Section 74 of the Central Goods and Services Tax (CGST) Act applies to tax periods up to financial year 2023–24 when the department alleges that tax was not paid or was short-paid, an erroneous refund was issued, or input tax credit (ITC) was wrongly availed or utilised because of fraud, wilful misstatement or suppression of facts to evade tax. The demand includes the tax, interest under Section 50 and a penalty that can equal the tax.
Businesses can reduce that penalty through statutory payment windows: 15% of the tax before the notice is served, 25% within 30 days after the notice, or 50% within 30 days after the adjudication order. Section 74A is the replacement framework for financial year 2024–25 onward, with a 60-day reduced-penalty period under the 2024 legislative changes.
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What Section 74 covers
Section 74 is the fraud-based demand provision in the CGST Act. It can be used where the proper officer alleges that a registered person:
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- received an erroneous refund; or
- availed or utilised input tax credit incorrectly,
and that the result was caused by fraud, wilful misstatement or suppression of facts to evade tax. A notice under Section 74 asks the taxpayer to show cause why the specified tax, interest under Section 50 and a penalty equivalent to the tax should not be recovered. That wording appears in Section 74(1) of the CGST Act.
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The allegation is more serious than a simple error. A calculation mistake, classification dispute or documentation lapse does not automatically satisfy the fraud-based test. The notice should identify the conduct and evidence relied on to connect the short payment, refund or ITC issue with an intent to evade tax.
Which financial years use Section 74?
Periods up to financial year 2023–24
The current Act text limits Section 74 to demands relating to tax periods up to FY 2023–24. Existing notices and proceedings for those periods continue under the Section 74 procedure, subject to the statutory time limits and any applicable court or tribunal stay.
Financial year 2024–25 onward
Section 74A was inserted as the common demand framework for FY 2024–25 onward, whether or not the department alleges fraud, wilful misstatement or suppression. The Ministry of Finance’s 2024 explanatory material describes Section 74A as providing a common time limit for demand notices and orders for those years. It also states that the reduced-penalty payment period was increased from 30 days to 60 days under the new framework.
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Therefore, the first question when a notice arrives is the tax period. Do not assume that a notice issued today is governed by Section 74; a current notice can still concern an earlier year, while a demand for FY 2024–25 or later is generally considered under Section 74A.
How much is the Section 74 penalty?
| When payment is made | Penalty | Effect |
|---|---|---|
| Before service of the Section 74(1) notice | 15% of the tax | No notice is issued for the amount paid, provided the tax and applicable interest are also paid. |
| Within 30 days after service of the notice | 25% of the tax | Proceedings relating to that notice conclude after payment of tax, interest and penalty. |
| Within 30 days after communication of the adjudication order | 50% of the tax | Proceedings relating to the notice conclude for the tax covered by the order. |
| After the statutory early-payment windows | 100% of the tax specified as penalty | The full penalty stated in the adjudication order can apply, in addition to tax and interest. |
The 15% option is set out in Section 74(5): the taxpayer may, before service of the notice, pay the tax, Section 50 interest and a penalty equivalent to 15% of that tax. The 25% and 50% options are reflected in the Act and the CBIC GST FAQ. These are statutory settlement windows, not discretionary discounts offered by an individual officer.
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Each percentage is calculated on the relevant tax amount, not on the combined total of tax and interest. Interest remains payable separately. A business should obtain a written computation that shows the tax base, the interest period and the penalty calculation before remitting money.
Interest under Section 50
Interest is separate from the penalty
Section 74 links the demand to interest payable under Section 50. Paying a reduced penalty does not eliminate interest. A taxpayer must pay the tax, the interest calculated for the applicable delay period and the penalty percentage applicable to the payment date.
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Section 50 sets a ceiling of 18% for delayed payment of tax under Section 50(1). For undue or excess ITC claims or reductions in output tax liability covered by Section 50(3), the statutory ceiling is 24%. The government notifies the operative rate, so the ceiling is not automatically the rate for every demand.
The correct computation depends on the nature of the liability, the tax period, the date on which tax or ITC became payable, payments already made and the rate notified for that period. Interest generally runs for the statutory period of delay. The notice should disclose the calculation or the data from which it can be reproduced; if it does not, request a transaction-level reconciliation.
How to check an interest calculation
- Identify the tax component on which interest is charged: unpaid output tax, an erroneous refund or an undue or excess ITC claim.
- Confirm the start date and end date used by the department, including the date of payment or reversal.
- Check the notified rate applicable to the relevant period and provision of Section 50.
- Remove amounts already paid or reversed, so interest is not charged twice.
- Recalculate each month or period separately where the liability arose at different times.
What happens after a Section 74 notice?
1. Fix the service date
Record the date, time, electronic channel and physical mode, if any, by which the notice was served. The 30-day window for the 25% penalty runs from service of the notice, while the post-order window runs from communication of the adjudication order. Preserve the original notice, attachments and portal download because a later dispute may turn on when service occurred.
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2. Reconcile the alleged tax
Match the notice to filed returns, invoices, e-way bills, contracts, payment records, refund applications and the electronic credit ledger. For an ITC allegation, reconcile purchase registers, supplier filings, credit notes, reversals and utilisation. For an erroneous refund, trace the application, sanction order, bank credit and subsequent adjustments. Prepare a schedule that separates admitted amounts, disputed amounts and amounts already paid.
3. Test the fraud allegation
Read the notice for the specific facts said to establish fraud, wilful misstatement or suppression to evade tax. Look for identified invoices, statements, documents, communications or conduct rather than a conclusion that an error is automatically fraudulent. A notice that proves only a tax difference may be vulnerable to a Section 74 challenge, because the fraud-based ingredient is essential.
4. Model the available outcomes
Prepare separate totals for payment before notice, payment within 30 days of notice and payment within 30 days of the order. Each model should show tax, Section 50 interest and penalty as separate lines. Also calculate the full-penalty exposure if the matter proceeds without an accepted payment or if an appeal does not succeed.
5. Obtain a professional review
Before paying or filing a reply, have a GST professional or tax lawyer review jurisdiction, limitation, evidence, computation and the proposed response. Payment can close proceedings for the covered tax when the statutory conditions are met, so an irreversible decision should not be made solely from a spreadsheet or an informal portal message.
How payment and closure are recorded
Payment is made through the GST electronic cash ledger and reflected in the electronic tax liability register. The prescribed electronic trail is important because a payment without the correct intimation may not produce the intended procedural closure.
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- DRC-03: used by the taxpayer to intimate payment, including tax, interest and penalty where applicable.
- DRC-05: records conclusion of proceedings after the applicable payment and statutory conditions are satisfied.
- DRC-07: records an adjudicated order for recovery.
Retain the challan, debit reference, DRC-03 acknowledgement, any DRC-05 conclusion and the order or notice to which the payment relates. Verify that the payment is allocated to the correct GSTIN, tax period and liability head. If the portal amount does not match the written computation, pause and resolve the discrepancy rather than paying an unexplained balance.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Time limit for a Section 74 order
For pre-74A periods, the Section 74 order is generally required within five years from the due date for filing the annual return for the relevant financial year. For an erroneous refund, the five-year period is generally measured from the date of the refund. The officer must issue the notice at least six months before the order deadline.
The calculation can change where a court or tribunal stay affects the statutory period. Businesses should therefore maintain a limitation worksheet showing the financial year, annual-return due date or refund date, notice date, six-month minimum lead time, order deadline and any stay period. A notice or order issued after the applicable limit can be challenged, but limitation is fact-specific and should be reviewed against the complete procedural record.
Section 74 compared with Sections 73 and 74A
| Issue | Section 73 | Section 74 | Section 74A |
|---|---|---|---|
| Typical period | Earlier non-fraud demands under the pre-74A framework | Tax periods up to FY 2023–24 | FY 2024–25 onward |
| Fraud or suppression allegation | Not required; used where the short payment is not attributed to fraud, wilful misstatement or suppression | Required allegation: fraud, wilful misstatement or suppression of facts to evade tax | Common framework whether or not fraud or suppression is alleged |
| Penalty structure | Lower non-fraud penalty structure under the applicable provision | Up to an amount equivalent to the tax, with 15%, 25% and 50% statutory payment windows | New framework; the 2024 explanation refers to a 60-day reduced-penalty period |
| Order limitation | Pre-74A limitation under the applicable Section 73 rule | Generally five years, subject to the annual-return/refund trigger and stay rules | Common time-limit framework introduced for FY 2024–25 onward |
| Interest basis | Section 50 | Section 50 | Section 50 and the rules applicable to the new framework |
| Key forms and route | Notice, reply, order and payment records under the applicable GST procedure | DRC-03 payment intimation, DRC-05 conclusion and DRC-07 adjudication record where applicable | Forms and procedural details applicable to Section 74A |
If the department fails to establish fraud, wilful misstatement or suppression in a Section 74 case, the demand is treated as a Section 73 matter rather than retaining the fraud-based consequences. That distinction can affect both penalty exposure and the applicable limitation analysis.
Common mistakes that increase exposure
Using the notice date instead of the service date
The 25% option is tied to service, not merely the date printed on the notice. Keep portal logs and delivery records.
Paying tax but omitting interest
A tax-only payment does not satisfy the statutory payment condition. Interest under Section 50 must be paid and documented separately.
Assuming a 15% payment is always available
The 15% route must occur before service of the Section 74(1) notice. Once the notice has been served, the relevant statutory window is the 25% option within 30 days.
Accepting a fraud label without checking evidence
Review whether the notice identifies intentional conduct and an evasion link. A disagreement over eligibility or a clerical mismatch may require a merits reply rather than automatic acceptance of Section 74.
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Ignoring the tax-period transition
Classify each disputed invoice, return period or refund by financial year. Section 74A applies from FY 2024–25, while Section 74 remains relevant to earlier periods.
Losing the audit trail
Keep the notice, reply, working papers, challans, portal acknowledgements, DRC forms and order in one indexed file. These records support limitation objections, payment-credit claims and any appeal.
Worked example of the penalty windows
Assume a notice specifies ₹10,00,000 of tax, with interest calculated separately under Section 50. Before the notice is served, the Section 74(5) penalty would be ₹1,50,000. If the notice has already been served, payment within 30 days would carry a ₹2,50,000 penalty. After an order is communicated, payment within 30 days would carry a ₹5,00,000 penalty. If the statutory window is missed, the order may impose a penalty equal to the ₹10,00,000 tax. In every case, the ₹10,00,000 tax and the separately computed interest remain payable; the example does not establish the applicable interest rate or number of days.
Quick Recap
Practical decision checklist
- Identify whether the disputed period is FY 2023–24 or earlier, or FY 2024–25 onward.
- Confirm the GSTIN, tax period, legal provision and amount in the notice.
- Record service and communication dates.
- Reconcile tax, interest, penalty and prior payments independently.
- Assess whether the evidence supports fraud, wilful misstatement or suppression to evade tax.
- Check the five-year limitation and any court or tribunal stay for a pre-74A demand.
- Choose, with professional advice, between payment within an available window and a merits response or appeal.
- Use the electronic cash ledger and preserve DRC-03, DRC-05, DRC-07 and challan records as applicable.
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