Applicability of Sec 74(5)

[KESHAV GROVER]

Wether Department can compel the taxpayer for deposit of penalty of 15% u/s 74(5) before issue of DRC 01A like under GST Audit or under normal inquiry or under scrutiny of returns or under any other proceeding where taxpayer is ready to deposit GST with interest ?

[Amit Agrawal]

Department can not compel the taxpayer for deposit of penalty of 15% u/s 74(5).

However, if Dept. feels that your situation falls under Section 74 and not under Section 73, then, you need to be ready defend your case judicially while deciding not to pay penalty u/s 74 (5).

Kindly also note that penalty u/s 74 reaches upto 100% of tax involved, depending upon the stage. Practically speaking, 15% penalty option is where Dept. is not ready to provide relief u/s 73 and assesses do not want to defend the case judicially but wishes a closure.

[KASTURI SETHI]

If you have deposited short payment of tax on being pointed out by the Department, the department will demand tax, interest and 15% penalty under Section 74 (5). DRC 01A is an opportunity to save 85% penalty otherwise SCN will be issued for imposition of penalty equal to tax evaded/not paid.

I agree with the views of Sh.Amit Agrawal, Sir.

[PAWANKUMAR SONI]

There are circumstances when the Department Auditor asks for reversal for mismatch of ITC with GSTR-2A and ask for making the payment of 15% for the same too.

Whereas there is no mens rea in a mismatch of ITC. Whether initiation of Notice under section 74 is valid?

[Shilpi Jain]

Agree with the experts. Recovery cannot happen without confirmation/finalisation of the demand

[Amit Agrawal]

Dear Shri Pawankumar Soni Ji,

Denial of ITC solely due to non-appearance of ITC invoices in GSTR-2A is strongly arguable case (specially for period before 09.10.2019 wherein these restrictions under Rule 36 (4) comes into picture) in my humble view.

And if you want to defend your non-liability to pay penalty u/s 74, I feel that you must be ready to defend your eligibility of such ITC on merits first. If you succeed, question of any interest or penalty does not arise.

But, if you agree to reverse / pay against such ITC along-with interest (which is treated as admission of non-availability of such ITC), from my practical experience, Dept. officer is - more likely than not - will also ask for penalty u/s 74 (5).

You need to take holistic call in such matters.

These are strictly personal views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

My above views are based on presumption that subject ITC is otherwise available to you. And you got proper tax-invoice in your name, bearing your GST registration number etc.

AI Summary

Penalty under Section 74(5) settlement option may be offered, but deposit cannot be compelled before demand finalisation.
The department should not compel payment of the reduced penalty under Section 74(5) before a demand is confirmed; recovery of penalty follows finalisation. A settlement option permits payment of a lower penalty to close proceedings, but admitting non availability of input tax credit by reversing ITC and paying interest can prompt penalty proceedings, whereas successfully defending entitlement on merits avoids tax and penalty exposure.