KSCAA Urges FM Nirmala Sitharaman to Curb Misuse of Section 74 Notices for Small GST Disputes

The Karnataka State Chartered Accountants Association (KSCAA) has urged Union Finance Minister and GST Council Chairperson Nirmala Sitharaman to intervene in what it describes as the growing misuse of Section 74 of the Central Goods and Services Tax (CGST) Act, 2017. In a formal representation dated July 28, the KSCAA flagged concerns over the issuance of show-cause notices invoking serious charges of fraud and suppression, even for minor value disputes and post-limitation cases that would otherwise fall under Section 73.

The KSCAA warned that indiscriminate use of Section 74, which carries severe penal consequences, is creating unnecessary litigation and compliance costs for honest taxpayers, especially small and medium enterprises. “It is highly improbable that genuine businesspersons would engage in fraud for trivial sums, as the cost and effort of litigation far outweigh any benefit,” the representation states.

Lack of Mens Rea: Section 74 is intended for cases involving “fraud, wilful misstatement or suppression of facts.” The KSCAA stressed that such notices require clear evidence of fraudulent intent (mens rea), and issuing them in routine disputes undermines the spirit of the law.

Penalising Buyers for Suppliers’ Defaults: Many Section 74 notices are being sent to buyers due to mismatches caused by sellers not uploading invoices or filing returns, despite courts consistently ruling that buyers should not be penalised for such third-party non-compliance.

Incorrect Tax Head Classification: Notices are often issued when taxpayers pay IGST instead of CGST/SGST or vice versa, even though the tax is paid and the error is traceable to GSTR-1 data provided by the taxpayer. The KSCAA deemed penal provisions in such cases as excessive.

Litigation Burden: Small businesses are bearing the brunt of prolonged litigation, with disruption to daily operations and erosion of trust in the GST system—running counter to the government’s ease of doing business agenda.

Proposed Recommendations:

The KSCAA has proposed that Section 74 notices should only be issued where there is demonstrable and quantified evidence of fraud or suppression. It also called on the Ministry of Finance to issue clear instructions or a circular under Section 168 of the CGST Act to prevent misuse of penal provisions in cases where there is no fraudulent intent.

The representation was jointly signed by CA Vijaykumar M Patel (President), CA Praveen S Shettar (Secretary), and CA Babitha G (Chairperson, Representation Committee), and was also marked to other key officials including Union Minister of State for Finance Shri Pankaj Chaudhary and CBIC Chairman Shri Sanjay Kumar Agarwal.

Industry Response

Tax professionals and industry bodies have welcomed the KSCAA’s move, noting that GST enforcement should not come at the cost of fairness and taxpayer rights. “When taxpayers are treated as suspects for clerical mistakes or third-party defaults, it undermines trust in the system,” said a Bengaluru-based tax consultant.

As the GST framework evolves, stakeholders are calling for a balanced approach that distinguishes between willful tax evasion and genuine errors, especially in a complex and evolving tax environment.