Form GST DRC-01 is the show cause notice issued under Section 73 (non-fraud, 3-year limit), Section 74 (fraud, 5-year limit), or Section 74A (unified, 2-year limit from FY 2024-25). Section 73 offers zero penalty if tax and interest are paid within 30 days; Section 74 imposes a minimum 25% penalty that escalates to 100%.
GST Notice DRC-01: 10 Common Grounds, Section 73 vs 74 Penalty Ladder, DRC-06 Reply, and DRC-07 Order Time Limit
Form GST DRC-01 is the most consequential notice in the GST demand and recovery framework. It is the formal Show Cause Notice (SCN) issued by the Proper Officer under Section 73 (non-fraud cases) or Section 74 (fraud, suppression, willful misrepresentation, or contravention with intent to evade tax) of the CGST Act 2017 read with Rule 142(1) of the CGST Rules 2017 (forms available on the CBIC website). It is also issued under the new Section 74A (introduced by the Finance (No. 2) Act 2024, applicable to financial years 2024-25 onwards) which creates a unified demand track with a 2-year limitation. DRC-01 is not the final demand order: it is the notice stage. The taxpayer responds via Form DRC-06, appears for a personal hearing, and only then does the Proper Officer pass the final demand order in Form DRC-07. The critical difference between Section 73 and Section 74 is not just the limitation period: it is the penalty structure. Under Section 73, paying the tax and interest within 30 days of receiving DRC-01 attracts zero penalty under Section 73(8). Under Section 74, the best available penalty at the DRC-01 stage is 25% of the tax under Section 74(8), and every stage of non-payment escalates the penalty to 50%, then 100%, of the tax. Understanding this penalty ladder is the single most important thing to take away from receiving a DRC-01. This guide covers the 10 most common grounds for DRC-01, the Section 73 vs 74 penalty comparison in full, how to structure a DRC-06 reply, the DRC-03 voluntary payment strategy, and the time limits within which DRC-07 must be passed.
Key Takeaways
- Form DRC-01 is the GST show cause notice issued under Section 73 (non-fraud, 3-year limitation), Section 74 (fraud/suppression, 5-year limitation), or Section 74A (unified, 2-year limitation for FY 2024-25 onwards). The same form is used for all three tracks; the section cited in the notice determines the limitation period, the penalty structure, and the legal standards that apply.
- The zero-penalty window under Section 73(8): if the taxpayer pays the full tax and interest within 30 days of receiving DRC-01, no penalty is payable and all proceedings are deemed concluded. This 30-day window is often more valuable than a protracted DRC-06 reply on a demand the taxpayer privately accepts. Missing this window means a minimum 10% penalty under DRC-07.
- Under Section 74 (fraud track), the penalty escalates in stages: 15% of tax if paid before DRC-01 is issued (via voluntary DRC-03); 25% of tax if paid within 30 days of DRC-01; 50% of tax if paid within 30 days of DRC-07 order; and 100% of tax if payment is made thereafter or after adjudication. Every month of delay costs more penalty.
- The DRC-07 order cannot be based on grounds not raised in DRC-01 (Section 75(7)). This procedural protection limits the Proper Officer to the demand raised in the SCN. A DRC-01 that is vague or understates the grounds actually limits the officer’s ability to enhance the demand at the DRC-07 stage.
- Section 74A, applicable from FY 2024-25, eliminates the Section 73 vs Section 74 distinction. All demand notices for FY 2024-25 and later are issued under Section 74A with a unified 2-year limitation and a graduated penalty (15% before SCN, 25% within 30 days of SCN, 100% thereafter). This significantly tightens the limitation clock for all cases from 2026 onwards.
- The time limit for DRC-07 is the same as the limitation period for the section under which DRC-01 was issued. If the Proper Officer fails to pass DRC-07 within the limitation period, the demand lapses. Tracking the limitation expiry date is a critical part of managing a pending DRC-01 proceeding.
What Is Form GST DRC-01 and Under Which Provision Is It Issued?
DRC stands for Demand and Recovery Communication. The DRC series covers all forms in the GST demand and recovery lifecycle, from the pre-SCN intimation (DRC-01A) to the voluntary payment (DRC-03), the reply to SCN (DRC-06), the final order (DRC-07), and the enforcement machinery (DRC-12 through DRC-19 for attachment, auction, and recovery from third parties). DRC-01 is the notice stage in this chain: it initiates the formal demand proceedings by giving the taxpayer an opportunity to show cause why the alleged tax, interest, and penalty should not be recovered.
The proceeding in which DRC-01 is issued depends on the circumstances of the non-payment or wrong credit:
| Section | When Applicable | Limitation for DRC-07 | Maximum Penalty |
|---|---|---|---|
| Section 73 | Tax not paid, short paid, erroneously refunded, or ITC wrongly availed in cases NOT involving fraud, suppression, willful misrepresentation, or deliberate evasion | 3 years from the due date of filing the annual return for the relevant financial year | 10% of the tax determined, minimum Rs. 10,000 (Section 73(9)) |
| Section 74 | Same defaults as Section 73 but involving fraud, suppression of facts, willful misrepresentation, mis-statement, or contravention with intent to evade tax | 5 years from the due date of filing the annual return for the relevant financial year | 100% of the tax determined (Section 74(1)); reduces to 50% if paid within 30 days of DRC-07 |
| Section 74A | All defaults for financial years 2024-25 and later, regardless of whether fraud is alleged or not. A single unified demand track replaces both Sections 73 and 74 for these periods | 2 years from the due date of filing the annual return for the relevant financial year | 100% of tax if no payment; 15% before SCN; 25% within 30 days of SCN; 25% within 30 days of DRC-07 order |
DRC-01 under Section 73 is the most common form of GST show cause notice: it covers routine non-compliance such as ITC mismatches, rate errors, and RCM lapses that are not attributable to intentional evasion. DRC-01 under Section 74 is a more serious notice: it alleges deliberate wrongdoing and the consequences (higher penalty, longer limitation, and the legal characterization of the taxpayer’s conduct) are significantly more adverse. The taxpayer who receives a DRC-01 should first verify which section is cited in the notice, because the entire response strategy, the voluntary payment calculus, and the appeal prospects depend on this single determination.
What Does a DRC-01 Show Cause Notice Contain?
Rule 142(1) of the CGST Rules 2017 requires the Proper Officer to issue the SCN in Form GST DRC-01 along with a summary of the SCN in Form GST DRC-02. The DRC-01 contains the following elements:
- Reference and date: A unique SCN reference number and the date of issue. This date starts the 30-day payment window under Section 73(8) and Section 74(8).
- Recipient details: The GSTIN, legal name, trade name, and principal place of business address of the taxpayer. Where the notice is to an unregistered person, the PAN and address are mentioned.
- Tax period under demand: The specific financial year(s) and tax periods (monthly or quarterly) for which the demand is raised.
- Statement of facts: The ground-by-ground allegation of non-compliance. This is the substantive section: it states what the officer alleges the taxpayer did or failed to do, the data compared (GSTR-1 vs GSTR-3B, GSTR-2B vs GSTR-3B, e-invoice data, audit findings, ICEGATE records), and the resulting discrepancy.
- Tax, interest, and penalty quantified: The CGST, SGST/UTGST, and IGST amounts alleged to be short-paid or wrongly credited, stated separately. The interest amount at 18% per annum from the due date to the date of the SCN (approximate). The proposed penalty amount under the applicable section.
- Legal basis: The specific section (73, 74, or 74A), sub-section, and rule under which the SCN is issued.
- Direction to show cause: The direction to the taxpayer to show cause, in writing and/or at a personal hearing, within the time specified in the notice.
- Opportunity of hearing: The date, time, and place of the personal hearing (or a direction to the taxpayer to request a date for hearing through the GST portal).
- Officer details: The name, designation, and office of the Proper Officer issuing the SCN.
What Are the 10 Most Common Grounds for DRC-01?
DRC-01 notices arise from a wide range of compliance gaps. Based on the most common demand categories observed across Section 73 and Section 74 proceedings, the following 10 grounds account for the large majority of GST show cause notices issued each year.
| # | Ground | Data Source Used by Officer | Typical Section |
|---|---|---|---|
| 1 | GSTR-2B vs GSTR-3B ITC mismatch: ITC claimed in GSTR-3B exceeds the credit available in GSTR-2B (auto-populated from supplier GSTR-1 declarations) | GSTR-2B portal data, GSTR-3B returns, ASMT-10 scrutiny findings | Section 73 (most cases) or Section 74 where pattern is systematic |
| 2 | Output tax short payment: Tax shown in GSTR-1 (outward supply) exceeds tax paid in GSTR-3B for the same period | GSTR-1 vs GSTR-3B comparison extracted from GSTN data | Section 73 |
| 3 | Section 17(5) blocked credits claimed: ITC taken on motor vehicles, food and beverages, club memberships, beauty services, or works contract services for immovable property construction | GSTR-3B ITC, purchase register examined in Section 65 audit (ADT-01) | Section 73 (unintentional) or Section 74 (deliberate) |
| 4 | RCM non-compliance: Tax not paid under reverse charge on Section 9(3) notified services (GTA, legal, director remuneration, import of services from abroad) or on purchases from unregistered dealers | Purchase register vs vendor registration status; GSTR-2A/2B for unregistered vendors | Section 73 |
| 5 | Wrong classification or rate: Supply declared at a lower tax rate due to incorrect HSN/SAC, or a composite supply taxed at a component rate instead of the principal supply rate | GSTR-1 HSN-wise summary; audit comparison of declared rate vs correct classification | Section 73 (genuine classification dispute) or Section 74 (deliberate misclassification) |
| 6 | ITC reversal not done (Rule 42/43): Proportionate ITC not reversed for exempt supplies, non-business use, or capital goods where reversal is required under Rules 42 and 43 of the CGST Rules | GSTR-9 vs GSTR-3B reconciliation; audit examination of exempt supply data | Section 73 |
| 7 | Section 16(4) time-barred ITC: ITC claimed after the deadline under Section 16(4), which limits ITC availing to the earlier of: the due date for filing the return for the month of September following the relevant financial year, or the date of filing the annual return | Month-wise GSTR-3B vs the financial year each invoice belongs to | Section 73; courts have held this may be Section 74 where time-barred credit is claimed knowingly |
| 8 | Export without LUT or without IGST payment: Goods or services exported under zero-rating without a valid Letter of Undertaking (LUT) for that financial year, and without paying IGST on the export supply | ICEGATE export records, GSTR-1 export data, LUT registration status on GST portal | Section 73 |
| 9 | ITC not reversed on credit notes: Supplier issued a credit note reducing the invoice value, which the recipient was required to reverse corresponding ITC; reversal not done in GSTR-3B | GSTR-2A/2B showing credit note entries from supplier vs GSTR-3B ITC reversal entries | Section 73 |
| 10 | Fake ITC (Section 74 fraud): ITC availed from suppliers who did not actually supply goods or services (fictitious invoices), or who did not pay the GST they collected to the government | DGGI intelligence, supplier GSTR-3B payment verification, e-way bill vs physical supply comparison, GSTR-2A vs purchase register | Section 74 (fraud) |
What Is the Penalty Ladder Under Section 73 and Section 74?
The timing of payment relative to the DRC-01 notice is the single most important financial decision in a GST demand proceeding. The penalty structure under Section 73 and Section 74 creates a clear financial incentive to pay early. The penalty increases at each stage of non-payment, and the difference between acting at the DRC-01 stage versus waiting for the DRC-07 order stage can be a penalty escalation from zero to 100% of the tax demanded.
| Stage | Section 73 (Non-Fraud) | Section 74 (Fraud/Suppression) | Section 74A (FY 2024-25+) |
|---|---|---|---|
| Before DRC-01 is issued (voluntary DRC-03 payment) | Zero penalty under Section 73(5). All proceedings deemed concluded. No SCN is issued after voluntary payment of tax + interest. | 15% of tax under Section 74(5). Reduced from 100% for proactive disclosure and payment before the SCN. | 15% of tax under Section 74A(5). Same voluntary payment incentive as Section 74. |
| Within 30 days of DRC-01 (DRC-03 payment) | Zero penalty under Section 73(8). Tax + interest paid; SCN proceedings concluded without penalty order. | 25% of tax under Section 74(8). The only reduced penalty available after SCN issue in fraud cases. | 25% of tax under Section 74A(8). Same structure as Section 74. |
| Within 30 days of DRC-07 order | 10% of tax (minimum Rs. 10,000) under Section 73(9). No further reduction available after this stage. | 50% of tax under Section 74(11). Still a reduction from the 100% maximum but substantially higher than at the DRC-01 stage. | 25% of tax under Section 74A(11). The same rate as the DRC-01 stage; the penalty does not escalate further between DRC-01 and DRC-07 under Section 74A. |
| After DRC-07 (not paid within 30 days of order) | 10% of tax under Section 73(9). The same as within 30 days of order; no further escalation beyond 10% under Section 73. | 100% of tax under Section 74(1). The full statutory maximum. No further reduction available; recovery proceedings under Sections 79-81 (bank attachment, property seizure) may commence. | 100% of tax under Section 74A(1). Same maximum as Section 74. |
How Do You Reply to Form GST DRC-01 in Form DRC-06?
Form DRC-06 is the statutory reply form filed by the taxpayer in response to a DRC-01 show cause notice. Rule 142(3) of the CGST Rules 2017 provides that the person on whom the SCN has been served may file a reply in Form DRC-06 within the time specified in the SCN. The DRC-06 filing is done through the GST portal, and the reply content is attached as a document. The structure of a well-drafted DRC-06 reply follows a clear hierarchy: jurisdiction first, merits second, quantum last.
- Verify limitation period and the section cited, and raise these in DRC-06 if applicable. The first section of every DRC-06 reply should address threshold issues: Is the DRC-01 issued within the limitation period for the section cited? Is the section cited correct for the nature of the allegation (is the officer invoking Section 74 fraud in a case that is factually non-fraud)? Is the officer competent to issue the SCN (correct jurisdictional officer)? Is the DRC-01 accompanied by a DRC-02 summary as required by Rule 142? A DRC-01 that is time-barred, issued by a non-competent officer, or missing the mandatory DRC-02 summary has procedural defects that can void the entire proceeding. Raising these at the DRC-06 stage creates the record for appeal. If a limitation challenge is strong enough, consider filing a writ petition before the High Court immediately upon receiving a time-barred DRC-01, without waiting for the DRC-07 order, since courts have granted stays on time-barred SCNs.
- Assess the demand head by head and classify each as admitted, partially admitted, or fully disputed. Go through every ground in the DRC-01 statement of facts and, for each ground, determine: Is the allegation factually accurate? Is the quantum computed correctly? Is there a valid legal defence to the demand even if the facts are accurate (for example, a classification dispute where your position is legally tenable, or an ITC claim that is correct under an interpretation of the law that the officer has not considered)? Prepare a written note summarising admitted liability, disputed liability, and the specific legal and factual grounds for each dispute. This note is the foundation of the DRC-06 reply and the personal hearing preparation.
- Pay the admitted portion via DRC-03 before filing DRC-06. If any portion of the demand is admitted (for example, the ITC mismatch for specific months is real but the officer has overstated the quantum), pay the admitted tax and interest via Form DRC-03 (voluntary payment) before or simultaneously with filing DRC-06. The DRC-03 payment for the admitted portion: stops interest accrual on the paid amount; eliminates penalty on that portion under Section 73(8) if paid within 30 days of DRC-01; and narrows the DRC-06 dispute to only the genuinely contested amounts, making the DRC-06 reply more focused and credible. A DRC-06 that admits nothing looks adversarial; a DRC-06 that admits where admission is warranted and disputes where dispute is warranted looks professional and credible.
- Draft the DRC-06 on the disputed portions with legal and factual analysis for each ground. For each disputed ground, the DRC-06 reply must: state the specific legal provision that the officer has relied on and why the officer’s interpretation is incorrect or inapplicable; produce the documentary evidence that contradicts the officer’s factual premise (reconciliation statements, GSTR-1/GSTR-3B summaries, purchase invoices, LUT certificates, credit note records); and compute the correct demand quantum for that ground if the officer has made an error in computation. For classification disputes, cite HSN rulings, advance rulings, CBIC circulars, or judicial decisions that support your position. For ITC disputes, produce the GSTR-2A/2B reconciliation with an explanation of each reconciling item. The DRC-06 is a legal document that will be part of the appeal record if the DRC-07 is adverse: write it accordingly.
- Request and prepare for the personal hearing; follow up on DRC-07 timelines. Section 75(4) of the CGST Act mandates that an opportunity of hearing shall be given to the taxpayer before a demand order is passed. If the DRC-01 does not mention a hearing date, explicitly request a personal hearing in the DRC-06 reply. Attend the hearing with your CA and relevant documents. After the hearing, send a written summary of the hearing submissions to the officer to create a paper trail. After the hearing, track the limitation expiry date: if the officer does not pass DRC-07 within the limitation period from the date of the annual return (3 years for Section 73, 5 years for Section 74, 2 years for Section 74A), write to the officer citing the impending limitation and, after the expiry date passes without an order, treat the demand as lapsed and formally communicate this to the officer. Do not assume the lapse passively: file a written communication and if necessary, approach the High Court for a declaration.
What Is the Role of DRC-03 Voluntary Payment in DRC-01 Proceedings?
Form DRC-03 is the voluntary payment form that allows a taxpayer to deposit tax, interest, and penalty at any stage of the demand proceedings without waiting for a formal order. It is the most versatile instrument in GST demand management and can be used at four distinct stages of DRC-01 proceedings, each with different penalty consequences.
| When DRC-03 Is Filed | Section 73 Penalty Effect | Section 74 Penalty Effect |
|---|---|---|
| Before DRC-01 is issued (proactive disclosure) | Zero penalty. Proceedings deemed concluded under Section 73(5). No DRC-01 will be issued for that admitted liability. | 15% penalty under Section 74(5). DRC-01 may still be issued for disputed portions; proceedings for admitted portion are concluded. |
| Within 30 days of DRC-01 | Zero penalty under Section 73(8) for the amount paid. The DRC-06 reply is still required for the disputed portion. | 25% penalty under Section 74(8) for the amount paid. |
| After DRC-06 reply, before DRC-07 order | Still zero penalty if it is technically within 30 days of DRC-01 date; otherwise, pending the DRC-07 order, there is no formal mechanism to conclude proceedings at zero penalty. The officer may, at their discretion, take note of the payment in the DRC-07 order. Practically: if the 30-day window has passed, wait for DRC-07 and pay within 30 days of DRC-07 to get the 10% penalty rate under Section 73(9). | No specific reduced penalty if paid after the 30-day window but before DRC-07. The officer exercises discretion. Practically: if the 30-day window passed, wait for DRC-07 and pay within 30 days (50% penalty) to avoid the 100% penalty. |
| Within 30 days of DRC-07 order | 10% penalty (minimum Rs. 10,000) under Section 73(9). No further reduction available. | 50% penalty under Section 74(11). |
DRC-03 is also used in a specific strategic context: where an ASMT-10 scrutiny notice is received or where an internal review identifies a compliance gap, a preemptive DRC-03 payment eliminates penalty before any DRC-01 is issued. ASMT-10 is a scrutiny notice; it is not itself a demand notice. However, if ASMT-10 findings are not adequately resolved in the ASMT-11 reply, the Proper Officer escalates to DRC-01. A DRC-03 filed during the ASMT-10 stage (before DRC-01 is issued) qualifies as a pre-SCN payment under Section 73(5), attracting zero penalty. The same logic applies for GSTR-3A non-filing default notices: if the underlying return period has a tax shortfall alongside the non-filing, depositing the shortfall via DRC-03 before the non-filing escalates to a DRC-01 eliminates the penalty exposure for that period.
What Happens After DRC-06: DRC-07 Order and the Time Limit?
After the taxpayer files DRC-06 and the personal hearing is concluded, the Proper Officer must pass a speaking order in Form DRC-07 under Section 73(9) or Section 74(9) or Section 74A. The DRC-07 is the final adjudication order in the demand proceeding. Several procedural rules govern what DRC-07 can and cannot do.
What DRC-07 Can Contain
The DRC-07 must determine: the tax amount confirmed (equal to or less than the DRC-01 demand, but subject to the Section 75(7) ground limitation); the interest on the confirmed tax at 18% per annum from the date of default to the date of payment; and the penalty applicable under the relevant section. The DRC-07 must be a speaking order: it must state reasons for accepting or rejecting each submission in the DRC-06 reply. An order that does not address the taxpayer’s specific arguments may be challenged before the Appellate Authority on grounds of non-application of mind.
The Section 75(7) Ground Limitation
Under Section 75(7) of the CGST Act, the Proper Officer cannot make a determination in DRC-07 on grounds that were not part of the DRC-01 SCN. This is a significant protection: if the DRC-01 alleged only an ITC mismatch, the DRC-07 cannot also demand tax on an output supply that was not mentioned in the DRC-01. The officer’s hands are tied to the grounds of the SCN. Where the officer tries to expand the demand in DRC-07 beyond the DRC-01 grounds, this excess is challengeable before the First Appellate Authority under Section 107.
Time Limit for DRC-07
The limitation period for passing DRC-07 is the same as the limitation period for issuing DRC-01: 3 years from the due date of the annual return under Section 73, 5 years under Section 74, and 2 years under Section 74A. This is the date by which the DRC-07 must be passed, not by which proceedings must begin. If the DRC-01 is issued late (close to the end of the limitation period) and the DRC-07 is not passed before the limitation expires, the demand lapses by operation of law. The taxpayer should track the limitation expiry date from the moment DRC-01 is received.
Challenging DRC-07 Before the Appellate Authority
A taxpayer aggrieved by DRC-07 can appeal to the First Appellate Authority under Section 107 of the CGST Act within 3 months of the order. The appeal is in Form APL-01, and a pre-deposit of 10% of the tax disputed in the appeal (on top of the admitted tax paid) is required for admission. From the First Appellate Authority, the appeal goes to the GST Appellate Tribunal (GSTAT) under Section 112 (pre-deposit: 20% of the remaining tax in dispute), and from the GSTAT to the High Court under Section 117. For businesses managing audit proceedings alongside a DRC-01, note that an ADT-01 Section 65 audit that produces adverse ADT-02 findings typically leads to a DRC-01 on the same issues: the DRC-06 and the ADT-02 response should be consistent in their legal positions. For unregistered persons who receive demands, the framework is different: ASMT-14 under Section 63 applies to unregistered persons and is a separate proceeding from the Section 73/74 demand framework. For registered private limited companies, DRC-07 orders are registered against the GSTIN and can affect the company’s compliance rating visible to counterparties on the GST portal.
Frequently Asked Questions on Form GST DRC-01
Can a DRC-01 be challenged by writ petition before the High Court without filing DRC-06?
Yes, in limited circumstances. The GST statute provides an adequate alternative remedy through the DRC-06 reply and the Section 107 appeal chain, and High Courts routinely refuse to entertain writ petitions against DRC-01 SCNs on the ground that the statutory remedy is available and adequate. However, writ petitions against DRC-01 are entertained by High Courts in specific situations: where the DRC-01 is issued after the limitation period has expired (a pure question of law that the Appellate Authority cannot resolve); where the officer issuing DRC-01 is jurisdictionally incompetent; or where the DRC-01 is issued in clear violation of a specific statutory provision that the adjudicating officer cannot self-correct (for example, a DRC-01 issued without any evidence of fraud under Section 74, where the Section 73 limitation was also expired). Outside these narrow circumstances, filing DRC-06 and pursuing the statutory appeal chain is the correct approach.
What is Form DRC-01A and is it mandatory before a DRC-01 is issued?
Form DRC-01A is the pre-SCN intimation prescribed under Rule 142(1A) of the CGST Rules 2017. In Section 73 (non-fraud) cases, before issuing the formal DRC-01 SCN, the Proper Officer may (but is not required to) issue DRC-01A informing the taxpayer of the tax ascertained as payable and giving an opportunity to pay before the formal SCN is issued. DRC-01A is discretionary: failure to issue DRC-01A before issuing DRC-01 does not make DRC-01 invalid. However, where DRC-01A is issued, the taxpayer should treat it as the last zero-penalty opportunity: paying the full tax and interest in response to DRC-01A, before DRC-01 is issued, is the earliest and best outcome because it results in zero penalty and no formal SCN. In Section 74 (fraud) cases, DRC-01A is typically not issued before the formal DRC-01.
Can the Proper Officer enhance the demand in DRC-07 beyond the amount in DRC-01?
No. Section 75(7) of the CGST Act specifically provides that the amount of tax, interest, and penalty specified in the DRC-07 order cannot exceed the amount specified in the DRC-01 notice, and the order shall not be based on any ground other than the grounds specified in the show cause notice. This is one of the most important procedural protections in the GST demand framework: it caps the officer at the DRC-01 demand and limits them to the grounds of the SCN. Where an officer attempts to enhance the demand or add new grounds in DRC-07, the excess is specifically challengeable before the First Appellate Authority. Additionally, Section 75(5) provides that where the Proper Officer finds after the adjudication that a larger amount of tax is due for the same period, a fresh SCN (DRC-01) must be issued for the additional amount, subject to the limitation period being available. If the limitation period has expired, the additional amount cannot be pursued.
What does Section 74A mean for DRC-01 notices issued from 2025-26 onwards?
Section 74A of the CGST Act (introduced by the Finance (No. 2) Act 2024, effective from FY 2024-25) replaces both Sections 73 and 74 for all defaults pertaining to FY 2024-25 and later years. Key changes: the limitation is now 2 years from the due date of the annual return (shorter than both the 3-year Section 73 and 5-year Section 74 periods); there is no distinction between fraud and non-fraud cases for the purpose of which provision applies; the penalty structure is: 15% if paid before DRC-01, 25% if paid within 30 days of DRC-01, 25% if paid within 30 days of DRC-07 order, and 100% otherwise. The practical effect of Section 74A is that the department must issue DRC-01 for FY 2024-25 issues by the annual return due date for FY 2026-27 (approximately November 2027 for GSTR-9 for FY 2024-25). For businesses, this means that demand proceedings for current periods will be faster, the penalty structure is more uniform (no Section 74 100% penalty at the DRC-01 stage), and the zero-penalty window no longer exists (minimum 15% even before the SCN).
Can a DRC-01 be issued for self-assessed tax shown in the return but not paid?
No. Where a taxpayer declares tax in their GSTR-3B but does not pay it, the amount is a “self-assessed tax” under Section 59 of the CGST Act. Self-assessed tax shown but unpaid is directly recoverable under Section 78 read with Section 79 (recovery proceedings) without issuing a DRC-01 show cause notice, because the taxpayer has already acknowledged the liability by declaring it. The Proper Officer can send an intimation in DRC-07 format (or a DRC-07 directly) and initiate recovery via bank attachment (DRC-14) without the DRC-01 notice-and-reply cycle. This is different from tax that is alleged to have been underpaid or short-paid based on the department’s assessment: for alleged underpayment (not self-assessed underpayment), DRC-01 is mandatory. The practical implication: if you declare output tax in GSTR-1 or GSTR-3B but do not pay the corresponding amount in cash (relying on unavailable ITC), the officer can recover it directly without a formal DRC-01 SCN.