← All articles …

DRC-01 GST Show Cause Notice: Section 73, 74 and 74A Reply

A DRC-01 notice is the point at which a GST dispute becomes formal. Everything before this- the ASMT-10 scrutiny, the DRC-01A pre-SCN intimation, the system-generated alerts was preliminary. The DRC-01 is the department's official position: here is what we believe you owe, here is why, and here is your opportunity to tell us why we are wrong.

A DRC-01 is a formal notice issued by a GST officer for cases of unpaid or short-paid tax, erroneous refunds, or incorrect use of input tax credit. It is a notice, not a demand order, and is issued under various sections, including Section 73 (non-fraud cases) and Section 74 (fraud cases), which apply until the financial year 2023-24. For the financial year 2024-25 and onwards, a new Section 74A is used for both fraud and non-fraud cases.

That last line matters enormously. The section cited in your DRC-01 determines the penalty you face and the deadline by which the notice had to be issued. Getting that right before you respond is the first step of an effective defence.

What DRC-01 Contains and What to Check First

The notice will spell out: the name and GSTIN of the taxpayer, the tax period involved, a summary of alleged contravention, the tax, interest and penalty proposed, grounds for allegations, the applicable sections of law, and a timeline to reply, usually 30 days.

Before drafting a single word of your reply, verify four things immediately:

1. Is the correct section cited? Section 73 and 74 are applicable till FY 2023-24. An officer cannot issue notice under these both sections for FY 2024-25 or onwards. Section 74A is applicable from FY 2024-25. A DRC-01 issued under Section 73 for FY 2024-25 is legally flawed. Raise it as a preliminary objection in your DRC-06 reply.

2. Was the notice issued within the time limit? For Section 73: the SCN deadline is three years from the GSTR-9 due date. For FY 2024-25, GSTR-9 due date is 31 December 2025, making the SCN deadline 31 December 2028. Any SCN issued after its limitation date is void on its face. For Section 74 (fraud cases, up to FY 2023-24), the limit is five years from the GSTR-9 due date. For Section 74A (FY 2024-25 onwards), Section 74A implements a uniform timeline of 42 months from the due date of furnishing the Annual Return.

3. Does the officer have jurisdiction? The proper officer must have territorial and subject-matter jurisdiction over your GSTIN. A notice issued by an officer outside their jurisdiction is challengeable.

4. Are the figures accurate? Cross-verify the tax amount, period, ITC figures, and interest calculation against your actual returns before accepting any number as correct.

Section 73 vs Section 74 vs Section 74A: Which One Applies and Why It Matters

Section 73 applies when there is no allegation of fraud, think honest mistakes, calculation errors, late filings. Section 74 applies when the department believes there was deliberate fraud, suppression of facts, or wilful misstatement.

This is not just a labelling exercise. The section determines the penalty you face at every stage of the proceedings. It also determines your strongest line of defence. If Section 74 is invoked but there is no evidence of fraud or suppression, challenge the invocation itself. Cite relevant tribunal and court decisions where Section 74 was struck down in absence of evidence of fraud.

The introduction of Section 74A marks a significant step towards simplifying the legal framework. By consolidating the provisions of Sections 73 and 74, Section 74A removes the distinction between fraud and non-fraud cases for issuing SCN, implementing a uniform timeline of 42 months from the due date of furnishing the Annual Return. Section 74A balances the compliance burden on taxpayers, extending the time limit for availing reduced penalties in fraud cases from 30 to 60 days, ensuring more time for voluntary compliance.

The practical impact of Section 74A's unification: you still face differentiated penalties depending on whether fraud is ultimately found, but the notice itself is issued under a single section regardless of the nature of the allegation.

The Penalty Structure: The Earlier You Pay, the Less You Owe

This is the single most important financial fact in the entire DRC-01 process. The penalty you pay depends entirely on when you pay.

Under Section 73 (Non-fraud, up to FY 2023-24)

Under Section 73, if the taxpayer pays the tax along with interest within 30 days of issuance of the SCN, no penalty is levied and the proceedings are concluded.

Stage of Payment	Penalty Rate
Before SCN is issued (via DRC-03 at DRC-01A stage)	Zero
Within 30 days of DRC-01 SCN	Zero
After 30 days of SCN but before DRC-07 order	10% of tax
Within 30 days of DRC-07 order	10% of tax
No payment, full adjudication	Up to 100% of tax

Under Section 74 (Fraud, up to FY 2023-24)

For Section 74: if the taxpayer makes payment of tax and interest along with penalty at 25% of tax within 30 days of issue of notice, it shall be deemed that all proceedings have been concluded.

Stage of Payment	Penalty Rate
Before SCN is issued (via DRC-03 at DRC-01A stage)	15% of tax
Within 30 days of DRC-01 SCN	25% of tax
Within 30 days of DRC-07 order	50% of tax
No payment, full adjudication	100% of tax

Under Section 74A (FY 2024-25 onwards)

Section 74A provides for pre-notice voluntary payment to avoid notices or conclude proceedings, and differentiates penalties for non-fraudulent shortfalls and for cases involving fraud, wilful misstatement or suppression. The 60-day window for reduced penalty in cases involving fraud is an improvement over the 30-day window under Section 74.

The takeaway is the same across all three sections: the earlier you pay or resolve the matter, the less the total outflow. Every stage of delay adds penalty.

The Most Common Grounds for DRC-01 Notices in 2025

Common triggers include: short payment or non-payment of tax, input tax credit misuse, excess refund claimed, undeposited tax with the government, late or non-filing of GST returns, and mismatch in GSTR-1 and GSTR-3B data.

In 2025 specifically, the most frequently seen DRC-01 notices relate to:

ITC claimed from cancelled supplier GSTINs: If you claimed ITC from a supplier whose GSTIN was cancelled with retrospective effect, the ITC is disallowed even if the invoices appeared genuine at the time.

GSTR-2B vs GSTR-3B ITC excess: ITC claimed in GSTR-3B beyond what was reflected in GSTR-2B for the same period. This follows from DRC-01B notices that were not resolved.

GSTR-1 vs GSTR-3B output tax gap: Output liability declared in GSTR-1 exceeds tax paid through GSTR-3B, suggesting under-payment.

Excess refund granted and now recovered: Refunds processed for zero-rated supplies or inverted duty structure that are found to be erroneous on re-examination.

Non-reversal of ITC for exempt supplies: Businesses making both taxable and exempt supplies who did not reverse the proportionate ITC under Rule 42/43 of CGST Rules.

How to File Your DRC-06 Reply: Step by Step

Form DRC-06 is the only designated reply form for SCNs under Sections 73, 74, and 74A.

Step 1: Log in to the GST portal at gstin.gov.in.

Step 2: Navigate to Services → User Services → View Notices and Orders. Locate the DRC-01 notice. Click Reply.

Step 3: In the DRC-06 screen, choose your response type: Dispute, Partial Acceptance, or Acceptance with full payment.

Step 4: Enter a concise three to four paragraph summary in the text box; the character limit is restrictive and unsuitable for detailed legal arguments. Upload your detailed signed reply as a PDF attachment along with all supporting documents including invoices, reconciliations, ledger extracts, and case law. Portal upload limits are typically 10 MB per file. Use multiple attachments if required.

Step 5: Preview, submit, and save the Acknowledgement Reference Number (ARN) and a PDF copy of the submitted form.

Step 6: If the officer schedules a personal hearing, attend in person or send your CA or advocate with proper authorization. Prepare a written submission to hand over during the hearing. Do not rely on verbal arguments alone.

How to Structure a Strong DRC-06 Reply

A well-structured DRC-06 reply follows four parts in strict sequence.

Part 1: Preliminary objections

Open with grounds that could terminate the proceeding on procedure, before the merits are touched: limitation (SCN issued after the applicable time window), jurisdiction (officer lacks territorial or subject-matter jurisdiction), natural justice (relied-upon documents were not supplied or the time given is insufficient), DRC-01A omitted (the pre-notice opportunity under Rule 142(1A) was not given), and section misapplication (the body of the notice alleges suppression but invokes Section 73, creating an internal contradiction). Even one successful preliminary objection drops the entire notice without examining the merits.

Part 2: Factual background

Describe in clear chronological terms what happened in the business during the period under review. Keep it factual and specific. Reference the actual invoices, return filings, and transactions involved.

Part 3: Substantive defence

Address each allegation in the DRC-01 individually. For ITC mismatch cases, explain why the credit was legitimately availed with invoice copies, payment proof, and GSTR-2B reconciliation. For output tax gaps, explain the timing differences between GSTR-1 reporting and GSTR-3B payment. For Section 74 fraud allegations, demonstrate the absence of intent through the factual record.

Part 4: Relief sought

Conclude with a specific request: drop the proceedings, accept the voluntary payment already made via DRC-03, reduce the penalty to the applicable rate for the relevant payment stage, or reclassify from Section 74 to Section 73 where fraud is not established.

If You Partially Agree With the Demand

Filing DRC-03 does not necessarily mean you accept the entire demand. You can pay the undisputed part and contest the balance. Make this distinction clear in your DRC-06 reply.

Pay the undisputed portion via DRC-03, note the ARN and payment details in your DRC-06, and file a complete dispute reply for the remaining amount. This approach demonstrates good faith, reduces interest exposure on the undisputed amount, and narrows the scope of any adjudication that follows.

What Happens After DRC-06: DRC-05 Closure or DRC-07 Demand Order

If the officer is satisfied with the response, they issue a closure order in DRC-05. However, if the reply is not satisfactory, or if no reply is submitted, the officer proceeds by issuing a demand order in DRC-07.

The DRC-07 demand order is the point at which the dispute crystallises into a confirmed liability. Once DRC-07 is issued, the order shall be treated as the notice for recovery. Any rectification of a DRC-07 order is made in Form DRC-08 under Section 161.

One critical practical consequence of not filing DRC-06: you must reply to DRC-01 within seven days from the date of receiving the notice, otherwise your access to filing GSTR-1 gets blocked automatically, meaning you cannot file and report fresh GST transactions for future periods. Even if you need more time for a substantive reply, file an initial response acknowledging receipt and requesting an extension to avoid the GSTR-1 blocking.

Section 128A Penalty Waiver: Closing Old Section 73 Demands for FY 2017-18 to 2019-20

For businesses still dealing with DRC-01 or DRC-07 demands under Section 73 for financial years 2017-18, 2018-19, and 2019-20, the Finance Act 2024 introduced a one-time waiver scheme under Section 128A.

The scheme allows taxpayers who pay the principal tax liability in full to receive a complete waiver of interest and penalty for those three years. The original deadline for payment was 31 March 2025 for most cases. Before SCN, use Form DRC-03 and no penalty is levied under Section 73. The Section 128A waiver goes further by waiving interest as well, which is not ordinarily available.

If you have a pending Section 73 demand for any of these three financial years and have not yet explored the Section 128A route, consult a GST professional immediately to check current eligibility and any extended deadlines notified by CBIC after March 2025.

Appealing a DRC-07 Demand Order

If the adjudication concludes with a DRC-07 order you disagree with, you can appeal under Section 107 of the CGST Act. File Form GST APL-01 within three months of the order. Challenged taxes require a 10% deposit of the disputed tax as pre-deposit. The Appellate Authority then hears the matter afresh.

If the Appellate Authority's order is also against you, the next forum is the Appellate Tribunal, followed by the High Court and Supreme Court for substantial questions of law.

Real Questions People Ask When They Receive a DRC-01

"I received a DRC-01 under Section 74 for fraud but I did not commit any fraud. The ITC mismatch was because my supplier filed their GSTR-1 late. How do I challenge the fraud allegation?" This is one of the most defensible situations in GST litigation. Section 74 requires the officer to establish deliberate fraud, suppression, or wilful misstatement. A timing mismatch caused by a supplier's late filing is not fraud. In your DRC-06, challenge the Section 74 invocation explicitly in the preliminary objection section. Cite the supplier's GSTIN and their GSTR-1 filing dates, attach your invoices and payment proof, and provide a GSTR-2B comparison showing the ITC was legitimately available once the supplier filed. Request reclassification to Section 73 and apply the zero-penalty rate accordingly. Courts and tribunals have repeatedly accepted this argument when the documentation is complete.

"The DRC-01 was issued for FY 2024-25 but it cites Section 74. Should it say Section 74A instead?" Yes. For FY 2024-25 and beyond, only Section 74A applies. A DRC-01 citing Section 74 for FY 2024-25 is legally incorrect. Raise this as your first preliminary objection in the DRC-06 reply. This procedural error goes to the jurisdiction of the notice itself and is a strong ground to challenge the proceedings at the threshold, before addressing any merits.

"I received a DRC-01 for an ITC reversal I did not make under Rule 42. The amount is partly correct. What is the best approach?" Pay the portion you agree with via DRC-03 before filing DRC-06. In your DRC-06, reference the DRC-03 payment with the ARN and amount, then present your calculation for the disputed portion with the specific inputs, outputs, and exempt supply figures for each tax period. Show your methodology for the ITC reversal you believe is correct. This approach limits the scope of adjudication to only the disputed balance and demonstrates good faith, which officers consistently factor into their final decision.

"I did not file DRC-06 within 30 days, and a DRC-07 order has been passed. What can I do now?" Two parallel tracks are available. First, file an appeal in Form GST APL-01 under Section 107 before the Appellate Authority within three months of the DRC-07 order, paying 10% of the disputed tax as pre-deposit. Second, check whether any rectification of the DRC-07 is possible under Section 161 for apparent errors. If the DRC-07 amount is very large and you cannot pay 10%, apply for a waiver of pre-deposit with documented reasons. Courts have occasionally allowed a pre-deposit waiver in cases of genuine hardship, though it is discretionary.

"My DRC-01 was issued without a prior DRC-01A intimation. Is this valid?" Yes, DRC-01A is not mandatory. The officer can issue DRC-01 directly without a prior DRC-01A intimation. However, some courts have taken the view that where DRC-01A was deliberately skipped to deprive the taxpayer of the pre-SCN voluntary payment opportunity, this is a ground worth raising procedurally, particularly where it results in higher penalties. Note it in your DRC-06 preliminary objections. Also know that even at the DRC-06 stage, you can make a DRC-03 voluntary payment for the undisputed portion with partial penalty benefit.

Received a DRC-01 show cause notice and not sure which section applies, whether the time limit was observed, or how to structure your DRC-06 reply? Upload your notice to Notice Sahayak . It identifies the applicable section, verifies the time limit against the financial year and GSTR-9 due date, calculates the penalty at each payment stage, and drafts a structured DRC-06 reply with the right preliminary objections and substantive defence.

Drafted by NoticeSahayak Editorial Team — based on CGST Act, CBIC circulars, and case law in our legal corpus.