GST Council Recommends Amendments to Sections 73 and 74 of CGST Act: Streamlining Demand Notice Timelines and Penalty Provisions

In an effort to simplify and harmonize the Goods and Services Tax (GST) framework, the 53rd GST Council meeting proposed significant amendments to Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act, 2017. These amendments, including the insertion of a new Section 74A, aim to standardize the time limits for issuing demand notices and orders, regardless of whether fraud or willful misstatement is involved. Additionally, the Council recommended extending the time limit for taxpayers to avail of reduced penalty benefits.

Background

The different time limits for issuance of show cause notices and adjudication of demands have led to confusion and legal disputes. There have been instances where notices issued under Section 74 (fraud cases) beyond the three years but within the five-year limit have been challenged. If the charges of fraud or suppression were not sustained, these notices had to be dropped as time-barred, resulting in legal uncertainty and numerous court cases. Garg Rice Mills v. State of Punjab [2024] challenged the legality of extending the due date for issuing notices under Section 73, arguing it was time-barred. In Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] where the department has issued show cause notices by bunching up notices for multiple assessment years, for a period for the time limit is already exhausted, the Hon’ble Madras High Court emphasized that the limitation period is applicable separately for each assessment year. The challenge in K. R. Pulp Papers Ltd. v. Goods and Services Tax Council [2024] regarding the extension of time for issuing notices reflects issues similar to those addressed by the proposed amendment.

Current Framework: Sections 73 and 74 of the CGST Act

Under the current provisions, Sections 73 and 74 of the CGST Act govern the issuance of demand notices and orders for tax, interest, and penalties:

• Section 73 deals with cases where there is no fraud, suppression of facts, or willful misstatement. The time limit for issuance of an order under the provision is three years from the due date for filing the annual return for the relevant financial year. Therefore, the show cause notice has to be issued at least three months prior to the expiry of time limit of passing of the adjudication order.
• Section 74 addresses cases involving fraud, suppression of facts, or willful misstatement. The time limit for issuance of an order under the provision is five years from the due date for filing the annual return for the relevant financial year. Therefore, the show cause notice has to be issued at least six months prior to the expiry of time limit of passing of the adjudication order.

Proposed Amendments: A Common Time Limit

The GST Council has recommended the following key changes:

1. Common Time Limit for Demand Notices and Orders: The proposed amendments seek to provide a common time limit for the issuance of demand notices and orders, irrespective of whether the case involves fraud, suppression, willful misstatement, or not. This change will apply to demands for the financial year 2024-25 onwards.

2. Extended Time Limit for Reduced Penalty: Currently, taxpayers must pay the tax demanded along with interest within 30 days to benefit from a reduced penalty. The proposed amendment extends this period to 60 days.
3. Insertion of New Section 74A: A new Section 74A will be introduced to streamline the implementation further, encapsulating the common time limit provisions

Implications of the Amendments

1. Clarity and Consistency: Introducing a common time limit simplifies the GST compliance framework, making it easier for taxpayers to understand and adhere to the timelines for demand notices and orders.
2. Ease of Compliance: The extended period for availing of reduced penalty benefits offers taxpayers additional time to settle their dues, easing the compliance burden and potentially reducing litigation.
3. Administrative Efficiency: A uniform timeline streamlines the process of issuing demand notices and orders for tax authorities, enhancing administrative efficiency and resource management.
4. Legal Certainty: Clear and consistent timelines help establish legal certainty and foster a more predictable tax environment. This can encourage better compliance and reduce the scope for disputes and litigations.

Conclusion

The proposed amendments to Sections 73 and 74 of the CGST Act, along with the introduction of Section 74A, represent a significant step towards simplifying the GST framework. With the amended provisions, the proper officer can determine fraudulent intent during proceedings. The recommendation is only to align the time limit of both provisions, however, it will bring a genuine taxpayer and a fraudulent one at par which is inconsistent with the legislative intent. A similar provision is also included in the Central Excise Bill, 2024. The time limit for taxpayers to avail reduced penalties is proposed to increase from 30 to 60 days, providing more time for compliance. It must be noted that Taxpayers with cases from financial years before 2024-25 will not benefit from the new common timeline and will be subject to the existing time limits. Taxpayers with notices already time-barred under the current law will not gain retroactive benefits from the new provisions. Taxpayers against whom fraud, suppression, or willful misstatement is proven will still face the prescribed penalties and consequences.