Form GST DRC-01 show cause notice under section 73 and section 74

What a DRC-01 is

Form GST DRC-01 is the electronic summary of a show cause notice issued under section 73, 74 or 74A, prescribed by Rule 142(1)(a). The detailed notice and its annexures are uploaded with it. Where the same grounds are extended to further tax periods, the officer issues a statement under section 73(3), 74(3) or 74A(3), summarised in Form GST DRC-02, and that statement is deemed to be a notice.

A DRC-01 must tell you three things: the amount of tax, interest and penalty proposed, the grounds on which it is proposed, and the period involved. Section 75(7) is important here. The demand confirmed in the order cannot exceed the amount specified in the notice, and no ground other than those in the notice can be used. A notice that merely says "excess ITC availed" with a figure and no reasoning is vulnerable, and that objection should be taken at the first opportunity rather than saved for appeal.

Section 73, section 74 and section 74A

For financial years up to 2023-24 the officer must choose between section 73 and section 74. That choice matters more than almost anything else in the notice, because it changes penalty exposure by a factor of ten. Section 74 requires the officer to allege and establish fraud, wilful misstatement or suppression of facts with intent to evade tax. A mismatch between GSTR-3B and GSTR-2B, standing alone, is not suppression, because the data was disclosed by you in returns the department already holds. If the notice invokes section 74 on mismatch grounds without pleading any positive act of concealment, say so expressly in the reply. Section 75(2) provides that where the section 74 charge is not sustained by the appellate authority or tribunal or court, the tax is to be redetermined as though the notice had been issued under section 73.

The reply and the hearing

The reply is filed in Form GST DRC-06 on the portal, under Services, then User Services, then View Additional Notices and Orders. The standard time is 30 days from service, and the reply window is stated in the notice. You can seek adjournment, but section 75(5) limits adjournments to three, and each request must record sufficient cause in writing.

Section 75(4) gives a right to personal hearing where a request is received in writing, or where any adverse decision is contemplated. Always tick the box asking for a personal hearing, even if you think the paperwork speaks for itself. Orders passed without a hearing where an adverse decision was made are regularly set aside and remanded, but remand costs you a year. Attend the hearing, file written submissions on the day, and take an acknowledgement.

Section 75(6) requires the order to state the relevant facts and the basis of the decision. An order that reproduces the notice and adds "the reply is not satisfactory" is a defective order and that defect is worth recording.

The grounds, and what actually answers them

Outward supply mismatches between GSTR-1 and GSTR-3B are answered with a month-wise reconciliation for the whole financial year, mapping credit notes, amendments in Tables 9A, 9B and 9C, zero-rated supplies under a letter of undertaking, and supplies on which the recipient pays under reverse charge. Where the difference is pure timing and the annual totals tie, the demand fails on tax and survives at most on interest. From July 2025 the liability tables of GSTR-3B have been auto-populated and locked, with corrections routed through GSTR-1A before the 3B, so this category is closing for newer periods.

Input tax credit against GSTR-2B is answered by classifying the disputed credit. Credit where the supplier filed GSTR-1 late and the invoice appeared in a later 2B is a timing shift, not a loss to revenue. Import credit is evidenced by the bill of entry and ICEGATE data. Credit distributed by an input service distributor appears in a different table. Credit on tax you paid under reverse charge never appears in 2B at all. Section 16(2)(aa) from 1 January 2022 requires communication of the invoice, so credit taken early is premature and the realistic exposure is interest, and only if the credit was utilised.

Section 16(2)(c) allegations, where the supplier reported the invoice but did not pay, should be answered first through Circular 183/15/2022-GST for FY 2017-18 and 2018-19 and Circular 193/05/2023-GST for 1 April 2019 to 31 December 2021, using a supplier certificate below ₹5 lakh per supplier per year and a CA or CMA certificate with UDIN above it. Where the supplier genuinely defaulted, the position is unsettled and honest advice says so. The Calcutta High Court in Suncraft Energy, the Gauhati High Court and the Karnataka High Court have protected bona fide recipients who hold invoices, proof of receipt and proof of banking payment. The Patna High Court in Aastha Enterprises, the Kerala High Court in M. Trade Links, the Andhra Pradesh High Court in Thirumalakonda Plywoods and the Gujarat High Court have upheld denial. Plead the facts that make you a bona fide recipient regardless of which line ultimately prevails: contract, e-way bill, transporter documents, goods receipt, bank payment through banking channels, and the supplier's registration status on the date of supply.

Reverse charge demands cover goods transport agency freight, advocate and law firm fees, sponsorship, director's remuneration, security services from a non-body-corporate, renting of motor vehicles, import of services, and since 10 October 2024, renting of commercial immovable property by an unregistered landlord to a registered tenant. Reverse charge must be discharged in cash. Where the credit is otherwise eligible, the real exposure is interest plus timing, and that point should be made expressly so the officer does not confirm a permanent demand on a revenue-neutral item.

Turnover demands built on Form 26AS or the audited accounts are answered with a bridge: book turnover, less non-GST items such as sale of capital assets, interest income, pure reimbursements and out-of-scope receipts, adjusted for advances and for TDS deducted in a different year, arriving at GST turnover.

Rule 42 and Rule 43 demands need the full working, including the annual recomputation. Check whether the officer has wrongly included interest income in exempt turnover; the Explanation to Rule 42(1) excludes interest on deposits, loans and advances for anyone other than a bank, financial institution or NBFC.

E-way bill demands are answered by extracting the full e-way bill data and tagging job work movements, branch transfers, sales returns, exhibition stock and duplicate bills, and by pointing out that consignment value includes tax while turnover does not.

For older years, check sections 16(5) and 16(6), inserted retrospectively by the Finance (No. 2) Act, 2024. Credit for FY 2017-18 to 2020-21 taken in any GSTR-3B filed up to 30 November 2021 is protected notwithstanding section 16(4), and a great many pending section 16(4) demands do not survive that.

Interest, and the two rates

Interest under section 50(1) is 18 per cent per annum on tax not paid by the due date, computed under Rule 88B(2) from the due date to the date of payment. Rule 88B(1) limits interest on belated returns to the cash ledger portion, but that relief does not apply once proceedings under section 73, 74 or 74A have started, so by the DRC-01 stage it is generally unavailable.

Interest under section 50(3) read with Rule 88B(3) is 24 per cent per annum, and it applies only where credit was wrongly availed and utilised. The two conditions are cumulative. Credit availed and reversed, where the credit ledger balance never fell below the wrongly availed amount, attracts no interest. Where the credit was utilised, interest runs from the date of utilisation to the date of reversal or payment, not from the date of availment. Produce the ledger.

After the order

The order is passed under section 73(9), 74(9) or 74A(5) and summarised in Form GST DRC-07 under Rule 142(5). The DRC-07 posts the amount to your electronic liability register and it becomes recoverable. Section 78 allows recovery to begin after three months from service of the order, and the officer can require earlier payment for reasons recorded in writing. Recovery under section 79 includes attachment of bank accounts and recovery from your debtors.

If you pay after the order, do it in DRC-03 and then file Form GST DRC-03A to map the payment against the demand in the liability register, otherwise the demand stays open. A rectification of an error apparent on the record can be sought under section 161 within three months of the order, with the order of rectification issued in Form GST DRC-08.

An appeal under section 107 must be filed within three months of communication of the order, with a further month condonable on sufficient cause. The pre-deposit is the full admitted amount plus 10 per cent of the disputed tax, subject to a cap of ₹20 crore each under CGST and SGST for orders from 1 November 2024. Interest and penalty are not part of the pre-deposit computation. The three-month limitation is strict and appellate authorities have very limited power to condone beyond the additional month, so diarise it on the day the DRC-07 is uploaded.

Mistakes that cost money

Filing only an adjournment request and never a substantive reply is the commonest and the most damaging, because appellate authorities are reluctant to admit evidence that was available and never produced. Uploading a reply as an unsearchable scan without a computation makes the officer's job impossible. Not asking for a personal hearing, and then complaining about section 75(4) in appeal, wastes a year on remand. Failing to challenge the section 74 characterisation at the reply stage means arguing penalty for the first time in appeal. Paying tax without interest and assuming the proceedings are concluded, when the statutory reliefs require both. And letting the appeal limitation run while negotiating informally with the range office.

What to attach

The full reconciliation for each ground with invoice-level annexures, electronic credit and cash ledger extracts, GSTR-2B extracts showing where disputed invoices landed, bills of entry and ICEGATE data, supplier and CA certificates with UDIN for section 16(2)(c), agreements and expense ledgers for reverse charge, e-way bill extracts with movement tagging, the Rule 42 and 43 working, the audited financial statements with a turnover bridge, DRC-03 challans and DRC-03A mapping for anything paid, and copies of the ASMT-10, ASMT-11 and DRC-01A correspondence to show the history.

Doing it yourself or getting help

A DRC-01 is not the place to economise. Even a straightforward single-issue notice benefits from professional drafting because the reply is the foundation of any appeal. Handle it yourself only if the amount is small, the ground is one you can fully document, and you are confident about the hearing. Get help without hesitation where section 74 or a fraud allegation under 74A is invoked, where multiple years are covered, where the exposure crosses a few lakh rupees, where the notice follows a search or summons, or where the limitation date for the order is close and the officer is likely to pass an order quickly.