Section 75: General Provisions for Tax Determination
In cases where a court or Appellate Tribunal order stays the delivery of notice or issuance of an order, the duration of that stay will not be taken into account when calculating the time frame mentioned in subsections (2) and (10) of section 73 or subsections (2) and (10) of section 74, as applicable.
The appropriate officer shall determine the tax payable by such person, deeming as if the notice were issued under sub-section (1) of section 73, if any Appellate Authority, Appellate Tribunal, or court determines that the notice under sub-section (1) of section 74 is not sustainable as the charges of fraud or wilful-misstatement or suppression of facts to evade tax have not been established against the individual to whom the notice was issued.
Any orders that must be made in response to directives from the Appellate Authority, Appellate Tribunal, or a court must be done so within two years of the directives' date of communication.
When a person subject to a tax or penalty requests in writing, or when they anticipate an unfavourable ruling being made against them, they are entitled to a hearing.
If the person subject to taxation shows adequate cause, the appropriate officer will grant the person time and adjourn the hearing for reasons that must be documented in writing. However, no person may be granted an adjournment more than three times while the proceedings are ongoing.
The appropriate officer must include all pertinent information and the reasoning behind his judgement in his order.
No demand may be validated on a basis other than those listed in the notice, and the amount of tax, interest, and penalty sought in the order may not exceed the amount mentioned in the notice.
The amount of interest and penalty will be adjusted according to any modifications made to the tax amount by the appropriate official, the Appellate Authority, the Appellate Tribunal, or the court.
Whether or not it is included in the order establishing the tax liability, interest on the tax that is underpaid or not paid must be paid.
If the order is not made within the three-year period specified in sub-section (10) of section 73 or the five-year period specified in sub-section (10) of section 74, the adjudication processes will be deemed to have finished.
The amount of time that has passed between the date the Appellate Authority, Appellate Tribunal, or High Court rendered a decision that is detrimental to the interests of revenue in other proceedings and the appeal that is currently pending before the Appellate Authority, Appellate Tribunal, or Supreme Court against such a decision.
If any amount of self-assessed tax according to a return submitted under section 39 remains unpaid, in whole or in part, or any amount of interest owed on such tax remains unpaid, the amount shall be recovered under the terms of section 79, regardless of sections 73 and 74.
If a person is subject to a penalty under sections 73 or 74, they cannot be subject to another penalty under this conduct for the same conduct or omission.
What is Recovery under GST?
The Goods and Services Tax (GST) recovery notice is a notification sent by the tax authority to the taxpayer to collect any unpaid taxes or interest. When a taxpayer does not pay all of the required taxes or fails to pay their GST liabilities by the deadline, they are issued this notification. The recovery notice gives the taxpayer a deadline, usually 30 days from the notice date, by which to pay the unpaid tax or interest. A registered taxpayer may be penalised in accordance with the government's notice in form GSTR 3A if he or she fails to file their GST returns by the deadline. However, government officials may start the process to recover tax under GST if the taxpayer or defaulter does not file the same, even three months after the order for the tax demand is issued.
Modes of Recovery by GST Authorities
The following methods are available to the GST authorities for recovering the tax amount owed by such defaulters:
Deduction of the amount due from any sum that the GST department owes to that individual.
Selling items that belong to that individual while being monitored or detained by a GST officer.
Tax recovery from a third party that is holding or might hold money for the defaulter in the future.
Recovery by the carrying out of a civil court's order for money payment or sale to enforce a charge or mortgage.
Detention and sale of any of the person's real estate, whether it be mobile or immovable.
Recovering taxes by executing any rules or regulations issued under the Act, as well as any bond or document executed under it.
Tax recovery is handled by the district collector in the person's home or place of business, treated as though it were a delinquent land revenue account. For this reason, the appropriate officer must prepare a certificate outlining the amount owed from such a person and give it to the relevant collector.
Tax recovery is accomplished by filing an application with the relevant magistrate, who will then proceed to collect the money as though it were a punishment that he had levied.
Tax arrears pertaining to CGST shall be retrieved in the same manner as SGST or UTGST arrears by the appropriate officer of the State or Union Territory government. After being recovered, the money will be credited to the Central Government's account. The Central Government and State/UT Government would split the money according to the amount owed to each authority if the amount collected through this method is less than the amount owing.
Recovery Provisions for Appeals and Revisions
The taxpayer has the option to request a revision of the demand notice or to submit an appeal. This could result in one of the following choices:
If there is an increase in the outstanding balance, the commissioner will issue a second demand notice for the balance owed. The prior notice will apply to the previous amount.
If there is a reduction in the amount owed, the taxpayer will be notified by the commissioner of the reduction; however, no more notice will be given, and the procedures will proceed using the lower sum. Furthermore, the Commissioner will notify the authorities involved in the recovery proceedings of the change.
Conclusion
The entire topic of demand and recovery under the goods and services tax (GST) refers to the government's attempt to recoup tax payments made by individuals who, by intent or not, fail to pay the GST on the provision of goods and services. Every defaulter is granted a grace period by the government to make up any underpaid or unpaid balances. Procedures will be started against the defaulter if they do not pay the tax within the time frame specified by the Act.
FAQ
Q1. What is demand and recovery under GST?
If taxes are not paid according to the law, a demand under the GST may be made. The Central Excise and Service Tax legislation bears similarities to the provisions under GST for demand. Demand in non-fraudulent instances is penalised 10%, whereas fraud cases are penalised 25% to 50%. There is an 18% or 24% interest rate. Revenue officials may start the recovery process.
Q2. What if GST demand is not paid?
You have two choices if you receive a GST demand order: pay the demand amount or file an appeal. Nonetheless, in the "interest of revenue," GST officials may request payment before the three-month deadline if they deem it necessary.
Q3. What is recovery under GST Section 78?
Section 78 deals with the beginning of the recovery process. With the caveat that the appropriate officer may, for reasons to be documented in writing, force the aforementioned taxable person to make the payment within a timeframe that is shorter than three months if he deems it necessary to protect the income.
Q4. What is the recovery mechanism under GST?
The taxpayer receives a notice from the GST officer alerting them to the upcoming action. Items that belong to the defaulter, such as inventory, equipment, or cars, may be seized by the officer. The remaining tax amount is subsequently collected by selling or auctioning these seized items.
Q5. What is the penalty under section 73 of GST?
The appropriate official will acknowledge and issue an order detailing the amount of tax, interest, and a penalty equal to ten percent of the tax or ten thousand rupees, whichever is higher, that the person levied with respect to the representation, if any, made.
Q6. What is the time limit for issuing a show-cause notice under GST?
The show-cause notice is sent out no later than three months before the end of the three-year period that follows the deadline for filing annual returns.
Q7. What is GST demand notice?
In the context of the Goods and Services Tax (GST) regime, a demand notice is a formal notification that the tax authorities send to an individual or business when they suspect that the entity is in arrears on GST-related taxes.
Q8. How do you respond to GST demand notice?
You can use the GST portal to send an online response to any of the GST notices. A taxpayer may use his own digital signature, also known as an e-signature, or the digital signature of permitted staff members. In cases when paying taxes and interest is necessary, fulfil your financial obligations in the prescribed way and format.
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