Introduction: Why Section 74A Is a Game-Changer for GST Penalties

The introduction of Section 74A in the Central Goods and Services Tax Act, 2017 marks a major shift in how GST penalties are determined and imposed in India. For businesses operating in Delhi, Gurugram, Noida, Faridabad, and Ghaziabad, this amendment is particularly important due to high transaction volumes, complex supply chains, and frequent GST scrutiny.

Section 74A consolidates the earlier Section 73 (non-fraud cases) and Section 74 (fraud cases) into a single unified provision. This is not a mere structural change. It fundamentally alters:

When fraud is determined
How and when penalties apply
The timelines for settlement
The ability to convert fraud cases into non-fraud cases

This reform aligns with the government’s objective of creating a more taxpayer-friendly GST regime while maintaining strong deterrence against genuine tax fraud.

What Section 74A Changes in GST Law

Section 74A introduces a unified framework that determines the nature of default (fraud or non-fraud) during adjudication, instead of at the notice stage.

Key Structural Change

Under the old regime, taxpayers were often labelled as committing fraud at the time of issuance of the Show Cause Notice (SCN). Under Section 74A, this classification is now made after examining evidence during adjudication.

Impact for Delhi NCR Businesses

Reduced reputational risk
Fairer treatment at the notice stage
More time for compliance and settlement
Lower risk of automatic fraud tagging

Old Law vs Section 74A: Key Differences

Previous Framework (Sections 73 & 74)

Old Section 73 – Non-Fraud Cases

Applicable where tax was not paid or short paid without fraud or suppression:

No penalty if tax + interest paid before or within 30 days of SCN
10% penalty (minimum ₹10,000) if paid at order stage

Old Section 74 – Fraud Cases

Applicable where fraud, willful misstatement, or suppression of facts was alleged:

15% penalty if paid before SCN
25% penalty if paid within 30 days of SCN
50% penalty if paid within 30 days of order
100% penalty if paid after 30 days of order

Key Problem with Old Law

Fraud determination happened at the notice stage, leading to:

Immediate fraud tagging
Higher litigation
Severe penalty exposure even for genuine errors

The Section 74A Revolution1. Unified Framework with Adjudication-Based Classification

Section 74A now contains both fraud and non-fraud mechanisms in one section. The key change is that fraud is determined during adjudication, not at the SCN stage.

Practical Impact: Businesses are no longer presumed guilty of fraud at the outset. The tax department must establish fraud based on evidence.

2. Extended Compliance and Settlement Windows

Section 74A provides double the time for settlement in fraud cases.

Stage	Old Section 74	Section 74A	Benefit
After SCN, before order	25% within 30 days	25% within 60 days	Double time
After order	50% within 30 days	50% within 60 days	Double time

For non-fraud cases:

No penalty on early payment
10% penalty (or ₹10,000) otherwise
Timelines aligned with 42-month SCN and 12-month order framework

3. Conversion Mechanism: Fraud to Non-Fraud

A major taxpayer-friendly feature of Section 74A is the statutory conversion mechanism. If fraud is not established during adjudication, the case can be treated as non-fraud.

Practical Example

A manufacturing company in Manesar receives an SCN alleging fraudulent ITC of ₹50 lakhs.

During adjudication, it is proved that the issue arose from a genuine accounting error.

Under Section 74A:

Case converts to non-fraud
Penalty reduces from 100% (₹50 lakhs) to 10% (₹5 lakhs)
Or NIL penalty if settled promptly

Detailed Penalty Comparison: Old Law vs Section 74A

Situation	Old Law	Section 74A	Key Difference
Non-fraud: Payment before SCN	No penalty	No penalty	Same
Non-fraud: Payment after SCN	No penalty	No penalty	Same
Non-fraud: At order stage	10% or ₹10,000	10% or ₹10,000	Better clarity
Fraud: Before SCN	15%	15%	Same
Fraud: After SCN	25% within 30 days	25% within 60 days	Doubled window
Fraud: After order	50% within 30 days	50% within 60 days	Doubled window
Fraud: Late payment	100%	100%	Same max penalty

Key Implications for Delhi NCR Businesses

1. Improved Cash Flow Management

Extended timelines allow businesses to arrange funds and evaluate settlement vs litigation.

2. Reduced Litigation

Fraud classification at adjudication stage reduces premature appeals.

3. Proportionate Penalties

Genuine errors are less likely to attract harsh fraud penalties.

4. Better Strategic Planning

Businesses in Gurugram, Noida, and Delhi can now plan compliance more effectively.

Compliance Requirements Under Section 74A

For Taxpayers

Maintain complete documentation
Reconcile ITC regularly
Respond to notices promptly
Engage GST professionals early
Monitor fraud vs non-fraud classification

For Tax Authorities

Establish fraud with evidence
Follow due process
Apply conversion mechanism where fraud is not proved

Practical Case Studies

Example 1: E-Commerce Company in Delhi

Tax short payment: ₹1 crore

Old Section 74:

Immediate fraud classification
100% penalty exposure (₹1 crore)

Section 74A:

Fraud determined during adjudication
If non-fraud: only 10% (₹10 lakhs)
If fraud but paid within 60 days of SCN: 25% (₹25 lakhs)

Potential saving: Up to ₹90 lakhs

Example 2: Manufacturing Unit in Noida

ITC claimed where supplier defaulted

Under Section 74A:

Treated as non-fraud if bona fide
Only 10% or NIL penalty

Frequently Asked Questions (FAQs)

Q1. From which year does Section 74A apply?

Section 74A applies prospectively from FY 2024-25 onwards. For earlier years, taxpayers may rely on its intent in appeals.

Q2. Does a Section 74A notice mean fraud?

No. Fraud is determined during adjudication, not at SCN stage.

Q3. What records should businesses maintain?

Invoices, reconciliations, vendor due diligence records, payment proofs, and correspondence.

Q4. Can cases be settled after the order?

Yes. Payment within 60 days of order with 50% penalty avoids 100% penalty.

Action Points for Businesses in Delhi NCR

Immediate Steps

Review pending GST notices
Prepare documentation
Calculate penalty exposure
Seek professional advice

Strategic Measures

Strengthen vendor verification
Regular GST internal audits
Staff training on GST compliance
Robust documentation protocols

Conclusion: Why Section 74A Matters

Section 74A represents a shift towards procedural fairness and proportionate penalties under GST. By extending timelines and ensuring fraud is determined on evidence, it protects genuine taxpayers while maintaining strict action against real fraud.

For businesses across Delhi NCR, understanding and leveraging Section 74A is essential for risk management, cash flow planning, and dispute resolution.

Need Expert GST Support in Delhi NCR?

Our team of Chartered Accountants assists with:

GST notice replies
Penalty computation and settlement
Fraud vs non-fraud classification
Appeals before Commissioner (Appeals) and Tribunals
GST audits and compliance

Disclaimer: This article is for informational purposes only and does not constitute legal advice. GST law is subject to amendments, notifications, and judicial interpretation. Please consult a qualified Chartered Accountant for advice specific to your case.