📌 What Is GST DRC-01 Notice?

FORM GST DRC-01 is a Show Cause Notice (SCN) issued under Section 73 or Section 74 of the CGST Act when the department believes that:

• Tax has not been paid

• Tax has been short paid

• ITC has been wrongly availed or utilised

• Refund has been wrongly granted

It initiates formal adjudication proceedings under GST law.

DRC-01 is issued pursuant to Rule 142 of the CGST Rules.

⚖ Legal Basis – Section 73 vs Section 74

🔎 Important Safeguard – Section 75(2)

If fraud is not established, proceedings initiated under Section 74 may be deemed to be proceedings under Section 73.

This significantly reduces penalty exposure.

🔍 Common Reasons for DRC-01

DRC-01 may arise from:

• Scrutiny under Section 61 (ASMT-10)

• Audit under Section 65

• Special Audit under Section 66

• Investigation / inspection under Section 67

• Data analytics mismatch

• Intelligence inputs

Common triggers:

1️⃣ ITC mismatch (2B vs 3B)
2️⃣ Excess ITC claim
3️⃣ GSTR-1 vs 3B turnover difference
4️⃣ E-way bill discrepancies
5️⃣ Alleged fake supplier transactions
6️⃣ Refund irregularities

🧠 Practical Scenarios & Defence Approach

🟢 Scenario 1: ITC Not Reflecting in GSTR-2B

Allegation: Excess ITC of ₹10 lakh.

Legal Position:

• ITC eligibility governed by Section 16(2).

• Mere non-reflection in 2B does not automatically disallow ITC.

• Conditions of Section 16(2)(a), (b), (c), (d) must be analysed.

Defence Strategy:

• Vendor reconciliation

• Proof of tax invoice

• Proof of receipt of goods/services

• Proof of payment to supplier

• Commercial documentation trail

🟢 Scenario 2: Invocation of Section 74 (Suppression Alleged)

Officer invokes fraud.

Critical Review Points:

• Is there evidence of wilful intent?

• Is it interpretational dispute?

• Is it clerical/technical error?

• Is revenue neutral?

Improper invocation can be legally challenged.

🟢 Scenario 3: Turnover Difference Due to Credit Notes

Difference between GSTR-1 & 3B.

Legal Review:

• Section 34 governs credit notes.

• Timing and reporting reconciliation required.

• Check Section 16(4) timelines.

Structured reconciliation often resolves dispute.

📋 How to Reply to DRC-01 (Step-by-Step Strategy)

Step 1: Analyse Allegations

Understand whether issue is factual or legal.

Step 2: Examine Invocation Section

Verify whether 73 or 74 is correctly invoked.

Step 3: Prepare Detailed Submission

Include:

• Facts

• Legal provisions

• Circular references

• Judicial precedents

• Documentary evidence

Step 4: File Reply in FORM GST DRC-06

Step 5: Attend Personal Hearing

Mandatory if adverse order contemplated or requested (Section 75(4)).

💰 Voluntary Payment – Updated Legal Position

Under Section 73 (Non-fraud cases)

Under Section 74 (Fraud cases)

Strategic decision required before opting for voluntary payment.

⚠ Common Mistakes in DRC-01 Cases

❌ Ignoring notice
❌ Paying full demand without legal review
❌ Not contesting incorrect Section 74 invocation
❌ Filing generic reply without documentation
❌ Missing personal hearing opportunity

🏁 Final Takeaway

DRC-01 is a critical stage in GST litigation.

However, demands can often be:

• Reclassified from Section 74 to Section 73

• Reduced substantially

• Set aside on procedural grounds

• Resolved through proper reconciliation

Early structured legal evaluation significantly reduces exposure.

📞 Professional Advisory Note

If you have received a DRC-01 under Section 73 or 74, conduct a detailed legal review of:

• Limitation period

• Nature of allegation

• Availability of Section 75 safeguards

• Voluntary payment implications

Before making any payment decision.