GST Demand Notice — Section 73 & 74 Complete Guide 2026

Updated: 3 June 2026 | CGST Act, 2017 | Sections 73, 74, 75 & Rules 142–161

A GST demand notice is issued by a GST officer when there is a shortfall in tax payment, excess ITC claimed, or other compliance gaps. Notices under Section 73 cover non-fraud cases (10% penalty, 3-year time limit) and Section 74 covers fraud/suppression cases (100% penalty, 5-year time limit). The formal notice is issued in Form DRC-01; voluntary payment is made via DRC-03. You have 30 days to reply to a Show Cause Notice.

DRC-01

Form DRC-01 — the formal GST demand / Show Cause Notice
Issued by GST officer. Reply must be filed within 30 days. Voluntary payment before SCN via DRC-03 avoids the notice entirely.

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Section 74 (fraud) carries 100% penalty. If the officer alleges suppression of turnover, wilful misstatement, or fraudulent ITC claim, the penalty equals the full tax demand. Respond promptly and engage a GST expert — criminal prosecution is also possible under Section 132 for large amounts.

Section 73 vs Section 74 — Key Differences

Feature	Section 73 (Non-Fraud)	Section 74 (Fraud / Suppression)
Nature of case	Honest mistake, inadvertent error, no intent to evade	Fraud, suppression of facts, wilful misstatement, collusion
Penalty — pre-SCN payment	10% of tax (min ₹10,000)	15% of tax (min ₹10,000)
Penalty — after SCN, paid within 30 days	25% of tax (reduced from 10%)	25% of tax
Penalty — on adjudication order	10% of tax (demand confirmed)	100% of tax (full penalty)
Time limit to issue SCN	3 years from due date of annual return	5 years from due date of annual return
Criminal prosecution	Not applicable	Possible under Section 132 for large amounts

Common Triggers for GST Demand Notices

GST officers issue demand notices based on GSTR reconciliations, e-way bill data analysis, and third-party information. The most frequent triggers in 2025–26 are:

HIGH RISK

Excess ITC Claim vs GSTR-2B

Claiming ITC in GSTR-3B that does not appear in auto-generated GSTR-2B (supplier has not filed their GSTR-1). The system auto-flags this discrepancy for scrutiny.

HIGH RISK

Turnover Underreporting

Turnover declared in GSTR-1 / GSTR-3B is lower than figures reflected in income tax returns, Form 26AS, bank statements, or e-way bill data. AIS/TIS cross-matching by GSTN.

COMMON

Wrong Tax Rate Applied

Applying a lower GST rate than prescribed for the HSN/SAC code. Common in construction, food processing, and textile sectors where rate classification is disputed.

COMMON

E-Way Bill Non-Compliance

Movement of goods above ₹50,000 without valid e-way bill. Detected via RFID and checkpoint data. Penalty under Rule 138 can be 200% of tax for tax evasion.

GST Demand Forms — DRC-01, DRC-03, DRC-07

Form	Purpose	Who Files / Issues	Stage
DRC-01A	Intimation before SCN — pre-notice communication	GST Officer	Pre-SCN
DRC-01	Show Cause Notice / demand notice	GST Officer	SCN stage
DRC-03	Voluntary payment of tax + interest + penalty by taxpayer	Taxpayer (via GST portal)	Pre-SCN or post-SCN
DRC-04	Acknowledgement from officer closing proceedings after DRC-03 payment	GST Officer	After DRC-03
DRC-06	Taxpayer's reply to Show Cause Notice	Taxpayer	Reply to SCN
DRC-07	Summary of demand order (final adjudication order)	GST Officer	After adjudication

Section 75 — Reduced Penalty Option

Section 75(12) provides a significant opportunity: if a taxpayer pays the full tax demand + interest within 30 days of receiving the Show Cause Notice, the penalty is reduced to 25% (from 100% under Section 74 or 10% under Section 73 at adjudication). This is the most cost-effective way to close a demand once SCN has been issued.

Adjudication timeline note: After the taxpayer's reply, the officer must issue a personal hearing opportunity before passing the final order. The adjudication order must be issued within the time limit specified — 3 years for Section 73 and 5 years for Section 74 from the due date of filing annual return for the relevant year.

Frequently Asked Questions

How do I respond to a GST DRC-01 demand notice?

When you receive a DRC-01 (Show Cause Notice / demand notice), you must file a reply in Form GST ASMT-11 or through the GST portal within 30 days of the notice date. The reply should include all supporting documents — GST returns, invoices, reconciliation statements, and any proof that contradicts the department's allegation. You may also request a personal hearing. If you agree with the demand, pay it using DRC-03 to avoid further proceedings.

How much time do I have to reply to a GST demand notice?

Under Section 73 (non-fraud cases), you have 30 days from the date of Show Cause Notice (SCN) to file your reply. Under Section 74 (fraud/suppression cases), the same 30-day window applies for reply. However, if you make voluntary payment before the SCN is issued (pre-SCN stage), you can pay using DRC-03 and the case is closed without further notice. Time limits for issuing SCN: 3 years from the due date of annual return for Section 73 cases, and 5 years for Section 74 cases.

Can I appeal against a GST demand order?

Yes. If the adjudicating officer passes an order against you under Section 73 or 74, you can appeal to the Commissioner (Appeals) within 3 months of the order. You must deposit 10% of the disputed tax amount (pre-deposit) along with the appeal in Form APL-01. If unsuccessful there, you can appeal further to GST Appellate Tribunal (GSTAT), then High Court, and finally the Supreme Court.

What is the benefit of paying GST demand before Show Cause Notice?

If you pay the full demand (tax + interest) and 10% penalty before the Show Cause Notice (SCN) is issued, the proceedings are dropped completely — no SCN is issued. This is a significant benefit under Section 73(5). Under Section 74(5), for fraud cases, paying demand + interest + 15% penalty before SCN avoids the SCN. Once you pay using DRC-03, the officer must issue an intimation in DRC-04 closing the proceedings.

Do I need a CA to handle a GST demand notice?

While not legally mandatory, having a CA or GST practitioner is strongly recommended — especially for Section 74 fraud/suppression notices where penalties can be 100% of tax demand. A professional can analyse the notice, identify valid defences, prepare a technically sound reply, and represent you at personal hearings. For large demands (above ₹5 lakh), or if criminal proceedings are threatened, engaging a GST specialist is essential to protect your interests.

GST Appeal Process GST Notices Litigation ITC Rules Under GST GST Return Filing GST Late Fee GST Annual Return

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