Section 74 GST Proceedings 2026: Excess ITC & RCM Default Ruling

What Happened?

The Madras High Court recently upheld proceedings initiated under Section 74 of the CGST Act, 2017 against a taxpayer for claiming excess Input Tax Credit (ITC) and failing to discharge GST obligations under the Reverse Charge Mechanism (RCM) on payments made to foreign booking agencies for commission services. The court found a prima facie case of ITC misuse and RCM non-compliance, paving the way for detailed assessment proceedings.

Background & Legal Context

Section 74 of the CGST Act empowers tax officers to issue a show-cause notice when there is prima facie evidence that:

• A taxpayer has availed excess or wrongful ITC
• GST has not been paid as required by law
• A taxpayer has made any false claim or statement

This section is crucial in cases involving Reverse Charge Mechanism (RCM) compliance. Under RCM, when a registered taxpayer receives services from an unregistered supplier (or a foreign supplier), the recipient becomes liable to pay GST instead of the service provider. Common scenarios include:

• Foreign airline commissions
• International booking platform fees
• Overseas logistics and freight charges
• Foreign consultant and training fees

In this case, the taxpayer had made payments to a foreign booking agency for commission services but:

• Failed to pay GST under RCM on these payments
• Incorrectly claimed input tax credit on related purchases, treating them as if GST had already been collected
• Did not maintain proper documentation or GST-2A records to justify the ITC claimed

The court found sufficient grounds to initiate assessment proceedings, meaning the department can now issue a detailed notice and demand recovery of unpaid GST plus interest and penalties.

What Does This Mean for You?

For Businesses with Foreign Service Payments:

If your business makes payments to foreign suppliers, unregistered domestic suppliers, or avails services from overseas entities, this ruling is a red flag. The Madras HC judgment strengthens the department's position in:

• Recovering unpaid RCM taxes: Even if you overlooked RCM compliance for one or two quarters, the department can now demand full payment with interest (at 18% per annum) and penalties up to 100% of the unpaid tax
• Denying wrongful ITC: If you claimed input credit on expenses related to services on which RCM was applicable, that ITC will be denied, and you must pay it back
• Extended liability: This is not just a correction—Section 74 can result in show-cause notices with demands for the complete financial year or multiple years

For Travel, Hospitality & E-Commerce Sectors:

These sectors extensively use foreign booking platforms, international payment gateways, and overseas commission-based services. The ruling directly impacts:

• Hotels and travel agencies paying foreign OTA (Online Travel Agency) commissions
• E-commerce platforms using international logistics partners
• Airlines dealing with foreign ground handling agencies

Interest & Penalty Impact:

If assessed under Section 74, you face:

• Interest: 18% per annum on unpaid GST (compounded monthly)
• Penalties: Up to 100% of tax if deemed wrongful ITC, or up to 50% if considered procedural default
• Legal costs: Time and resources spent on compliance hearings and appellate proceedings

Assessment Year (AY 2025-26) Relevance:

The department can initiate Section 74 proceedings within the statutory period of GST law. There is no specific time bar mentioned, but generally, the officer can proceed based on scrutiny of GST-3B returns and GST-2A records filed in your account. Correcting errors immediately is critical for AY 2025-26 onwards.

What Should You Do Now?

Step 1: Immediate Audit of Foreign Payments

Review all payments made to:

• Foreign suppliers or service providers
• Unregistered domestic suppliers
• International platforms or payment gateways

Identify whether RCM was applicable and whether GST was paid.

Step 2: Check Your GST Returns (Last 2-3 Years)

Verify in your GSTR-3B returns whether you:

• Paid tax under RCM in the relevant months
• Reported these payments correctly in your ITC schedules
• Maintained GSTR-2A records matching your purchases

Step 3: File Voluntary Disclosure / Amendment

If you discover errors, file amended GSTR-3B returns immediately under GST law. This shows good faith and may result in reduced penalties. While GST law doesn't have a formal amnesty scheme like Income Tax, voluntary correction demonstrates compliance intent to the department.

Step 4: Maintain Robust Documentation

For all foreign payments, maintain:

• Original invoices from foreign supplier
• Proof of payment (bank statement, wire transfer confirmation)
• Currency conversion details
• RCM payment proof (GSTR-3B extract showing RCM paid)
• ITC schedule showing the relationship between payment and ITC claimed

Step 5: If You Receive a Section 74 Notice

Do not ignore it. Immediately:

• Consult a GST-qualified CA
• File your written reply with supporting documents within 7 days
• Provide clear evidence of RCM payment (e-way bill, GST payment receipts)
• Explain any discrepancies with documentary proof

Key Takeaways

• Section 74 is now actively enforced: The Madras HC ruling emboldens tax officers to issue show-cause notices for RCM non-compliance and excess ITC. Ensure full compliance going forward for AY 2025-26 and beyond.
• RCM on foreign services is non-negotiable: If you pay any unregistered or foreign supplier for services, GST under RCM is mandatory. There are no exceptions. Failure attracts penalties up to 100%.
• ITC and RCM are linked: You cannot claim input credit on expenses where RCM was applicable. The department cross-checks GSTR-3B and GSTR-2A records automatically. Inconsistencies trigger assessments.
• Time bar doesn't apply strictly: Unlike Income Tax, GST assessments under Section 74 can be initiated even after 3-5 years if discrepancies are discovered. Document everything to avoid future liability.
• Voluntary compliance is advisable: If you suspect errors in previous years, amend your returns immediately. This demonstrates good faith and protects you from higher penalties and interest charges in case of a department notice.

Practical Checklist for Compliance (AY 2025-26):

• Identify all foreign/unregistered supplier payments
• Verify RCM GST was paid in the relevant month
• Reconcile ITC claimed with RCM paid
• Maintain invoices and payment proofs for 6 years
• File accurate GSTR-3B returns monthly
• Train your accounting team on RCM rules

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602