A letter dated May 4, 2025, from Rakesh Garg, an author and advocate, to the Chairman of the Central Board of Indirect Taxes & Customs, raises concerns about the alleged misuse of powers under Section 74 of the CGST Act, 2017, by Delhi CGST offices. The letter contends that the Audit Departments of the Delhi CGST Commissionerate are frequently and arbitrarily invoking Section 74, which pertains to cases involving fraud or wilful misstatement, even in situations that would fall under Section 73 for reasons other than fraud. Evidence from RTI responses is presented, indicating that 100% of show cause notices issued by Delhi CGST Audit-I and Audit-II over the past three financial years were under Section 74, with similar trends noted for the Directorate General of GST Intelligence. The author argues that this blanket application of the 'Charge of Fraud' is mechanical, lacks proper inquiry or justification, and contradicts judicial pronouncements on invoking extended limitation periods. This practice, it is argued, leads to severe negative consequences for taxpayers, including adverse impacts on credit ratings, banking facilities, business goodwill, contracts, and causes emotional distress, potentially infringing on the right to carry on trade or profession. The letter requests the establishment of an independent oversight mechanism and directions to GST authorities to restrict the use of Section 74 (and the new Section 74A) to genuine fraud cases based on reasoned assessments.

From:
Rakesh Garg
19A, Ansari Road, Darya Ganj,
New Delhi-110002
Phone: 9810216270
Email: sarlegal.rgarg@gmail.com

Dated the 4th May 2025

To,
The Hon'ble Chairman,
The Central Board of Indirect Taxes & Customs,
New Delhi

Subject: Request for immediate intervention and remedial measures in reference to Misuse of powers under section 74 of the Central Goods and Services Act, 2017(CGST) by the Delhi CGST Offices.

Respected Sir,

I am an author of Sales Tax, VAT, Service Tax and GST Books for over 25 years. These books have been widely referred to, including by officials of the VAT and GST Departments. I have also assisted the Government of Delhi in drafting various provisions and procedures under the Delhi VAT Act, 2004. In addition, I am an Advocate, earlier practicing as Chartered Accountant, for past 40 years.

With due respect, I wish to draw your esteemed attention to the ongoing harassment and distress suffered by genuine taxpayers registered under the GST regime, which arises from the frequent and arbitrary misuse of section 74 of the CGST Act, 2017 by the Audit Departments of the Delhi CGST Commissionerate.

This letter is not intended to highlight the quantum of penalty. Rather, it seeks to draw your esteemed attention to the grave concern surrounding the CHARGE OF 'FRAUD,' which carries far-reaching and damaging consequences. Such a label could adversely affect credit ratings (including CIBIL and others), disrupt access to banking facilities and credit lines, tarnish hard-earned business goodwill, jeopardize existing and prospective contracts, and inflict profound emotional distress and reputational harm.

1. Under the GST Act, in case of non-payment or short payment of the GST relating up to Financial Year 2023-24, a show cause notice may be issued either under section 73 or section 74. While section 74 applies only in instances involving fraud, wilful suppression, or an intent to evade tax (in short, fraud cases), section 73 governs all other cases. The relevant sub­sections of sections 73 and 74 are annexed herewith as Exhibit-1.

2. For demands relating to the Financial Year 2024–25 and onwards, the legislature has introduced section 74A, effective from 1 November 2024. This section consolidates the provisions of sections 73 and 74, while providing a unified limitation period. The substantive distinction between fraudulent and non-fraudulent cases remains intact under section 74A. Relevant extracts of section 74A are also enclosed in Exhibit-1.

3. Being professionally active in the field of GST and regularly involved in training programs for GST professionals, I have come across numerous instances where GST Audit Authorities have invoked section 74 in a mechanical and routine manner—without conducting any preliminary inquiry, assessment of evidence, or articulation of reasons.

4. At the outset, I fully support strict action, including invocation of section 74 in fraud cases—such as those involving fake invoices or bogus transactions— where there is an evident intent to evade tax.

5. However, the GST Audit Departments have failed to adhere to the principles laid down by the Hon'ble Supreme Court and various High Courts with regard to invocation of extended limitation. These judicial pronouncements have consistently held that the extended limitation period (and charge of fraud) may be invoked only when specific conditions under the law are satisfied; and also, such notice must clearly state the grounds and allegations against the taxpayer in adherence to principles of natural justice.

In the case of HM. Industries vs. Commissioner of Value Added Tax reported in 2014 (78) VST 382 (Delhi High Court), in relation to Delhi VAT Act, the Hon'ble Delhi High Court observed that extended period is an exception and not the rule. Unless all the conditions specified in the Act are satisfied, extended limitation period cannot be invoked.

In the case of Kaur & Singh vs. Collector of Central Excise, New Delhi 1997 (94) ELT 289 (SC) [and many other judgments by the Hon'ble Supreme Court and High Courts], the Hon'ble Supreme Court observed that the party to whom a show cause notice of this kind is issued must be made aware of the allegation against it. This is a requirement of natural justice. Unless the assessee is put to such notice, he has no opportunity to meet the case against him. This is all the more so when a larger period of limitation can be invoked on a variety of grounds. Which ground is alleged against the assessee must be made known to him, and there is no scope for assuming that the ground is implicit in the issuance of the show cause notice.

6. I filed a Right to Information (RTI) application under the RTI Act, 2005 vide Reference No. GSTCN/R/T/ 25/00034 on 02 April 2025; and received the information from the CGST Audit-I and CGST Audit-II vide their letters dated 16.04.2025 and 17.04.2025,

In their response, the Delhi GST Audit Departments revealed that 100% of show cause notices issued over the past three financial years were under section 74, without a single notice being issued under section 73. This statistic strongly indicates blanket and indiscriminate use of the fraud provision.

The information, as received from the CGST Audit-I and CGST Audit-II, is summarized as under: – [Copies of the RTI response from CGST Audit-I and CGST Audit-II are annexed as Exhibit 2 to 3.]

7. This Summary clearly shows that fraud and wilful intent have been alleged against taxpayers across the board—regardless of the actual nature of the discrepancies—without lawful justification or procedural fairness.

8. Similarly, the Directorate General of GST Intelligence also invoke section 74 in majority of cases without following the due process of law. In another RTI filed by my colleague, it has been informed vide letter dated 25.04.2025 that in last three years for issuing show cause notices, the Directorate has invoked section 74 in 242 cases, out of total of 265 cases. Further, in the year 2024­25, the Directorate invoked section 74 in 100% cases. Copy of the RTI response is annexed as Exhibit 4.

9. As a professional engaged in the field of indirect taxation, I have observed that in the following instances (by way of illustration), the Department has invoked Section 74 of the Act, whereas the nature of the cases warranted initiation of proceedings under Section 73 instead:

(i) The taxpayer relied on a judicial pronouncement for non-payment;

(ii) The applicable tax rate on supplies to government or government entities is under dispute;

(iii) Tax has not been paid on reverse charge basis (RCM) where taxpayer is eligible for full ITC (a revenue-neutral scenario);

(iv) The Head office failed to distribute input tax credit to its branches, resulting in no revenue loss;

(v) The "CGST+SGST" is paid instead of "IGST" or vice a versa;

(vi) A duly sanctioned refund is later deemed erroneous.

10. With due regards, for the sake of repetition, the blanket application of Charge of Fraud has significant adverse consequences. Besides imposition of higher penalties, such actions may adversely impact the taxpayer personally and financially, including loss of business; such as, –

(i) Impact credit ratings (CIBIL and others), which may lead to disruption of banking facilities and credit lines;

(ii) Blemish the reputation of the taxpayer before the business associates and harm its goodwill;

(ii) Cause immense emotional distress and social stigma.

11. This conduct by the GST Departments also infringes upon the fundamental rights under Article 19(1)(g) of the Constitution of India—impairing the right to carry on trade or profession—by adversely affecting working capital and damaging the credibility of genuine businesses.

12. I respectfully submit that I hold no personal or vested interest in this matter. This request is made purely in the public interest, with the sole aim of upholding the rule of law and contributing to the effective and judicious functioning of the Department

In view of the above, I humbly request that Your Goodself may constitute or appoint an independent oversight mechanism or committee to review past and ongoing proceedings where charge of fraud under section 74 or 74A is being framed; and to kindly issue appropriate directions to the GST Authorities to ensure that:

(i) The provisions under section 74 (or section 74A from 1 November 2024) are
invoked only in genuine cases involving fraud or wilful suppression with the intent to evade tax;

(ii) Such invocation must be based on a reasoned and speaking order, preceded by proper inquiry and assessment;

(iii) Routine and mechanical application of these provisions in non-fraud cases is strictly discouraged.

With utmost respect and sincere regard for Your Goodself and the Hon'ble CBIC, Yours Faithfully

Adv (CA) Rakesh Garg

Exhibit – 1

Section 73. Determination of tax 1[, pertaining to the period upto Financial

Year 2023-24,] not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any wilful-misstatement or suppression of facts.

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

Section 74. Determination of tax 2 [, pertaining to the period upto Financial Year 2023-24,] not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

3[Section 74A. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason pertaining to Financial Year 2024-25 onwards.

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder:

Provided that no notice shall be issued, if the tax which has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised in a financial year is less than one thousand rupees.

(5) The penalty in case where any tax which has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised,–

(i) for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, shall be equivalent to ten per cent. of tax due from such person or ten thousand rupees, whichever is higher;

(ii) for the reason of fraud or any wilful-misstatement or suppression of facts to evade tax shall be equivalent to the tax due from such person.

Notes:-

1 Inserted w.e.f. 01.11.2024 (vide N. No. 17/2024-CT, dated 27.09.2024) by the Finance (No. 2) Act, 2024 (15 of 2024) (s.136) dated 16.08.2024

2 Inserted w.e.f. 01.11.2024 (vide N. No. 17/2024-CT, dated 27.09.2024) by the Finance (No. 2) Act, 2024 (15 of 2024) (s.137) dated 16.08.2024

3 Inserted Sec. 74A w.e.f. 01.11.2024 (vide N. No. 17/2024-CT, dated 27.09.2024) by the Finance (No. 2) Act, 2024 (15 of 2024) (s.138) dated 16.08.2024