Order from Department U/s 74

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A GST payer received an order under Section 74 demanding interest and penalty for excess ITC claimed in FY 2018-19, despite paying the GST amount and reversing the ITC. The department issued the order as the interest and penalty were not paid. The advice suggests that interest is only due if ITC was both wrongly availed and utilised, and penalty under Section 74 requires fraud, which may not apply here. Options include filing a rectification application, appealing the order, or exploring waivers, though paying the small demand might be the most pragmatic solution.

Deepak Rawat

Deepak Rawat (Querist)

26 January 2026 Dear Experts,
My friend received an order u/s 74 to pay interest and penalty. Earlier, he was served with a notice to pay the GST along with interest and penalty as he had claimed excess ITC in FY 2018-19. He paid GST only and intimate to department to accept DRC-03 and drop proceeding. He didn't pay Interest and penalty, as in that financial year, there was no output liability, thus ITC was not utilized.
Now, the department served an order u/s 74 to pay interest and penalty.
Please guide, what can he do? The interest and penalty amount is so small, roughly around 7 thousand only. Should he file an appeal or any other way to close this order?

Dhirajlal Rambhia

Dhirajlal Rambhia

(Expert)

26 January 2026 Amount being small, advisable to close the matter by paying the demand.

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

14 November 2026 The amount is small, but the interest may not be legally due at all. Check this before paying.

Interest
• Interest on ITC is payable only where ITC was wrongly availed AND utilised (Sec 50(3), substituted retrospectively from 1 July 2017 by the Finance Act, 2022). Under Rule 88B(3), ITC is treated as utilised when the electronic credit ledger balance falls below the wrongly availed amount.
• If there was no output liability in FY 2018-19 and the ledger balance never fell below the excess ITC until it was reversed, interest is nil. Show the ledger extract month-wise.

Penalty
• Sec 74 applies only where there is fraud, wilful misstatement or suppression. A plain excess claim with no utilisation, reversed on notice, is a Sec 73 case. Under Sec 73, if the tax was paid before the notice or within 30 days of it, no penalty arises.
• If the order stays under Sec 74, penalty is reduced to 50% if paid within 30 days of the order (Sec 74(11)).

Options
1. File a rectification application (Sec 161) if the order ignores the DRC-03 payment or computes interest wrongly.
2. Appeal under Sec 107 within 3 months, with pre-deposit of 10% of the disputed amount, arguing nil interest and Sec 73 applicability.
3. If the matter is redetermined under Sec 73, the waiver of interest and penalty under Sec 128A (FY 2017-18 to 2019-20) may be explored.

For about Rs 7,000, paying may be pragmatic. But if the interest is nil by law, a short rectification request costs little and sets the record straight.

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