When I receive calls that start with “Ma’am, I got a section 73 GST notice,” my first response is always: don’t panic.
One client from Pune, a trading firm, recently got a show-cause notice under Section 73 GST for ₹4.2 lakh. They’d simply entered a sales invoice twice. We replied with evidence, paid the small difference and interest, and the department dropped the case.
That story could be yours too. So let’s demystify what Section 73 and Section 74 of the GST Act actually mean and what to do when such a notice lands in your inbox.
Why Penalty under Section 73 and Section 74 Exist
GST is a self-declaration tax system. The government trusts taxpayers to compute and pay correctly. But trust always comes with verification.
Sections 73 and 74 are enforcement tools—meant to recover tax that was:
- not paid,
- short paid, or
- wrongly refunded / ITC availed.
The only dividing line is intent:
- If the error was unintentional → Section 73.
- If there was fraud or suppression → Section 74.
Section 73 under GST — For Honest Mistakes
Section 73 covers situations where businesses go wrong without intending to evade tax.
Typical examples:
- Wrong GST rate applied (12 % instead of 18 %).
- ITC claimed because supplier uploaded invoice late.
- Credit note not reflected correctly in return.
- Simple accounting duplication.
Penalty Structure
| Stage | What You Pay | Penalty |
|---|---|---|
| Before SCN | Tax + Interest | 0 % |
| After SCN but before order | Tax + Interest | 10 % or ₹10,000 (min) |
This approach keeps the law business-friendly. If you realise your own error, fix it, and pay, the law doesn’t punish you.
Section 74 under GST — For Fraud or Suppression
Section 74 is invoked when officers find deliberate tax evasion.
Examples include:
- Creating fake invoices to claim ITC.
- Hiding outward supplies.
- Maintaining parallel books.
- Misclassifying intentionally to reduce rate.
Penalty Structure
| Stage | What You Pay | Penalty % of Tax |
|---|---|---|
| Before SCN | Tax + Interest | 15 % |
| After SCN but before order | Tax + Interest | 25 % |
| Within 30 days of order | Tax + Interest | 50 % |
| Beyond 30 days | Tax + Interest | 100 % |
So a ₹10 lakh fraud could mean ₹10 lakh tax + ₹10 lakh penalty + interest if you don’t settle early.
Section 73 vs Section 74 — The Key Differences
| Basis | Section 73 GST | Section 74 GST |
|---|---|---|
| Nature of error | Without fraud | With fraud / suppression |
| Intent | Genuine mistake | Wilful evasion |
| Penalty | 10 % or ₹10,000 | Up to 100 % of tax |
| Voluntary payment benefit | Full penalty waiver | Partial reduction |
| SCN time limit | 2 yr 9 m | 4 yr 6 m |
| Order time limit | 3 yr | 5 yr |
| Burden of proof | On taxpayer (for facts) | On department (for fraud) |
Remember this table—it’s the simplest way to explain the difference between Section 73 and 74 in GST during client discussions or internal reviews.
How a GST Notice Travels Through the System
Step 1 – Detection
Officers may flag mismatches between GSTR-1 and 3B or via data analytics, audit or e-way-bill checks.
Step 2 – Pre-Notice Communication (DRC-01A)
This is a friendly nudge: “We found this mismatch; please pay or explain.”
You can respond in DRC-01A Part B and close the matter before it becomes formal.
Step 3 – Show Cause Notice (DRC-01)
If you ignore or dispute the pre-notice, you’ll receive a formal SCN under Section 73(1) or 74(1). It must clearly mention:
- the relevant section,
- tax period,
- grounds of demand, and
- supporting evidence.
Step 4 – Reply and Personal Hearing
You have full right to reply with documents and to be heard personally (Sec 75(4)).
Step 5 – Adjudication Order (DRC-07)
After considering your reply, the officer issues a speaking order confirming or dropping the demand.
Step 6 – Recovery if Unpaid
If dues remain unpaid after 3 months, recovery actions may include:
- adjusting refunds,
- attaching bank accounts, or
- seizing property.
Time Limits Matter
- Section 73: SCN ≤ 2 yr 9 m | Order ≤ 3 yr.
- Section 74: SCN ≤ 4 yr 6 m | Order ≤ 5 yr.
Any notice issued beyond these limits is time-barred. Always verify the date of your annual return when checking this.
Voluntary Payment Benefits
Voluntary compliance saves both penalty and peace of mind.
Example 1: A retailer notices ITC reversal missed in March. He pays ₹50 000 tax + ₹2 000 interest before SCN. → Case closed under Section 73 — no penalty.
Example 2: A construction firm caught with fake invoices pays tax + interest + 15 % penalty before SCN. → Case closed under Section 74.
Early action speaks volumes about your intent.
Real Stories from the Ground
Case A – A Startup’s Mismatch
A SaaS startup applied 12 % instead of 18 % GST on software export fees. During a departmental review, they admitted the error, paid the difference, and the officer closed it under Section 73 with no penalty.
Case B – The Fake Invoice Syndicate
A group of traders circulated ₹2 crore fake invoices. The lead member was charged under Section 74 and faced a 100 % penalty plus prosecution.
Case C – The Confused Manufacturer
A manufacturer of plastic caps treated them as “accessories” (12 %) instead of “parts” (18 %). After a professional opinion and proof of genuine confusion, the authority accepted Section 73 — minor penalty only.
These examples show how intent defines the section.
Common Triggers for GST Notices
- Non-filing of GSTR-9 or 9C.
- ITC on blocked items (motor cars, food, etc.).
- Supplier not filing GSTR-1 → ITC mismatch.
- Wrong HSN or classification.
- Difference between e-way bill data and returns.
Regular reconciliations eliminate 90 % of these risks.
Defenses That Work
- Expired Limitation: Show that notice issued late.
- Defective SCN: If it lacks reasons, challenge it.
- No Proof of Fraud: In Section 74 cases, fraud must be proven.
- Duplicate Demand: Confirm same issue not raised elsewhere.
- Prior Payment: Attach payment proofs.
- Natural Justice: If no hearing, order is void.
A well-drafted reply often stops a dispute from escalating.
What Courts Have Said
- Omaxe Ltd. v. CCT (2021): SCN must specify section clearly.
- Bharti Airtel Ltd. (2021): ITC mismatch ≠ fraud unless proved.
- Arya Vaidya Pharmacy (Kerala HC): Order without hearing violates natural justice.
Courts repeatedly favour transparent taxpayers.
Financial and Emotional Impact
A notice can feel intimidating. Apart from the tax burden, the process can disturb your business rhythm.
But remember — in most cases, it’s not an accusation; it’s a question. Treat it professionally, not personally.
Practical Checklist When You Receive a GST Notice
- Download and save the notice PDF.
- Note the section (73 or 74) and amount.
- Check due date for reply.
- Match figures with GSTR-3B and books.
- Collect supporting invoices and ledgers.
- Prepare a neat reply with annexures.
- Attend hearing (if offered).
- Keep acknowledgment of submission.
- Evaluate if voluntary payment saves cost.
Post-Order Appeal Process
If the order seems unjustified:
- File appeal under Section 107 within 3 months of order.
- Pay:
- Entire tax admitted by you + 10 % of disputed tax as pre-deposit.
- Appeal goes to the Appellate Authority.
If still aggrieved, you can move to Appellate Tribunal (once operational) and then High Court.
Many cases get partial relief or full waiver at appeal stage if documents are solid.
Long-Term Prevention Plan
- Monthly GST health check: Compare returns and books.
- Quarterly internal audit: Spot classification errors.
- Vendor verification: Avoid non-compliant suppliers.
- Proper record-keeping: 5-year invoice archive.
- Professional review: Engage CA or Virtual CFO once a year.
Good habits today mean fewer notices tomorrow.
Frequently Asked Questions
Q1. What is the main difference between Section 73 and Section 74 under GST?
Intent. Section 73 is for innocent errors; Section 74 for wilful evasion.
Q2. How much is the penalty under Section 73 GST?
10 % of tax or ₹10 000, whichever is higher.
Q3. And under Section 74 GST?
Up to 100 % of tax; can reduce to 15 %, 25 %, or 50 % with early payment.
Q4. Can I avoid penalty completely?
Yes — pay tax + interest before SCN under Section 73.
Q5. Can the department recover from my bank account?
Yes, only after final order and non-payment beyond due period.
Q6. Should I hire a CA for replying to SCN?
Recommended — a structured reply by a CA can save huge penalties.
My Professional Advice
After handling dozens of such cases, here’s my honest observation:
- 80 % notices are due to careless data entry, not fraud.
- Officers are more cooperative when they see genuine intent.
- A well-organised reply builds credibility for future interactions.
So next time you get that dreaded email from “noreply@gst.gov.in,” breathe deeply, collect your papers, and handle it methodically. The law is not against you — it just wants clarity.
Conclusion
Sections 73 and 74 are two sides of the same coin — both aim to recover tax but treat intent differently.
| Scenario | What You Should Do |
|---|---|
| Unintentional mistake | Pay tax + interest before SCN → No penalty (Section 73) |
| Possible fraud | Consult CA immediately and consider settlement (Section 74) |
| Disagree with order | File appeal within 3 months |
In the age of data matching and e-invoicing, transparency is your best protection.
Stay updated, stay honest, and stay ready to respond.