Please Help: ITC Availed & Utilized on Supply from Non-Existent Firms
Posted Date : 22-Feb-2025 , 01:08:41 pm | Posted By: Vivaan Read More At: Https://
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Query: ITC Availed & Utilized on Supply from Non-Existent Firms
We had availed and utilized Input Tax Credit (ITC) on supplies made by non-existent firms. Before the issuance of the Show Cause Notice (SCN) under Section 74 of the Act, we voluntarily paid the full tax liability, partial interest, and a penalty at the rate of 15%. Subsequently, the SCN was issued, to which we duly furnished our reply.
Following this, a DRC-07 order has been issued, demanding interest under Section 50 and imposing a penalty equal to 100% of the tax amount. However, if the penalty is paid within 30 days of receiving the order, it is reduced to 50% of the tax amount.
Our query:
1. Penalty Liability: Since we had already made a voluntary payment of penalty at 15% before the issuance of the SCN, are we still liable to pay an additional penalty of 50% of the tax amount as per the DRC-07 order? Or is our earlier payment sufficient to discharge the penalty liability?
Kindly provide clarification on the above aspects.
Query: ITC Availed & Utilized on Supply from Non-Existent Firms
We had availed and utilized Input Tax Credit (ITC) on supplies made by non-existent firms. Before the issuance of the Show Cause Notice (SCN) under Section 74 of the Act, we voluntarily paid the full tax liability, partial interest, and a penalty at the rate of 15%. Subsequently, the SCN was issued, to which we duly furnished our reply.
Following this, a DRC-07 order has been issued, demanding interest under Section 50 and imposing a penalty equal to 100% of the tax amount. However, if the penalty is paid within 30 days of receiving the order, it is reduced to 50% of the tax amount.
Our query:
1. Penalty Liability: Since we had already made a voluntary payment of penalty at 15% before the issuance of the SCN, are we still liable to pay an additional penalty of 50% of the tax amount as per the DRC-07 order? Or is our earlier payment sufficient to discharge the penalty liability?
Kindly provide clarification on the above aspects.
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Answers:
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 Answer by: Kavya |
| here lets breakdown for you in this case.
ITC was availed and utilized on fake invoices (non-existent suppliers).
Before SCN under Section 74 was issued:
You paid 100% of tax.
Paid partial interest.
Paid penalty at 15% of tax under Section 74(5) voluntarily.
SCN was still issued later.
You replied to SCN.
DRC-07 order issued, demanding:
Full interest under Section 50.
Penalty equal to 100% of tax, reducible to 50% if paid within 30 days.
Legal Position under Section 74 of CGST Act:
1. Section 74(5) – Before SCN:
Allows the taxpayer to voluntarily pay tax + interest + penalty @15% to avoid SCN.
If full payment is made under 74(5) before SCN, and taxpayer informs department via DRC-03, then:
No SCN should be issued.
Proceedings are deemed concluded.
However, in your case, partial interest was paid — this is key.
2. Since only Partial Interest was Paid, Conditions of 74(5) Not Fully Met:
The voluntary payment under 74(5) is valid only if tax + full interest + 15% penalty is paid before SCN.
Since only partial interest was paid, the benefit of conclusion of proceedings under 74(5) is not available.
Hence, department was within its right to issue SCN and pass order under 74(9).
Penalty under Section 74(1) & 74(9):
The normal penalty is 100% of the tax amount.
If paid within 30 days of DRC-07 order:
Penalty is reduced to 50% of the tax amount under proviso to Section 74(11).
So, What Happens to Your 15% Already Paid?
Unfortunately, that 15% penalty already paid is not considered sufficient once proceedings are continued under Section 74(9).
It will be adjusted against the total penalty payable, but:
You still need to pay the balance (i.e., remaining 35%) to make up the 50%, within 30 days.
Final Answer:
Since you did not pay full interest, your voluntary payment under Section 74(5) is incomplete, and hence not conclusive.
As a result, you are still liable to pay additional penalty (50% of tax if paid within 30 days of DRC-07).
Action Steps:
Pay the balance penalty (after adjusting 15%) to reach 50%.
Also ensure any remaining interest under Section 50 is paid.
File DRC-03 to record these payments and keep proof.
here is all you have to do.
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