Section 73 of the CGST Act: A Detailed Guide
Section 73 of the CGST Act has been used to evaluate demand in genuine situations with no hidden motives in India. However, in response to the recommendation of the 53rd GST Council meeting, the FY 2024–25 budget included some benchmark changes as per this section. It is important to understand these changes to stay on top of them. The modifications to Section 73 of the CGST Act and their potential advantages for taxpayers are covered in this article.
Table of content
What is Section 73 of the CGST Act?
The process for defining the GST demand in various situations without any secret agenda (such as fraud, deliberate misrepresentations, or factual suppression) is covered by Section 73 of the CGST Act if:
Taxes are not properly compensated.
Taxes paid fall short of the total sum owed.
The tax is inaccurately reimbursed.
Section 73 of the CGST Act 2017's Input Tax Credit (ITC) is unlawfully used or acquired.
Purpose of Section 73 of the CGST Act
Section 73 is essential because it ensures tax compliance without heavily burdening genuine and honest errors. It applies to all situations where taxes have been inaccurately refunded or underpaid. A manufacturing company, for example, may have claimed an input tax credit (ITC) on purchases it thought qualified, only to discover later that the purchases were ineligible. Section 73 offers a framework for handling the problem in these situations. For small and medium-sized businesses, which might not have highly developed tax departments and are more likely to make inadvertent mistakes, this section is very relevant. It provides a means of correcting errors without levying harsh penalties related to fraudulent activity.
Applicability of Section 73 in FY 2023-24 and Beyond
The CGST Act's Section 73 has changed in FY 2024–2025. Two main events that have amended Section 73's provisions will impact your company. Let's analyse these significant occurrences and the resulting changes:
Recommendations from the GST Council’s 53rd Meeting
Let's first evaluate the adjustments proposed at the 53rd GST Council meeting:
Creating a deadline for the issuance of demand notices.
For taxpayers who pay tax and interest within 60 days of receiving the notice, the penalty burden is lessened.
Modifications Made by the 2024–2025 Financial Budget
Through the Finance Bill 2024-25, the Finance Minister introduced a new Section 74A to cover the provisions of Section 73 of the CGST Act and Section 74 in response to the 53rd GST Council Meeting's recommendations. Therefore, the following changes will be implemented starting in FY 2024–2025:
GST demands are still subject to Section 73 via FY 2023–2024.
Section 74A will prevail in FY 2024–2025. The following are the main modifications to Section 73 of the CGST Act brought about by Section 74A:
Provisions in Section 73 | Changes made by Section 74A |
Issue of demand notice | Under the new changes, a demand notice will be issued only if the tax amount exceeds Rs. 1,000 for the Financial Year. |
Time Limit under Section 73 | The time limit will be 42 months from:
The order should be issued within 12 months of the demand notice. Additionally, it can be extended up to a maximum of 6 months. The procedure should be completed within 18 months. |
Penalty under Section 73 | Penalty will be the higher of 10% of tax due or Rs.10,000 No penalty is applicable if the taxpayer pays the tax and interest within 60 days of the demand notice’s issue. |
Time Limit Set By Section 73 of the CGST Act
According to Section 73, the demand notice should be sent out at least three months before the final order is issued. The CGST Act's Section 73 timelines were unclear, which confused the taxpayers. Furthermore, there was no cutoff date for finishing the demand procedure. The following explicit time limits are imposed by the recently acquired Section 74A:
The notice must be sent out 42 days prior to either the deadline for submitting the annual return or
The incorrect rebate
After the notice is given, the final verdict should be issued within a year. Any higher-ranking officer, such as a Joint Commissioner, may extend this period for six months.
The Demand Procedure under Section 73 of the CGST Act is implemented using the Demand and Recovery Certificate (DRC) series of forms.
Penalties and Interest Under Section 73
Even though Section 73 discusses cases that are not fraudulent, it however charges fines and interest to guarantee compliance:
Interest: From the due date until the date of payment, mandatory interest is reviewed at 18% annually on the tax amount.
Penalty: A penalty of 10% of the tax amount or Rs. 10,000, whichever is greater, will be prescribed if the tax and interest are not paid before the notice is sent.
For instance, if a business receives a notice after a year that it has unpaid taxes by ₹100,000, it would be liable for:
Tax: Rs. 100,000
Rs. 18,000 in interest (18% for a year)
Rs. 10,000 (10% of tax, with a minimum of Rs. 10,000) is the penalty. Liability total: Rs. 128,000
This framework promotes voluntary tax compliance and prompt error correction.
Penalty under Section 73 | Penalty under Section 74A | ||
Situation | Applicable Penalty | Situation | Applicable Penalty |
Tax and interest paid before the notice is issued | No Penalty | Tax and interest paid before the notice is issued | No Penalty |
Tax and interest paid within 30 days of the notice being issued | No Penalty | Tax and interest paid within 60 days of the notice being issued | No Penalty |
Tax and interest paid after 30 days of the notice being issued | 10% of Tax Due or Rs. 10,000, whoever is higher | Tax and interest paid after 60 days of the notice being issued | 10% of Tax Due or Rs. 10,000, whoever is higher |
Steps for Demand and Recovery Under Section 73 of the CGST Act
Section 73's demand and recovery procedure is structured as follows:
Notice Issuance: The tax officer should notify the taxpayer of the reasons behind the sales.
Chance to React: The notice is given to the taxpayer, who generally has 30 days to respond.
Examining the Response: The officer looks at the taxpayer's response or any supporting documentation submitted.
Order Issuance: The officer issues an order, either acknowledging demand or concluding proceedings based on the analyses.
Payment or Appeal: Should the demand be verified, the taxpayer is required to make the payment or, if they disapprove of the order, to appeal.
Software companies, for example, must either accept the demand and pay the taxes or respond with proof of their classification justification if they receive a notice of underpayment taxes due to inaccurate service classification.
Mistakes Leading to a Notice Under Section 73
Several common mistakes occur leading to Section 73 notices:
Inaccurate goods or service classification: Underpayment of taxes may arise from using the incorrect HSN code.
Input tax credit claim errors: Input tax credit claim errors involve overestimating the eligible amount or claiming ITC on ineligible items.
Misunderstanding of the exemptions: Provisions are misinterpreted when some supplies are mistakenly believed to be exempt.
Errors in calculations: Simple math errors in determining tax liability are examples of calculation errors.
Transactions omitted: Transaction omission is the inability to include specific sales or purchases in returns.
Incorrect B2B and B2C payment reporting: Inaccurate tax calculations can result from misclassification of business-to-business and business-to-consumer transactions.
Input tax credit failure: When payment to the supplier is not received within 180 days, the ITC is not reversed.
For example, a chain of restaurants misclassified their takeout and dine-in services under different tax rates, which would result in an underpayment of taxes.
Responding to a Demand Notice U/s 73 of the CGST Act
As we proceed with the DRC series of forms, you can use form DRC-03 to advise the suitable officer of payment by CGST Act 73. To respond to the demand notice, however, you can use Form DRC-06.
According to Section 73 of the CGST Act, you have the following options for responding to a demand notice:
The payment is still pending, and the demand is correct.
The demand is accurate, and the money has already been paid.
The demand isn't completely true.
The demand is half correct.
Let's say you are against the GST authority's demand order. In that situation, Section 73 of the CGST Act allows you to appeal the demand order.
Consequences of Ignoring a Notice Under Section 73
Ignoring a notice under Section 73 could have serious repercussions.
Request automatic verification: The tax officer may confirm the demand without further notice.
Higher fines: There is no longer any opportunity to pay low fines.
Procedures for recovery: The department can begin recovery actions, like attaching bank accounts.
Legal issues: Later on, it becomes more challenging to contest the demand.
Effect on business operations: Ignoring notices may create challenges in getting different certifications needed for your company.
For instance, the taxpayer may be subject to a demand of Rs. 128,000 and legal action, if a notice for Rs. 100,000 is disregarded.
Recent Updates
Section 73 has recently undergone the following updates: Elaboration of time limit computation:
Clarification regarding time limit computation: The CBIC has provided an explanation of the three-year period's calculation with regard to late annual returns.
COVID-19 extension: During the pandemic, short-term extensions were given for a set of time limits under this section.
Coordination with other sections: Measures have been taken to guarantee Section 73 and its corresponding provisions are consistent.
Streamlining the process: Digital notices are being issued and responses to notices are accepted.
With these updates, Section 73 will be implemented efficiently and in a way that benefits taxpayers.
Conclusion
The CGST Act's Section 73 guarantees tax compliance free from the complications of fraud-related cases. Companies can effectively fulfill their tax obligations by being informed of the time limits, recovery process, and associated penalties. It's important to respond on time because ignoring notices can have financial implications.
FAQ
Q1. What is Section 73 of the CGST Act?
The CGST Act's Section 73 outlines the process to identify demand in circumstances other than fraud, wilful misinterpretation, or fact suppression.
Q2. When can a notice under Section 73 be issued by a tax officer?
For any of the reasons listed, the tax officer may submit the taxpayer a notice under section 73:
Taxes are not paid on schedule.
The actual GST liability exceeds the tax paid.
The tax refund is inaccurate.
The ITC is misused.
As long as the relevant tax amount for the fiscal year exceeds Rs. 1,000.
Q3. What is the show cause notice as per section 73 of GST?
Under Section 73 of the CGST Act, a taxpayer who tends to make a GST demand is provided a show-cause notice. The notice questions the taxpayer why the tax mentioned in the SCN should not be attributed.
Q4. How should you reply to a show cause notice issued under section 73 of GST?
The GST platform enables the online registration of any reply to notices. Taxpayers may use their own or their approved personnel's digital or e-signature. If tax and interest transactions are essential, make them required in the appropriate format.
Q5. What is the difference between sections 73 and 74?
When there is no presumption of fraud, deliberate distortion, or factual suppression, Section 73 applies to any tax liability. A tax liability is only subject to Section 74 in cases where fraud, purposeful misrepresentation, or factual suppression are suspected.
Q6. What happens after a show cause notice in GST?
In the circumstance that the application has not yet been issued, the taxpayer has 20 days from the date of SCN issuance to plea an extension of the closing date for replying to the SCN or an adjournment of the personal hearing once the tax officer has issued the show cause notice and set the date of the individual hearing.
Q7. What happens if you don't respond to show cause notice?
If you don't respond to your warning to show cause, it may be assumed that a decision has been made. This may lead to huge legal action, including contract termination or financial penalties. Ultimately, the nature of the dispute will determine any effects.
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