GST Section 74 Notice for Fake Purchase: Comprehensive Legal Defense & Remedies Guide

Introduction: The Escalating Scrutiny Over Alleged Fake Purchases

Across India, tax authorities have significantly intensified audit proceedings and investigations into Input Tax Credit (ITC) claims under the Goods and Services Tax (GST) regime. Taxpayers—ranging from mid-market enterprises to large corporate entities—are increasingly receiving Show Cause Notices (SCN) under Section 74 of the CGST Act, 2017 alleging the availing of ITC based on "fake," "bogus," or "non-existent" purchase invoices.

In many instances, these notices are issued to bona fide purchasers simply because a vendor down the supply chain defaulted on tax payments or had their GST registration cancelled retrospectively. Being served a notice under Section 74 carries severe financial and legal implications: extended limitation periods of up to 5 years, mandatory interest under Section 50, and punitive penalties scaling up to 100% of the tax demanded.

However, an allegation of fraud by the Revenue Department does not automatically equate to liability. Taxpayers have robust legal mechanisms and statutory remedies to defend their legitimate ITC claims.

1. Challenge the Threshold Applicability of Section 74 (Fraud vs. Non-Fraud)

The primary procedural defect in most GST notices for bogus purchases is the routine invocation of Section 74 (fraud, wilful misstatement, or suppression of facts) instead of Section 73 (non-fraud cases). The Department often uses Section 74 as a shortcut to bypass the standard 3-year limitation period and levy maximum penalties.

Key Legal Arguments:

• Burden of Proof Lies on the Revenue: The legal onus to establish fraud, deliberate misstatement, or suppression rests squarely on the Tax Department. Merely establishing that a supplier failed to deposit tax or went untraceable post-transaction does not automatically prove fraudulent intent on the part of the buyer.
• Establishing Bona Fide Intent: If the recipient acted in good faith, conducted due diligence at the time of procurement, and maintained proper records, Section 74 cannot be sustained legally. The notice must be challenged on jurisdictional grounds for improper invocation of Section 74.

2. Establish 100% Compliance with Section 16(2) Conditions

To defend an ITC claim effectively, the taxpayer must construct an unassailable documentary audit trail proving complete adherence to all five conditions prescribed under Section 16(2) of the CGST Act, 2017:

1. Tax Invoice / Debit Note: Possession of valid tax invoices containing all mandatory particulars specified under Rule 46 of the CGST Rules.
2. Physical Movement & Receipt of Goods/Services: Evidentiary proof demonstrating actual receipt of goods or services. This includes E-Way Bills, Lorry Receipts (LR), Goods Receipt Notes (GRN), weighbridge slips, factory gate entry registers, and material inspection reports.
3. Tax Paid to the Credit of Government: Verification that the tax charged on the invoice has been remitted by the supplier, or relying on judicial precedents where recovery must first target the defaulting supplier.
4. Furnishing of GST Returns: Furnishing of monthly returns under Section 39 (GSTR-3B) by the recipient.
5. GSTR-2A / GSTR-2B Matching: Invoice visibility in the auto-populated GSTR-2A/2B statement during the relevant tax period.
6. Payment Proof via Banking Channels: Full payment of invoice consideration along with applicable tax made to the supplier within 180 days via verified banking channels (RTGS/NEFT/Cheque).

3. Counter Relied Upon Documents (RUD) & Exercise Natural Justice Rights

In notices alleging fake purchases, the Department frequently relies on third-party statements, statements recorded under Section 70 during search/seizure operations, or internal investigation reports from the Directorate General of GST Intelligence (DGGI).

Defensive Countermeasures:

• Demand Un-redacted Copies of RUDs: An adjudication order based on documents or statements not supplied to the assessee violates the Principles of Natural Justice. Demand complete copies of all Relied Upon Documents (RUD).
• Invoke Right to Cross-Examination: If the Department bases its case on third-party depositions (e.g., statements from an alleged dummy supplier or broker), explicitly file an application seeking cross-examination of those witnesses. If cross-examination is denied, the evidentiary value of those statements is severely compromised under law.
• Distinguish Specific Transactional Facts: Demonstrate that third-party statements are generic and do not directly refute your specific, documented purchase transaction.

4. Primary Recovery Action Must Target Defaulting Suppliers

A fundamental tenet of GST jurisprudence is that a bona fide recipient cannot be penalized for a supplier’s subsequent failure to remit tax, provided the recipient discharged the full tax burden to the supplier at the time of transaction.

Key Takeaways Checklist for CFOs & Tax Practitioners

Practical Impact Summary