India Inc is increasingly voicing concern over the “arbitrary and excessive” use of Section 74 of the Central Goods and Services Tax (CGST) Act—originally designed to punish willful tax evasion. Industry players and legal experts now allege that the provision, which allows the government to initiate proceedings in cases of fraud or suppression of facts, is being invoked routinely, even in situations that involve no intent to evade tax.
At the core of the worry is a growing trend: classification disputes, interpretation differences, or even clerical errors are being treated as fraudulent conduct by tax officers. This not only invites severe penalties but also inflicts reputational and financial damage on businesses, including small and mid-sized enterprises.
Section 74: From anti-fraud tool to broad enforcement lever?
Section 74 of the CGST Act, 2017, empowers authorities to recover tax dues where non-payment arises from fraud, willful misstatement, or suppression of facts. It allows for a penalty of up to 100% of the tax amount and has a limitation period of five years—longer than the three years under Section 73, which applies to genuine or non-fraudulent mistakes.
But what was intended to be a deterrent against deliberate evasion is now being seen as an enforcement shortcut.
“Section 74 was supposed to be used sparingly and judiciously. But now, nearly every case of tax mismatch or classification difference is being labeled as fraud,” said a senior tax head at a leading FMCG company. “This not only leads to inflated demands but forces businesses into prolonged and costly litigation.”
Experts warn of structural misuse
An tax expert, points to systemic misuse of the provision.
“Section 74 is now being used as a default, not an exception. Revenue authorities often invoke it to bypass the shorter timeline under Section 73,” he said.
“You cannot call every dispute fraud. Even a genuine difference in legal interpretation is being treated as suppression of facts. This erodes taxpayer confidence and violates the intent of the law.”
He notes that disputes involving classification or valuation—often revenue-neutral—are frequently escalated under Section 74, exposing businesses to criminalisation where none is warranted.
The timeline trap
One major reason behind the trend appears to be the extended five-year limitation under Section 74. Tax professionals say this creates an incentive for officers to stretch timelines or issue notices after deadlines under Section 73 have lapsed.
“This is weaponising timelines. Officers invoke Section 74 not because there is fraud, but because the three-year window under Section 73 has closed,” said a senior tax consultant advising infrastructure clients. “This amounts to a procedural workaround at the cost of legal integrity.”
Not just legal but business impact too
The implications of being served a Section 74 notice go well beyond tax recovery:
- Reputational Damage: Allegations of fraud can tarnish a company’s standing, especially for entities engaged in government contracts or raising funds.
- Cash Flow Disruption: Businesses may need to provision large amounts for disputed tax and penalties.
- Litigation Overload: Disputes under Section 74 tend to drag on longer and require heavier legal firefighting.
- Emotional Toll: For SMEs, being accused of fraud can be personally and professionally devastating.
Another tax expert echoes these concerns, “Section 74 has, in some instances, been invoked in cases beyond fraud or suppression, including reconciliation mismatches or revenue-neutral scenarios. There have even been cases where matters adjudicated under Section 73 were later escalated to Section 74 in appeals—this creates unnecessary uncertainty.”
Courts push back
Several High Courts across India are now scrutinising how Section 74 is being applied. Writ petitions have challenged the issuance of show-cause notices based on vague or templated language, absence of specific fraud evidence, and improper jurisdictional procedures.
In many cases, courts have struck down notices, asserting that:
- Fraud cannot be inferred from tax shortfalls alone.
- Interpretational disputes do not constitute suppression.
- The burden of proof lies with the department, not the taxpayer.
“There’s growing judicial consensus that the provision must be invoked only with cogent evidence and not as a tool of convenience,” he said. “Mechanical issuance of notices without application of mind is against the spirit of natural justice.”
A glimmer of course correction?
In response to industry feedback, the GST Council has introduced Section 74A, which provides for demand proceedings without the need to establish fraud. Experts say this could reduce the misuse of Section 74, but only going forward.
Another tax expert, explains “Section 74A is a positive step, aimed at streamlining enforcement in non-fraud cases. But it applies prospectively—from FY 2024–25 onwards. For disputes of earlier years, the misuse of Section 74 continues to be a live issue unless clarified further.”
“Issuance of show-cause notices under Section 74 for classification differences or clerical lapses is deeply problematic. It dilutes the provision’s deterrent value and burdens honest taxpayers unnecessarily.”
She also draws parallels with the Service Tax and Excise regimes, where similar misuse of penal provisions was struck down by appellate forums for lack of evidence.
The ask from industry
Business associations and tax professionals are urging the government to:
- Issue guidelines defining clear thresholds for invoking Section 74.
- Mandate officer-level approvals before issuance.
- Require specific fraud justification in show-cause notices.
- Train officers to distinguish genuine mistakes from malafide conduct.
There are also calls for a clarification circular or even a statutory amendment to reinstate the intent of the law.
“The distinction between Sections 73 and 74 is not procedural—it reflects two fundamentally different kinds of conduct. Diluting that distinction weakens compliance culture and creates distrust,” he said.
