Chapter 19: Demands and Recovery

The provisions relating to demands and recovery deal with situations where tax has not been paid, has been short-paid, or has been erroneously refunded.

Statutory Basis:

Section 73 – Non-payment or short payment of tax without fraud or wilful misstatement.

Section 74 – Non-payment or short payment of tax with fraud, wilful misstatement, or suppression of facts.

Section 74A (inserted via Finance Act, 2024) – Power to reduce or waive penalty in certain cases.

(a) Section 73 – Non-fraud Cases

Applicable where tax not paid or short paid without intent to evade tax.

Show cause notice (SCN) to be issued at least 3 months before the time limit for order.

Order to be issued within 3 years from the due date of annual return for the relevant year.

Voluntary Payment Benefits (before SCN):

(b) Section 74 – Fraud Cases

Applicable where tax short paid due to fraud, wilful misstatement, or suppression.

SCN to be issued at least 6 months before order.

Order to be passed within 5 years from the due date of annual return.

Reduced Penalty Options:

(c) Section 74A – Waiver / Reduction of Penalty

Introduced to encourage early settlement of disputes.

Government empowered to waive penalty or interest by notification for specified periods or cases.

Relief linked to voluntary payment and cooperation by taxpayer.

Brings parity with Vivad se Vishwas-type settlement mechanism in GST.

An SCN is a legal notice issued by the proper officer demanding explanation for non-payment or short payment of tax.

Essentials of a Valid SCN:

Must be specific, clear, and based on evidence.

Should mention section invoked, period of default, and amount demanded.

Should enclose statement of facts and grounds.

Issued before adjudication, allowing the taxpayer to reply and seek hearing.

Response Procedure: 1️⃣ Read the allegations carefully and verify computation. 2️⃣ File a written reply within prescribed time, rebutting each point. 3️⃣ Seek personal hearing if required (Rule 142(4)). 4️⃣ Voluntary payment via Form DRC-03 may close proceedings if accepted.

Invalid SCN: Courts have repeatedly held that SCNs lacking legal basis or jurisdiction are void ab initio and unenforceable.

When tax remains unpaid after adjudication, recovery proceedings commence under Section 79 of the CGST Act.

Modes of Recovery:

Rule 142A: Mandates electronic communication of recovery proceedings through Form DRC-09 to DRC-25 (various stages like notice, sale, or attachment).

Protection for Taxpayers: If taxpayer has filed an appeal with pre-deposit, further recovery remains stayed till appeal disposal (Section 107(7)).

Section 83 empowers the Commissioner to provisionally attach property (including bank accounts) of a taxable person during proceedings under certain sections (e.g., 67, 73, 74, 76, etc.).

Purpose: To protect the interests of revenue during ongoing investigation or adjudication.

Key Points:

Attachment valid for one year unless vacated earlier.

Must be based on reasonable belief and recorded satisfaction.

Not to be used as a punitive measure.

Judicial View: Courts (e.g., Kaish Impex Pvt. Ltd. v. UOI, Bombay HC) have held that arbitrary or mechanical attachment violates Article 14 and 19(1)(g) of the Constitution.

Section 82 of the CGST Act provides that tax dues under GST shall be the first charge on the property of the taxable person, notwithstanding any other law.

Meaning: Government dues take priority over all other claims, including secured creditors, except where the Insolvency and Bankruptcy Code (IBC) applies (as per Section 238 of IBC).

Illustration: If a taxpayer owes ₹10 lakh to the bank and ₹8 lakh in GST dues, the department’s dues enjoy first charge unless resolution under IBC is pending.

Exceptions:

In case of IBC proceedings, insolvency resolution has precedence.

Where property already sold before tax demand, recovery cannot be enforced retrospectively.