GST Demand and Recovery Notices: An Overview
Rohit Agarwal
Hello, I’m Rohit Agarwal, a seasoned Chartered Accountant with over 12 years of specialized experience in Goods and Services Tax (GST) and indirect taxation. Based in Kolkata, I am a Partner at AAN Associates LLP, where I provide expert guidance and support to clients navigating the complexities of GST and indirect tax laws.
Introduction
The Goods and Services Tax (GST) has transformed India’s indirect tax landscape since its implementation in 2017. One of its most significant features is its data-driven compliance mechanism, which electronically matches returns, invoices, and credits. While this improves transparency and reduces evasion, it also means that discrepancies in return filings can automatically trigger demand and recovery notices—often without manual scrutiny by officers.
These system-generated or officer-initiated notices can be intimidating for taxpayers, especially small and medium businesses. A lack of understanding about their nature, timelines, and the correct way to respond can lead to unnecessary litigation, penalties, and even recovery actions like bank account attachment.
What is a GST Demand Notice?
A GST demand notice is an official communication from the tax department informing a registered taxpayer that tax, interest, or penalty is due and needs to be paid. It is usually issued in cases such as the following:
- There is short-payment or non-payment of tax.
- The taxpayer has wrongly claimed input tax credit (ITC).
- The taxpayer has erroneously claimed a refund.
- There are discrepancies between returns filed—for example, mismatches between GSTR-1 and GSTR-3B.
The legal provisions governing such demands are primarily found under Sections 73 and 74 of the CGST Act, 2017.
- Section 73 applies when tax remains unpaid or short-paid without any fraud or wilful misstatement.
- Section 74 applies when tax is unpaid or short-paid due to fraud, suppression, or willful misstatement.
What is a Recovery Notice?
Once a demand is confirmed (either through an order or because the taxpayer fails to respond), the department may initiate recovery proceedings under Sections 78 and 79 of the CGST Act. These provisions empower tax officers to recover dues through any of the following measures:
- Deduction from any amount owed by the government (like refunds);
- Detention or sale of goods belonging to the taxpayer;
- Attachment of bank accounts or property;
- Recovery from third parties (customers or suppliers);
- Auction of movable or immovable property.
How Are These Notices Generated?
Under the GST regime, many notices are automatically generated through the GST Network (GSTN) system based on return mismatches and analytics. With the government’s focus on automation and artificial intelligence, discrepancies are flagged in real-time, and notices are issued electronically.
Common automated notices include:
Form | Purpose | Trigger |
ASMT-10 | Notice for scrutiny of returns | Mismatch between GSTR-1, GSTR-3B, or ITC claims |
DRC-01 | Show-cause notice for the demand | Detected short payment or excess credit |
DRC-07 | Summary of final demand order | Confirmed tax, interest, and penalty |
DRC-01B / 01C | Automated intimation of discrepancies | ITC mismatch or under-reported outward supplies |
DRC-09 / DRC-10 | Recovery proceedings | Non-payment of the demand after the order |
Automated systems compare data from GSTR-1 (outward supplies), GSTR-3B (tax payment), GSTR-2B (ITC availability), e-way bills, and annual returns. Even small mismatches — often due to timing differences or vendor delays — may trigger a notice.
Reasons Why Demand Notices Are Issued
- Mismatch between GSTR-1 and GSTR-3B:
Outward supplies declared in GSTR-1 do not match the tax liability paid in GSTR-3B. - Excess ITC claim:
Input Tax Credit claimed in GSTR-3B exceeds ITC available as per GSTR-2B. - Ineligible ITC: Claiming credit on blocked items under Section 17(5), such as motor vehicles or personal expenses.
- Non-filing of returns:
Continuous non-filing of returns results in default notices and system-generated demands. - Refund irregularities:
Erroneous refund claims due to export turnover mismatches or inverted duty structure errors. - Tax evasion detection:
Based on data analytics or intelligence, authorities may issue notices for tax evasion or suppression.
Process Flow From Return to Recovery
Understanding the timeline and flow of actions helps taxpayers respond correctly.
Step 1: Discrepancy Detected
The system or officer detects an anomaly between returns or data sources.
Step 2: Notice Issued
A notice (ASMT-10 or DRC-01) is issued electronically through the GST portal and by email/SMS. The notice mentions the reason for the discrepancy and the amount of tax involved.
Step 3: Taxpayer’s Response
The taxpayer must reply within the stipulated period (usually seven to thirty days) using the relevant online form—for example, ASMT-11 for scrutiny or DRC-06 for a show-cause reply. Supporting documents, reconciliations, and explanations must be attached.
Step 4: Department’s Order
If the officer is satisfied, the matter is closed (ASMT-12 issued). If not, a demand order is passed in Form DRC-07, specifying tax, interest, and penalty.
Step 5: Payment or Appeal
The taxpayer must either pay the amount or file an appeal (Form APL-01) within 3 months of the order. Pre-deposit (10–20 percent of the disputed tax) is required for appeal admission.
Step 6: Recovery Proceedings
If no payment or appeal occurs, the officer can initiate recovery under Section 79, including bank attachment or sale of assets.
How to Respond to a GST Demand Notice
Step 1: Read the Notice Carefully
a. Identify the form number, section, period, and nature of the discrepancy.
b. Check whether it’s just an intimation (like DRC-01B) or a formal show-cause notice (DRC-01).
Step 2: Verify the Discrepancy
a. Reconcile your GSTR-1, GSTR-3B, and GSTR-2B for the mentioned period.
b. Identify if the issue arises from vendor non-filing, data entry error, or legitimate difference (e.g., credit note timing).
Step 3: Prepare Supporting Documents
a. Download relevant returns, invoices, e-way bills, and ledgers.
b. Prepare reconciliation statements and explanations.
Step 4: Draft a Clear Reply
a. Use the online reply form (e.g., DRC-06 or ASMT-11).
b. Address each point raised in the notice.
c. Use concise, factual language supported by documentary evidence.
d. Avoid emotive or argumentative language.
Step 5: Pay if Liability is Admitted
If you agree with part or all of the demand, pay the admitted amount promptly and inform the officer. This helps avoid penalties and shows good faith.
Step 6: File Appeal if Required
If the demand is unreasonable or incorrect, file an appeal in Form APL-01 within 3 months. Ensure the statutory pre-deposit is made to keep the appeal valid.
Step 7: Keep Records
Maintain digital and hard copies of all notices, replies, orders, challans, and communications for future reference or audit.
9. Automated Notices: The Double-Edged Sword
Automation has improved efficiency and consistency in GST administration, but it has also created challenges:
a. High volume of notices: Even small mismatches can trigger automated intimation.
b. Limited human discretion: Officers may rely entirely on system-generated data without verifying context.
c. Genuine taxpayers burdened: Honest errors or vendor non-compliance may lead to unjustified demand
Best Practices to Avoid GST Demand and Recovery Notices
- File returns accurately and on time.
Late filings often result in cascading mismatches. - Monthly reconciliations.
Regularly match GSTR-1, 3B, and 2B to detect errors early. - Vendor management.
Follow up with suppliers to ensure timely return filing so that ITC appears in GSTR-2B. - Maintain documentation.
Keep invoices, contracts, and e-way bills ready for scrutiny. - Use compliance software.
Automation tools can reconcile data and flag discrepancies proactively. - Review refunds carefully.
Ensure calculations for zero-rated supplies or inverted duty are correct. - Internal audits.
Conduct quarterly GST health checks by professionals to identify risks. - Monitor portal notifications.
Regularly check for notices under User Services > View Notices and Orders. - Keep communication updated.
Ensure that your email address and mobile number on the portal are accurate to receive timely alerts. - Respond promptly.
Never ignore any notice — even an intimation should be acknowledged and acted upon.
Conclusion
The GST system’s automated nature means every return you file interacts with multiple datasets — invoices, suppliers’ filings, and analytics tools. Any inconsistency can trigger an automated demand or recovery notice.
- File accurately and on time.
- Reconcile data frequently.
- Maintain complete documentation.
- Respond promptly and professionally.
- Know your rights — appeal, hearing, and recovery safeguards.
Automation is here to stay; however, awareness and disciplined compliance can transform it from a potential risk into a tool for greater efficiency. A well-prepared taxpayer is rarely a penalized taxpayer. Stay vigilant, stay compliant, and handle GST notices with clarity and confidence.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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