Understanding Demand for Tax under GST

Last Update Date : February 28, 2018

Taxes whether Direct or Indirect, are the main source of revenue for the government. So, it has to make sure that it gets this revenue either voluntarily or forcefully. Even though Goods and Services Tax is a newly introduced tax, the government has got all its bases covered when it comes to the collection of the tax. Provisions for raising the demand for tax and recovering it where its unpaid have been prescribed in the GST Act. GST has replaced indirect taxes like Service tax, VAT and Excise duty etc. and demand and recovery provisions under GST Act are similar to such provisions under Service Tax Act and Excise Act. Provisions of demand and recovery of GST are covered from section 73 to section 84 of Chapter XV of the CGST Act, 2017.

Types of Demand of Tax under GST

Broadly speaking, the demand for tax can be raised by the GST officials for short payment or non-payment of tax in two different cases:

  • When there is fraud or willful misstatement or suppression of facts
  • When there is no fraud or willful misstatement or suppression of facts

Section 73 – When there is No Fraud

Section 73 of the CGST Act deals with the cases where taxes are short paid or unpaid, but without invocation of fraud by the assessee. Let’s have a look at the time frame specified for the adjudication of such cases.

Time Limits for Adjudication of Cases where there is no Fraud

  • In case the assessee has short paid or not paid at all, or input tax credit has been wrongly availed or used by him, the adjudication of the case should be done within 3 years from the date of filing of annual return for the relevant FY.
  • If the assessee received an erroneous refund, the case must be adjudicated within 3 years from the date on which such refund was credited to the assessee’s account.
  • The law also ensures that the concerned assessee gets notified well in advance about the demand raised by the tax authorities. As per the law, the taxpayer shall be issued a notice well in advance if the tax authorities identify a default in tax payment. The notice must be issued at least 3 months before the deadline for adjudication of case or issue of order.
  • So, in a normal case, if a taxpayer has not paid taxes for the month of January 2018, then the tax department must issue the order on this matter latest by 30th September 2022.

Section 74 – When there is Fraud

Section 74 deals with cases where there is non-payment or short payment of tax by the assessee and the authorities find willful suppression of facts or misstatement or fraud to be involved. Let’s have a look at the time frame specified for the adjudication of such cases.

Time Limits for Adjudication of Cases

  • In case the assessee has short paid or not paid at all, or input tax credit has been wrongly availed or used by him, the adjudication of the case should be done within 5 years from the date of filing of annual return for the relevant FY.
  • If the assessee received an erroneous refund, the case must be adjudicated within 5 years from the date on which such refund was credited to the assessee’s account.
  • The law also ensures that the concerned assessee gets notified well in advance about the demand raised by the tax authorities. As per the law, the taxpayer shall be issued a notice well in advance if the tax authorities identify a default in tax payment. The notice must be issued at least 3 months before the deadline for adjudication of case or issue of order.
  • So, in a normal case, if a taxpayer has not paid taxes for the month of January 2018, then the tax department must issue the order on this matter latest by 30th September 2024.

Note:

  • During the trial of a normal case, if it is found that fraud is involved, then the trial can be extended up to 5 years (under section 74) from 3 years (under section 73).
  • The provision to extend the period to 5 years from 3 years can be invoked only when there is a willful misrepresentation/suppression with the intention to evade tax as per one of the Judgments of Honorable Supreme Court.
  • If there is no suppression of the facts or all the facts have been disclosed to the department then the time limit for adjudication can’t be extended.
  • Where the service of notice or issuance of the order is stayed by an order of Court or Appellate Tribunal, the period of stay is excluded in computing the period specified based on the case in the Act.

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Interest and Penalty for Default in Payment of GST

If the defaulter takes appropriate action, i.e. pay tax, interest and penalty on time, he can escape prosecution.

Interest and Penalty before Show Cause Notice being issued

In normal case

  • The taxpayer needs to pay the tax due along with applicable interest.
  • He should make this payment before show cause notice being issued to him under section 73(1) & inform to the Proper officer in writing.

In case of fraud or suppression or misstatement etc.

  • The taxpayer needs to pay the tax due along with interest and penalty @ 15% of the tax amount.
  • He should make the payment before service of show cause notice under section 74(1) & inform to the Proper officer in writing.

So, after the payment of the tax, interest and penalty, the Proper officer will not serve any show cause notice under section 73(1) & section 74(1) as the case may be.

[ Read: Offences and Penalties under GST ]

Interest and Penalty after Show Cause Notice being issued

Even after show cause notice is issued by the Proper officer, the taxpayer can avoid prosecution by taking certain actions, i.e. pay tax, interest and penalty on time.

In normal case

  • The taxpayer needs to pay the tax due along with applicable interest
  • He must make the payment within 30 days of issue of SCN under section 73(1)
  • After the payment, no penalty will be levied/collected

In cases of fraud / suppression / misstatement etc

  • The taxpayer needs to pay tax due along with interest as well as penalty @ 25%
  • He must make the payment within 30 days of issue of SCN under section 74(1)

Note: If the Proper officer fails to act timely and pass an order after issuing show cause notice then the adjudication will be considered complete.

Interest and Penalty after issuing of order

Even after the order is issued, the taxpayer can avoid prosecution by taking certain actions, i.e. pay tax, interest and penalty on time.

In cases of fraud / suppression / misstatement etc

  • The taxpayer needs to pay tax along with interest & penalty @ 50%
  • He makes this payment within 30 days of communication of order

Note: All proceedings, in respect of the said notice, shall not include proceeding under section 132 i.e. punishable offences.

Table Showing Penalty Percentages under Different Payment Cases

Situations No Fraud Cases (Sec 73) Fraud Cases (Sec 74)
Before issue of show cause notice Nil 15% of the tax due
Within 30 days from issue of show cause notice Nil 25% of the tax due
Within 30 days from issue of order Higher of 10% of Tax or INR 10,000 50% of the tax due
 Any other case  100% of the tax due
  • Proper officer (with sufficient cause) may grant time and adjourn the hearing for reasons to be recorded in writing. However, GST laws do not allow more than three adjournments to a person during the proceedings.
  • Amount of tax, interest and penalty demanded in the order shall not be more than the amount specified in the notice and no demand shall be confirmed on the ground other than the ground specified in the notice.

Cases where Tax is Collected but not Paid

  • GST law has provisions related to the recovery of the amount collected by a person as tax from another person but not deposited with the Government.
  • Here law says that it is mandatory to pay the amount of tax collected from another person to the government regardless of whether the supplies in respect of which such amount collected is taxable or not.
  • For any such unpaid tax, the Proper officer may issue SCN for its recovery and charge penalty equivalent to such amount.
  • Though there is no time limit to issue SCN under Section 76(2) for these cases but the Proper office has to pass an order after following principles of natural justice within one year from the date of issue of such notice.
  • Period of stay by an order of the court or Appellate Tribunal shall be excluded in computing the period of one year.

Tax wrongly collected and Paid to Central or State Government

If a transaction was considered intra-state supply which actually was interstate supply and wrong tax was collected and paid, then a refund of such tax can be claimed.
If a registered person paid integrated tax on a transaction which is actually an intra-state supply but considered an inter-State supply, then he does not need to pay any interest on the amount of CGST / SGST or CGST / UTGST as the case may be.

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