GSTAT Clarifies: Section 74 Cannot Be Used Solely for GSTR-1 and GSTR-3B Mismatches

Introduction

The Goods and Services Tax Appellate Tribunal (GSTAT) has issued its first reported decision, providing much-needed guidance on the misuse of Section 74 of the CGST Act, 2017 in situations involving discrepancies between GSTR-1 and GSTR-3B returns. This ruling lays down important principles that will influence numerous pending GST disputes across India.

The Tribunal has specifically addressed three recurring questions in GST litigation:

  1. Can a mere mismatch between GSTR-1 and GSTR-3B justify initiation of proceedings under Section 74?
  2. Are appellate authorities permitted to re-determine tax liability under Section 73 when proceedings under Section 74 fail?
  3. What is the extent of GSTAT’s powers as the final appellate forum, particularly regarding fact-finding?

This decision is expected to serve as a major precedent in cases where authorities have mechanically invoked Section 74 without demonstrating fraud, wilful misstatement, or suppression of facts.

Background Facts of the Case

The assessee, Sterling and Wilson Pvt. Ltd., is in the business of providing EPC services and is registered under GST. During scrutiny of returns for FY 2018-19, the department detected a difference between the outward tax liability reported in GSTR-1 and that reflected in GSTR-3B.

  • Output tax as per GSTR-1: ₹31.36 crore
  • Output tax as per GSTR-3B: ₹31.09 crore
  • Alleged short payment of tax: ₹27,06,634/-

On the basis of this numerical difference alone, the department initiated proceedings under Section 74 of the CGST Act, alleging suppression of facts and intention to evade tax. The Proper Officer confirmed demand of tax along with interest and penalty, treating the case as one involving fraud or suppression.

The First Appellate Authority, while clearly recording a finding that there was no intention to evade tax, nonetheless sustained the demand of tax and interest. The penalty was modified by treating the case as one covered by Section 73 rather than Section 74.

Aggrieved by this approach, the assessee filed a second appeal before the GSTAT.

The Tribunal had to examine the following key questions:

  1. Applicability of Section 74

    • Can proceedings under Section 74 be sustained when there is no finding of fraud, wilful misstatement, or suppression of facts with intent to evade tax?
    • Is a simple difference between GSTR-1 and GSTR-3B sufficient to attract Section 74?

  2. Power to Re-determine Tax under Section 73

    • Once proceedings under Section 74 fail, can the First Appellate Authority or Tribunal itself re-classify the case under Section 73 and confirm demand accordingly?
    • How does Section 75(2) of the CGST Act impact such a situation?

  3. Scope of GSTAT’s Jurisdiction in Second Appeals

    • Does GSTAT have authority to examine both facts and law, or is it restricted like second appeals under Section 100 of the Code of Civil Procedure, 1908?
    • Can GSTAT reappreciate factual findings and evidence?

1. Mere GSTR-1 vs GSTR-3B Mismatch Does Not Justify Section 74

The Tribunal held unequivocally that a simple mismatch between GSTR-1 and GSTR-3B, by itself, does not attract the stringent provisions of Section 74.