Section 74 Under CGST Rules: Voluntary Payments & Penalties Guide

The Goods and Services Tax (GST) revolutionized India’s taxation system in 2017. It aimed to simplify and unify the country’s complex tax structure. Within this framework, Section 74 of the Central Goods and Services Tax (CGST) Act plays a crucial role in addressing tax evasion cases.

Section 74 under CGST deals specifically with situations involving fraud, wilful misstatement, or suppression of facts to evade tax. It outlines the procedures for determining tax liability, imposing penalties, and allowing for voluntary payment in such cases.

The significance of voluntary payment under Section 74 cannot be overstated. It provides taxpayers an opportunity to rectify their mistakes, reduce penalties, and avoid lengthy legal proceedings. This proactive approach benefits both the government and taxpayers, promoting compliance and reducing administrative burden.

Understanding Voluntary Payment Under Section 74

Voluntary payment under Section 74 allows taxpayers to pay tax dues, interest, and a reduced penalty before a Show Cause Notice (SCN) is issued or within 30 days of receiving it. This provision encourages taxpayers to proactively rectify errors or omissions involving fraud or misstatement, thus reducing legal consequences.

Benefits:

• Reduced Penalties: By opting for voluntary payment before an SCN, penalties are significantly lower compared to payments made after an SCN.
• Avoid Legal Complications: Voluntary compliance helps prevent further legal actions, minimizing potential fines and the risk of prosecution.

Practical Example: If a business realizes it has underreported taxable sales, it can use this provision to voluntarily pay the due tax and interest. By doing so before an SCN, the penalty is reduced, and the company avoids legal proceedings.

Procedure for Voluntary Payment Using Form GST DRC-03

To make a voluntary payment under Section 74, taxpayers must use Form GST DRC-03. This form is available on the GST portal and allows taxpayers to declare and pay their tax liabilities voluntarily.

Here’s a step-by-step guide to filing Form GST DRC-03:

1. Log in to the GST portal (www.gst.gov.in) using your credentials.
2. Navigate to the ‘Services‘ tab and select ‘Payment‘ > ‘Create Challan‘.
3. Choose ‘Voluntary Payment (DRC-03)‘ under the reason for payment.
4. Select the appropriate Act (CGST/SGST/IGST) and fill in the required details.
5. Enter the tax amount, interest, and penalty (if applicable).
6. Choose your preferred payment mode and complete the payment.
7. Once the payment is successful, the DRC-03 challan will be generated.

It’s crucial to file Form GST DRC-03 within the stipulated timeline to avail of the benefits of voluntary payment.

Voluntary Payment Before SCN: Penalty Benefits

• Penalty Reduction: If a voluntary payment is made before receiving an SCN, the penalty is reduced to 15% of the tax amount. This is far lower than the potential 100% penalty imposed if the case proceeds through adjudication.

  Example: For instance, if a taxpayer has evaded ₹1,00,000 in GST, the penalty under normal circumstances could be as high as ₹1,00,000. However, by making a voluntary payment before the SCN, the penalty drops to ₹15,000, representing a significant savings.

• Avoiding Legal Proceedings: Voluntary payment also helps in avoiding the issuance of an SCN, which means the taxpayer is saved from entering legal proceedings and potential reputational harm.

Tax Liability Under Section 74

The tax liability under Section 74 includes the unpaid or short-paid tax, along with interest calculated from the due date of payment until the actual date of payment. The interest rate is typically 18% per annum.

In cases of voluntary payment, the tax liability is calculated as follows:

Tax Liability = Unpaid/Short-paid Tax + Interest + Reduced Penalty

For instance, if a taxpayer has evaded ₹1,00,000 in GST over a period of one year:

• Tax amount: ₹1,00,000
• Interest (18% for one year): ₹18,000
• Reduced penalty (15% of tax amount): ₹15,000
• Total liability: ₹1,33,000

This calculation demonstrates how voluntary payment can significantly reduce the overall financial burden on the taxpayer.

Penalties and Interest Under Section 74

The penalties under Section 74 are designed to deter tax evasion and encourage voluntary compliance. The penalty structure is as follows:

1. 15% of the tax amount if paid before the issuance of SCN
2. 25% of the tax amount if paid within 30 days of SCN issuance
3. 50% of the tax amount if paid after 30 days of SCN issuance but before the issuance of an order
4. 100% of the tax amount if paid after the issuance of an order

Interest is charged at 18% per annum from the due date of payment until the actual date of payment, regardless of when the payment is made.

For example, if a taxpayer has evaded ₹1,00,000 in GST:

• Penalty if paid before SCN: ₹15,000
• Penalty if paid within 30 days of SCN: ₹25,000
• Penalty if paid after 30 days of SCN but before order: ₹50,000
• Penalty if paid after order: ₹1,00,000

This progressive penalty structure clearly incentivizes early voluntary payment.

Show Cause Notice (SCN) Under Section 74

A Show Cause Notice (SCN) is a formal document issued by the tax authorities when they have reason to believe that a taxpayer has evaded tax through fraud, wilful misstatement, or suppression of facts.

The SCN outlines:

1. The alleged tax evasion and its quantum
2. The basis for arriving at the tax amount
3. The proposed penalty and interest
4. The time frame within which the taxpayer must respond

Upon receiving an SCN, the taxpayer has 30 days to respond. They can either contest the allegations or opt for voluntary payment to reduce the penalty.

For instance, if a jewellery retailer receives an SCN alleging underreporting of sales to evade GST, they have 30 days to either provide evidence refuting the allegation or make a voluntary payment to settle the matter with a reduced penalty.

Steps to File GST DRC-03 for Voluntary Payment

Filing GST DRC-03 for voluntary payment is a straightforward process. Here’s a detailed guide:

1. Log in to the GST portal (www.gst.gov.in)
2. Go to ‘Services‘ > ‘Payment‘ > ‘Create Challan’
3. Select ‘Voluntary Payment (DRC-03)’ as the reason for payment
4. Choose the appropriate Act (CGST/SGST/IGST)
5. Enter details such as the financial year, original tax period, and cause of payment
6. Provide a brief explanation for the voluntary payment
7. Enter the tax amount, interest, and penalty (if applicable)
8. Select your preferred payment mode (Net Banking, Credit Card, etc.)
9. Complete the payment
10. Download and save the generated DRC-03 challan for your records

Remember, the deadline for filing DRC-03 is before the issuance of SCN or within 30 days of receiving the SCN to avail maximum benefit.

Consequences of Non-Payment Under Section 74

Failing to make a voluntary payment or respond to an SCN under Section 74 can lead to severe consequences. These may include:

1. Imposition of maximum penalty (100% of tax amount)
2. Seizure of assets or bank accounts
3. Cancellation of GST registration
4. Legal prosecution in extreme cases

For example, if a manufacturer fails to respond to an SCN alleging GST evasion of ₹10,00,000, they may face:

• A penalty of ₹10,00,000 (100% of tax amount)
• Interest of 18% per annum on ₹10,00,000
• Potential seizure of factory equipment or freezing of bank accounts
• Criminal charges for tax fraud

These consequences underscore the importance of addressing tax issues promptly and honestly.

Common Defences Against Section 74 SCN

While voluntary payment is often the best course of action, there are situations where taxpayers may have valid defences against a Section 74 SCN. Some common defences include:

1. Clerical Errors: If the alleged evasion resulted from a genuine clerical mistake rather than intentional fraud.
2. Misinterpretation of Law: If the taxpayer can prove that their actions were based on a reasonable interpretation of complex tax laws.
3. Time-Barred Notices: If the SCN is issued after the 4 years and 6 months limit specified in Section 74.
4. Lack of Evidence: If the tax authorities fail to provide concrete evidence of fraud or wilful misstatement.

For instance, a software company receiving an SCN for misclassification of services could argue that the classification was based on a reasonable interpretation of GST charges for software services, which are often subject to debate.

Differences Between Section 73 and 74

Here is comparison to know the difference between section 73 and section 74:

Aspect	Section 73	Section 74
Application	Non-fraudulent cases (e.g., tax short-paid, ITC wrongly availed)	Fraud, wilful misstatement, or suppression of facts to evade tax
Time Limit for SCN	2 years and 9 months from the due date of annual return	4 years and 6 months from the due date of annual return
Penalty	10% of tax amount due	Up to 100% of tax amount due
Nature of Offense	Unintentional errors or non-fraudulent actions	Intentional fraud or evasion
Voluntary Payment Benefit	Reduced penalty for voluntary payment before SCN	Reduced penalty but stricter compared to Section 73

Conclusion

Section 74 under CGST addresses tax evasion while offering taxpayers a chance for voluntary compliance, resulting in reduced penalties and legal complications. By making timely voluntary payments and complying with GST regulations, taxpayers can avoid severe consequences, promoting transparency and efficiency in the tax system. Tata nexarc can support businesses by offering tools and services that streamline compliance with GST regulations, including guidance on voluntary payments and tax-related matters, helping businesses navigate complex tax processes efficiently and avoid penalties, ensuring smooth operations.