Exploring Section 74 Of The CGST Act 2017 - Understanding Tax Irregularities Arising From Fraud Or Misstatement

Author: LawSphereX

Category: Taxation

Published: 2026-08-23T19:46:59.827Z

Updated: 2026-08-30T07:07:05.972Z

EXPLORING SECTION 74 OF THE CGST ACT 2017:

UNDERSTANDING TAX IRREGULARITIES ARISING FROM FRAUD OR MISSTATEMENT

Vinay Sharma, BA LLB (H), Amity Law School, Noida

ABSTRACT

The Central Goods and Services Tax (CGST) Act, 2017 was introduced to bring uniformity to India’s indirect tax system. Among its important provisions, Section 74 plays a key role in handling cases where taxes are not paid correctly due to fraud, intentional misstatements, or hidden facts. This section gives the tax department the authority to investigate and identify situations where taxes have either not been paid, underpaid, wrongly refunded, or where input tax credit (ITC) has been wrongly claimed or used because of dishonest actions. It serves as a tool to prevent tax evasion and to keep the GST system transparent and trustworthy. The process under Section 74 begins when the department issues a showcause notice to the taxpayer. This notice explains the reasons for the suspected tax issue and gives the taxpayer a chance to respond.

After this, the department carries out a detailed review, taking into account the evidence and all related details. Importantly, the law mentions that the whole process must be completed within a certain time limit, ensuring timely decisions. Section 74 also respects the principles of natural justice, which means taxpayers have the right to be heard and defend themselves before any final decision is made. To prevent misuse of power, the section includes certain protections to ensure that taxpayers are not treated unfairly. It allows individuals to explain their side, especially if the issue arose from a genuine mistake or misunderstanding. However, some experts believe that this section could be misused or wrongly applied, which might cause problems for honest taxpayers.

Therefore, the real challenge lies in finding the right balance between strict tax enforcement and protecting taxpayer rights. Keywords: GST Act, Fraud, Misstatement, Section 74, Input Tax Credit.

Introduction

India’s introduction of the Goods and Services Tax (GST) on July 1, 20171, marked a major reform in the country’s indirect tax system. The main objective behind GST was to create a simplified and unified tax structure, replacing the earlier complex web of central and state taxes. This change is considered one of the most significant tax overhauls since India became independent in 1947. Before GST, India followed a dual tax system. The central government collected taxes like Excise Duty and Service Tax, while state governments imposed VAT, Entry Tax, and other local levies. This structure caused a tax-on-tax problem, often known as the cascading effect, where tax was charged at multiple stages without proper credit for earlier taxes. The GST system aimed to solve this issue by introducing a single tax on the value added at each stage, along with the benefit of input tax credit.

Under GST, tax is charged at various points in the supply chain, but businesses are allowed to claim credit for the tax they’ve already paid on purchases. This method reduces the final-tax paid by consumers and lowers the overall cost of goods and services. GST is divided into four main tax slabs—5%, 12%, 18%, and 28%. Essential items are taxed at lower rates, while luxury and harmful goods may attract a cess on top of the regular tax. To roll out this new system, coordination between the Centre and States was necessary. Both levels of government share the power to tax and collect revenue. To help manage this, the GST Council was established as a constitutional body. Headed by the Union Finance Minister, the Council includes finance ministers from all states and union territories. This joint decision-making process helped ensure that different perspectives were considered.

One of the biggest benefits of GST has been the creation of a common national market. Earlier, doing business across state borders involved dealing with different state taxes and rules. With GST in place, these barriers have been removed, making it easier for companies to trade across the country. This has improved logistics, reduced delivery times, and made supply chains more efficient. GST has also brought digital convenience into tax compliance. Through the GSTN portal, businesses can register and file returns online—monthly, quarterly, or yearly—based on their

1 The Central Goods and Services Tax Act, No. 12 of 2017, Acts of Parliament, 2017 (India).

turnover. This paperless system has lowered compliance costs and brought more transparency into the tax process. However, the rollout of GST wasn’t without its challenges. Initially, many companies faced disruptions in their operations as they adjusted to the new rules. There have also been concerns about the classification of goods under different slabs, with many calling for simplification of the tax rate structure. Additionally, some businesses experienced technical glitches with the online portal, highlighting the need for ongoing upgrades. Despite these hurdles, GST is largely seen as a transformational reform. It has helped improve tax collection, streamlined the indirect tax regime, and supported economic development. The revenue collected through GST has allowed governments to invest more in infrastructure, welfare schemes, and other public projects.

Going forward, continuous efforts to refine the system, address existing concerns, and ensure smoother compliance will be crucial to making the most of this landmark reform. Section 74 of the Act: Section 74 of the Central Goods and Services Tax (CGST) Act, 2017 deals with situations where tax has been not paid, underpaid, wrongly refunded, or where input tax credit (ITC) has been incorrectly claimed or used due to fraud, intentional misstatement, or suppression of facts2. If a tax officer believes that any of these issues have taken place, they can issue a show-cause notice to the person involved. This notice asks the person to explain why they should not be required to pay the pending tax amount, along with interest and a penalty equal to the unpaid tax. In this: • Fraud refers to deception done knowingly to gain unfair benefits.

• Wilful misstatement usually involves false claims made on purpose, often with someone else’s help. • Suppression of facts means hiding information that should have been disclosed by law or 2 Comptroller and Auditor General of India, Report No. 1 of 2022 – Indirect Taxes – Goods and Services Tax, Ch. 4, available at https://cag. gov. in. failing to provide it when asked by the authorities. Section 74 also allows the officer to issue an assessment order that decides how much tax, interest, and penalty is owed. However, before passing such an order, the law ensures that the person gets a fair chance to present their side, following the principles of natural justice. Once the assessment is done, the officer issues a demand notice, which includes the full amount to be paid. The taxpayer is expected to clear this amount within 30 days from the date they receive the notice.

If the payment is not made on time, the department can start recovery actions, such as freezing assets, arrest, or even detention. The section also mentions that if a person ends up paying more than required, the extra amount will be refunded or adjusted as per the rules. Overall, Section 74 gives tax officers the authority to ensure that dues are collected properly, while also making sure that the taxpayer gets a fair opportunity to explain their case. Fraud Determination and its Penalty: Section 65 of the GST Act, 2017, allows the authorities to carry out an audit of a registered taxpayer’s financial records, including their account books, returns, statements, and supporting documents.

The purpose of this audit is to verify the correctness of turnover, the legitimacy of exemptions and deductions claimed, the applicable tax rate on goods or services, the use of input tax credit (ITC), any refund claimed, and other related details. In simple terms, the audit helps confirm whether the taxpayer has followed GST laws accurately and completely3. The primary aim of such audits is to go through documents maintained during normal business operations, including those required under Section 35 of the Act. These audits are meant to detect any revenue loss and give the taxpayer a fair chance to clarify issues. Ideally, this process should be cooperative and non-confrontational, aimed at resolving disputes smoothly. During these audits, there may be cases where tax is unpaid, paid incorrectly, or underpaid.

Sometimes, incorrect refunds are issued or input tax credit is wrongly claimed. These mistakes may either be genuine errors or deliberate acts of evasion. To address this, the law has been structured

3 Nitya Tax Associates, GST – Law & Commentary with Analysis and Procedures, Vol. 1, 7th ed. (2022).

into two parts: • Section 73 deals with unintentional errors where there is no intent to deceive. • Section 74 applies when there is clear evidence of intent to evade tax, either through fraud, misrepresentation, or hiding facts. The lawmakers, understanding the complexity of modern business, created this distinction to ensure fair treatment. For example: • If tax is not paid or underpaid, • If a refund is wrongly claimed, • Or if ITC is wrongly availed or used, Then Section 73 will apply if it’s a simple mistake, and Section 74 will be invoked if there is clear intent to deceive. The wording in Section 74—“intention to evade tax through fraud, wilful misstatement or suppression of facts”—is crucial. It's not enough to just make a mistake or miss a payment; the authorities must prove that the person knowingly tried to escape their tax responsibility.

"Evade" means deliberately avoiding a legal duty, and "intention" adds the requirement of a conscious decision to do so. So, for the department to act under Section 74, they must present strong evidence that the taxpayer knowingly broke the rules. This ties into the legal principle of innocent until proven guilty. Unfortunately, it has been seen in practice that penalties under Section 74 are sometimes imposed even when there's no real proof of wrongful intent. Officers may use this section too freely, applying heavy penalties without explaining how they concluded that the person was intentionally dishonest. Merely raising a query or conducting an audit under Section 65 does not justify penalties under Section 74 unless the evidence is solid and convincing. Penal provisions should be used carefully, only when there’s a clear, provable effort to cheat the system.

Honest mistakes or small clerical errors should not be treated as fraud. The law says that if the mistake is unintentional, only extra tax and interest should be charged—not a penalty. And if there is a penalty, the burden of proof lies with the department. The taxpayer must be given a proper hearing as per Section 75(4), and the audit and penalty processes must remain separate, each with its own legal framework. Simply using an audit to justify a penalty without proper procedure or notice is not legally sound. It has been increasingly observed that Section 74 of the GST Act is being used in cases where there is no clear allegation of intentional concealment or misstatement by the seller. In several instances, audit officers are invoking this provision to impose penalties without showing any evidence of deliberate wrongdoing.

Often, they fail to explain how they concluded that there was a conscious effort to misrepresent facts or hide information. As a result, just referring to Section 74 isn’t enough to justify a penalty. Based on the legal provisions and actual circumstances, using this section to impose a fine—without solid proof of fraud, misrepresentation, or factual suppression—is not valid. Section 74 is specifically meant for cases where there is a willful attempt to avoid paying tax. So, any extra tax liability that arises due to unintentional errors doesn’t fall under its scope. Because penalties under this section are quasi-criminal in nature, they should be used carefully and only when there’s strong supporting evidence. Applying them loosely can lead to misuse of power and unfair treatment.

Also, when a small tax shortfall happens because of an honest mistake, applying Section 74 essentially accuses the taxpayer of cheating the system on purpose. This damages the taxpayer’s reputation without proper basis. Before making such serious claims, the department must have convincing proof. Otherwise, it not only harms the image of honest businesses but also goes against the idea of making it easy to do business in the country. It ends up wasting time for both the taxpayer and the authorities. Courts have also held that while conducting audits under Section 65, officers must consider the nature and complexity of the business. In other words, audits should not be done in a mechanical or routine way. They should be thoughtful and context-specific.

The legal position is quite clear: unless there’s strong evidence showing that the taxpayer deliberately tried to dodge tax, no penalty under Section 74 can be imposed. A genuine mistake or an oversight is not a crime. The intent to deceive the tax system must be clearly proven before any punishment is considered under this provision.

The Supreme Court, in the case of Hindustan Steel Ltd. vs. State of Orissa4, held that when a quasicriminal process leads to a penalty, it must be due to a deliberate failure to follow a legal duty. A penalty should not be imposed unless the person knowingly broke the law, acted dishonestly, or showed a clear disregard for their responsibilities. Just because the law allows for a penalty doesn’t mean it must automatically be applied. The authorities have the discretion to decide whether a penalty is necessary after reviewing all relevant details of the case. Similarly, in Assistant Commissioner (ST) & Others vs. M/s. Satyam Shivam Papers Pvt. Ltd. & Another5, the Hon’ble Supreme Court supported the findings of the High Court, which had carefully reviewed the matter and found no evidence that the taxpayer had any intention to avoid tax.

While the Supreme Court agreed with the High Court’s ruling, it did set aside the cost that had been imposed in the case. It’s worth noting that although this judgment was related to the expiry of an E-Way Bill, the key point made by the Court applies to all the offences listed under Section 122 of the GST Act. The takeaway from this ruling is that, apart from minor administrative errors covered under Section 125, penalties under Section 74 should only be triggered when there is clear intent to avoid paying taxes. The way audit procedures are carried out suggests that there is very little chance of a taxpayer deliberately hiding their tax obligations. There’s also no strong indication that the taxpayer knowingly gave wrong information.

Most of the time, the issues found during an audit appear to be honest and unintentional errors—like missing a few transactions in the total turnover or making minor mistakes while claiming Input Tax Credit (ITC). These are common human mistakes, not calculated attempts to avoid tax. Such errors usually come from oversight or carelessness, but that doesn’t mean the taxpayer acted with an intention to deceive or conceal information. In such cases, the law under Section 50 already makes it clear that the taxpayer is liable to pay the due tax along with interest. However, imposing a penalty under Section 74 is not justified when there’s no clear evidence of fraud or intent to evade tax. Just like taxpayers can make mistakes, so can Audit Officers when preparing audit orders, which may lead to incorrect tax demands. This is

4 Hindustan Steel Ltd. v. State of Orissa, (1969) 2 S.C.R. 627 (India).

5 Assistant Comm’r (ST) v. Satyam Shivam Papers Pvt. Ltd., 2022 SCC OnLine SC 1511 (India).

exactly why the GST framework includes proper checks and balances to protect both the authorities and the taxpayers. Importantly, the responsibility to prove that the taxpayer committed an offence lies with the Audit Officer. The officer may form a preliminary opinion to begin penalty proceedings, but such action must follow the legal process outlined in Section 74, along with the hearing requirement under Section 75(4). While audit findings might serve as the basis for further action, the penalty process must remain independent. The two cannot overlap or compensate for each other’s weaknesses. Even if penalties are being considered for serious violations, they must go through a separate and clearly defined legal route. This means that a taxpayer can only be formally notified about penalty proceedings through a proper statutory notice.

General references in audit reports under Section 65 often lack the clarity required by law and cannot substitute for the legal notice process. Issuing of Fake Invoices: In recent times, the issue of fake or bogus invoices has become increasingly common in India. Almost every day, new cases are reported from different parts of the country. Since the Goods and Services Tax (GST) system is entirely digital—covering its application, compliance, and monitoring—it has become easier for tax officials to detect irregularities. These include missing links in transactions, undeclared trades, and suspicious entries. Fake invoices are often used to avoid paying taxes, claim false Input Tax Credit (ITC), show inflated business turnover or expenses, or even to carry out circular trading schemes6.

Since GST was rolled out, both Central and State GST departments have caught several cases where fraudulent invoices were used to wrongfully claim ITC. This fake credit is then used to pay GST on outward supplies, reducing actual tax liability. In most of these cases, the motive clearly points to intentional fraud. Beyond tax evasion, such practices are also used to mislead other institutions—like banks—by showing inflated business figures or moving money illegally. To counter this, the Central Board of Indirect Taxes and Customs7 (CBIC) and the GST Network (GSTN) have begun using advanced data analysis tools. Through their investigations, they've 6 Ministry of Finance, Govt. of India, Press Release, “CBIC Tightens Crackdown on Fake Invoices Under GST,” (Nov. 2020), available at https://pib. gov. in/PressReleasePage. aspx? PRID=1673784.

7 CBIC, Standard Operating Procedure for Action Against Identified Taxpayers for Discrepancies Between GSTR-1 & GSTR-3B, GST Investigation Wing, Instruction No. 01/2022-GST (Jan. 7, 2022). discovered mismatches between the amount of IGST and Compensation Cess paid at customs during imports and the ITC claimed in GSTR-3B. They’ve also found significant discrepancies between the self-declared tax liabilities shown in GSTR-1 and those reported in GSTR-3B. Conclusion: Section 74 of the CGST Act is meant to deal with cases where someone is suspected of breaking GST rules or intentionally evading tax. It allows tax officers to issue notices and begin an investigation to understand how serious the violation is and how much tax is due. If, after the inquiry, the taxpayer is found at fault, they may be required to pay not just the pending tax but also a penalty.

To avoid falling under the scope of Section 74, businesses should closely follow the rules laid out in the CGST Act. This includes timely payment of taxes, accurate filing of returns, and maintaining proper records of all financial transactions. Setting up strong internal systems and conducting regular checks can help catch any errors or gaps early, so they can be fixed before becoming bigger issues. Additionally, seeking advice from GST professionals or consultants can help ensure that a business remains compliant and understands the finer details of the law. Staying updated with any changes in the GST framework is also essential to avoid unintentional mistakes that may lead to penalties.