GST Demand Notice Under Section 73: Reply and Payment

A show cause notice under Section 73 of the CGST Act has appeared in your GST portal inbox, and it concerns a financial year you assumed was closed. The Section 73 GST notice is the department's standard route for demanding tax that was short paid because of error, omission or a genuine misunderstanding of the law, not fraud. It quotes a tax figure, adds interest and warns of penalty. What follows explains which years it can cover, how to read the numbers, how to reply with your returns and reconciliation, what paying early saves, and how an appeal works.

Which tax periods and demands fall under a Section 73 GST notice

Section 73 applies where tax has not been paid, has been short paid, has been erroneously refunded, or where input tax credit has been wrongly availed or utilised, and there is no allegation of fraud, wilful misstatement or suppression of facts. Those aggravated cases go under Section 74, where the penalty is far heavier. The distinction matters, because the notice tells you which regime you are in and it decides how much room you have to settle cheaply.

Ordinary Section 73 demands arise from GSTR-1 and GSTR-3B mismatches, ITC claimed in 3B that does not appear in GSTR-2B, disputed rates of tax, wrong place of supply, non-inclusion of freight or subsidy in value, and returns filed with estimates that were never corrected.

The outer time limit is three years from the due date for furnishing the annual return for the financial year concerned, and the notice must be issued at least three months before that date. Take FY 2023-24, where the annual return was due on 31 December 2024. The order can ordinarily be passed up to 31 December 2027, and the show cause notice should reach you by 30 September 2027. Notifications have extended these dates for the earliest GST years, so read the notice rather than assuming a year is time-barred.

You may first receive Form GST DRC-01A, an intimation of tax ascertained as payable. It is a pre-notice consultation, not the notice itself. Many businesses ignore it, which is a mistake, because it is the cheapest point to correct a wrong number.

Reading the show cause notice: tax, interest and penalty

A Section 73 notice carries three amounts. The tax figure is broken head-wise into IGST, CGST and SGST, and period-wise, usually in an annexure. Interest is charged under Section 50 at 18% per annum, running from the date the tax ought to have been paid to the date of actual payment. Penalty is the third element.

If the demand is confirmed at adjudication, the penalty under Section 73 is 10% of the tax or ₹10,000, whichever is higher. That is why a ₹40,000 tax demand carries a ₹10,000 penalty, while a ₹12 lakh demand carries ₹1.2 lakh. Under Section 74 the penalty can equal the tax itself.

Three details deserve a close look before you draft anything. Confirm the tax period matches your returns, confirm the tax heads are correct, and check whether the annexure adds up. Officers work from portal analytics and third-party data such as e-way bills and e-invoices, and an automated annexure can double count a transaction that was reported late in a subsequent period.

Preparing a reply with returns and reconciliation

The reply has to be evidence-led. Pull GSTR-1, GSTR-3B, GSTR-2A and 2B, GSTR-9, the electronic credit ledger, e-way bills, purchase and sales registers, and the ledger extract from your accounting software for each month in the notice.

Build a reconciliation statement in three columns: as per returns, as per books, and as per the notice. Explain each gap with a document. A common and defensible explanation is timing, where an invoice reported in GSTR-1 of March is reflected in GSTR-3B of April. Another is a credit note issued in the next period. Where the demand is genuinely correct, admit that portion instead of contesting the whole notice. Officers respond better to a partly admitted demand than to a blanket denial with no papers.

File the reply in Form GST DRC-06 on the portal and hand over a signed copy with annexures to the officer, keeping the acknowledgement. If you need more time, ask for an adjournment in writing before the hearing date rather than skipping the hearing.

A worked example

A Pune-based auto components supplier with turnover of about ₹18 crore received a notice for FY 2021-22. The department proposed ₹12,40,000 as tax on the difference between GSTR-1 and GSTR-3B, and ₹4,60,000 as ITC claimed in GSTR-3B but not reflected in GSTR-2B, totalling ₹17,00,000. Interest at 18% for roughly 20 months came to about ₹5,10,000. The 10% penalty, if confirmed, would be ₹1,70,000.

The supplier reconciled month by month. Of the ₹12,40,000, about ₹9,80,000 was a timing gap already paid with the next month's return, which the ledger showed. On the ITC, only ₹1,10,000 was unsupported. He paid ₹10,90,000 tax with about ₹3,27,000 interest on that portion within 25 days of the notice, and filed a reply explaining the rest with annexures. The officer dropped the explained portion in the order. Contesting everything without paperwork would have exposed him to the full ₹17,00,000 tax, the interest and the penalty, followed by an appeal.

Paying before adjudication and the penalty position

Section 73 rewards early payment. If you pay the tax with interest before the notice is served, on your own ascertainment or on the officer's, and inform the officer in writing, no penalty is payable and no notice should follow for that amount. If the notice has already been issued, paying the full tax with interest within 30 days of the notice means no penalty, and the proceedings are treated as concluded for that amount. The 30 days run from the date of the notice, not from the date you read it.

Payment is made through Form GST DRC-03, from the cash ledger. Input tax credit cannot be used. Pick the correct tax period, the correct tax head and the correct cause, and quote the reference number of the notice or intimation so the payment maps to the demand. Keep the ARN receipt. A payment that sits unmatched is treated as unpaid.

Interest under Section 50 stops on the date of debit in the cash ledger. Every week of delay adds roughly 0.35% of the tax as interest, so a ₹10 lakh demand costs about ₹3,500 a week.

For 2017-18 to 2019-20, Section 128A of the CGST Act provides a waiver of interest and penalty where the full tax is paid within the notified date. Check the current position and the notified deadline on the CBIC site before you decide, because the scheme does not help once its window closes.

Before you file the reply or make the payment, assemble this set:

• Copy of the notice or DRC-01A with its annexure and the portal reference number

• GSTR-1, GSTR-3B and GSTR-2B for every month mentioned, downloaded from the portal

• GSTR-9 and the reconciliation statement filed for the year

• Electronic credit and liability ledger extracts, and bank proof of tax paid

• Purchase and sales registers, invoices, e-way bills and credit notes for the disputed transactions

• An interest computation working, showing the date each shortfall was actually paid

• Written acknowledgement of every submission made at the counter or on the portal

Common mistakes

Three errors repeat. Paying through DRC-03 without quoting the notice reference, so the officer never sees the adjustment. Admitting the entire demand in the reply out of nervousness and losing the timing-difference argument permanently. And uploading the reply on the last day without annexures, then discovering that the portal does not accept a revision.

Personal hearing and the adjudication order

You are entitled to be heard. Section 75(4) requires the officer to grant a personal hearing where you ask for it in writing, either in the notice reply or separately, and where an adverse decision is contemplated. The hearing is where a reconciliation finally gets discussed by a human being. Attend it, or send an authorised representative with a written submission, and leave with a receipt.

The officer then issues an order summarised in Form GST DRC-07, which appears on the portal. Read it against your reply. If the order does not deal with your submissions or the annexures, that is a ground of appeal. If the officer fails to pass the order within the statutory time limit, the proceedings are treated as concluded, and you should say so in writing rather than assume the portal will fix itself.

Appeal against the demand order

An appeal lies to the Appellate Authority under Section 107, filed in Form GST APL-01 within three months of communication of the order. One more month can be condoned if you show sufficient cause, and no more than that. You must pay the tax and interest admitted in full, and deposit 10% of the remaining tax in dispute as pre-deposit, capped at ₹20 crore. The appeal is filed electronically on the GST portal, with the order and a statement of facts attached.

Do not treat the appeal as a way to buy time without evidence. The reconciliation that worked in the reply has to be filed again, in a clearer form, and the grounds should be specific: a timing difference, a credit note, a jurisdiction error, or a demand barred by time. A further appeal to the GST Appellate Tribunal under Section 112 needs another deposit, so the economics rarely work for a small demand. The CBIC tax information portal carries the Act, rules and forms if you want to read the provisions yourself before meeting your consultant.

Start this week: download the notice annexure along with GSTR-1, GSTR-3B and GSTR-2B for every month named, build the three-column reconciliation, and mark the date on which your 30-day payment window closes.

This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.