The Misuse of GST Section 74: A Threat to Honest Taxpayers
Thank you for reading this post, don't forget to subscribe!India Inc. is raising serious concerns over the “arbitrary and excessive” use of Section 74 of the Central Goods and Services Tax (CGST) Act. While this provision was designed to target deliberate tax evasion, tax officers are now routinely applying it to a broader range of situations, including genuine mistakes and simple clerical errors. This practice is leading to inflated tax demands, severe penalties, and unnecessary reputational damage for businesses.
Intent vs. Error: The Core of the Problem
The fundamental issue lies in blurring the lines between Sections 73 and 74.
- Section 73 applies to genuine mistakes, such as clerical errors, classification disputes, or differences in interpretation. It has a three-year limitation period and carries less severe penalties.
- Section 74 is specifically for cases of fraud, willful misstatement, or suppression of facts with the clear intent to evade tax. It allows for a penalty of up to 100% of the tax amount and has an extended five-year limitation period.
Experts and industry leaders say that officers are misusing Section 74 to bypass the shorter timeline of Section 73, weaponizing the five-year window to issue notices even when no fraud is involved.
Consequences for Businesses
The implications of facing a Section 74 notice go far beyond a simple tax demand:
- Reputational Damage: Allegations of fraud can tarnish a company’s standing, especially for small and mid-sized enterprises (SMEs) that depend on their credibility.
- Cash Flow Disruption: Businesses are forced to set aside large amounts for disputed taxes and penalties, impacting their financial health.
- Costly Litigation: Disputes under Section 74 are often prolonged and require expensive legal battles.
- Eroding Trust: Treating every tax mismatch as a fraudulent act undermines confidence in the tax system and burdens honest taxpayers.
Judicial Pushback and a Glimmer of Hope
Fortunately, Indian High Courts are now challenging the mechanical application of Section 74. They have ruled that fraud cannot be assumed from tax shortfalls alone and that the burden of proof rests with the tax department.
In an effort to correct this issue, the government introduced Section 74A for new cases from the financial year 2024-25 onwards. This new section aims to standardize timelines and streamline the process for both fraud and non-fraudulent cases, but it only applies prospectively.
For now, industry stakeholders are urging the government to issue clear guidelines, mandate higher-level approvals for Section 74 notices, and train officers to differentiate between genuine errors and willful evasion. This is seen as a critical step to ensure that the law’s intent is restored and the integrity of the compliance system is maintained.
