🔹 Introduction

Receiving a DRC-01 Show Cause Notice (SCN) under GST is one of the most common and stressful experiences for businesses. It usually means that the department believes you have either short-paid tax, wrongly claimed ITC, or availed excess refund. But the good news is — most DRC-01 notices can be resolved effectively if handled properly.

In this guide, we explain:

• Why DRC-01 is issued

• Legal basis (Sec. 73, 74 till FY 2023-24; Sec. 74A from FY 2024-25)

• Step-by-step process to reply

• Practical examples

• Best practices to avoid future notices

(References: CGST Act, 2017; Finance (No. 2) Act, 2024 – Sec. 74A)

🔹 Real-World Case Examples

⚠️ Case 1: Wrong ITC Claim

A trader in Ghaziabad claimed ₹3 lakh ITC based on supplier invoices. However, the supplier did not file GSTR-1, so ITC didn’t appear in GSTR-2B. The department issued DRC-01.

✅ Action: Trader reconciled books, accepted mistake, and paid liability + interest via DRC-03. Notice was closed without penalty (since under old Sec. 73 – non-fraud).

⚠️ Case 2: Sales Mismatch

A Noida SME declared ₹50 lakh sales in GSTR-1 but only ₹45 lakh in GSTR-3B. The department issued DRC-01 under Sec. 74A (FY 2024-25 onwards).

✅ Action: Business explained that ₹5 lakh invoices were wrongly reported in next month’s return. Provided reconciliations + filed correction. Department accepted explanation, no demand created.

⚠️ Case 3: Excess Refund Claimed

A Delhi exporter claimed refund of ₹10 lakh IGST on exports, but shipping bills showed only ₹9.5 lakh. DRC-01 issued.

✅ Action: Exporter submitted revised statement and voluntarily paid ₹50,000 + interest via DRC-03. Case settled.

🔹 Legal Basis of DRC-01

• Till FY 2023-24:

  • Sec. 73 → Tax not paid/short paid, ITC wrongly availed (non-fraud).

  • Sec. 74 → Same situations but involving fraud, willful misstatement, suppression.

• From FY 2024-25:

  • Sec. 74A → Unified section covering all cases of short payment, wrong ITC, or excess refund.

  • Time limit: Notice within 42 months from due date of annual return; adjudication order within 12 months (extendable by 6 months).

  • Penalty:

    • If paid before SCN → No penalty.

    • If paid within 30 days of SCN → Reduced penalty.

    • After adjudication → Higher penalty applies.

🔹 Step-by-Step Guide to Reply to DRC-01

📌 Step 1: Download Notice

• Login to GST Portal

• Go to Services → User Services → View Additional Notices & Orders

• Download DRC-01

📌 Step 2: Read Carefully

• Check the section (73, 74, or 74A)

• Note the amount of tax, interest, penalty

• Identify reply due date

📌 Step 3: Analyze Reason

• Common grounds: ITC mismatch, sales difference, refund excess, late payment

• Reconcile with books, GSTR-1, GSTR-3B, GSTR-2B

📌 Step 4: Prepare Reply in DRC-06

• Log in → Services → User Services → My Applications → Application Type: Reply to Notice

• Select DRC-06

• Upload detailed explanation with supporting documents (sales register, purchase register, reconciliation statements)

📌 Step 5: If Liability Exists

• Pay tax + interest (and penalty if applicable) using DRC-03

• Attach payment challan in reply

📌 Step 6: Submit Reply

• File reply using DSC/EVC

• ARN generated as proof

📌 Step 7: Follow-up

• Department reviews reply

• May issue DRC-07 (demand order) if not satisfied

• Appeal can be filed in APL-01 within 3 months

🔹 Best Practices While Replying

• ✅ Always reply within time limit (generally 30 days)

• ✅ Provide clear reconciliations instead of lengthy explanations

• ✅ Attach all supporting documents

• ✅ If mistake is genuine, pay voluntarily via DRC-03 → avoids penalty

• ⚠️ Never ignore notice – non-reply leads to ex-parte demand

• ⚠️ Take professional help if notice involves large amounts/fraud allegations

🔹 FAQs on DRC-01

Q1. Can I revise my reply after submitting in DRC-06?
➡️ No, once submitted, modification is not possible. Ensure accuracy.

Q2. If I pay tax before receiving DRC-01, will I still get a notice?
➡️ Generally no, but if payment is not properly reflected, notice may still be issued.

Q3. Can penalty be waived in DRC-01 cases?
➡️ Yes, under Sec. 74A, if paid before SCN or within 30 days of SCN, penalty is waived/reduced.

Q4. What if I do not reply to DRC-01?
➡️ Department will issue DRC-07 demand order; recovery proceedings may start.

Q5. Can I challenge DRC-01 in appeal?
➡️ You can appeal against DRC-07 order, not the SCN itself.

🔹 Conclusion

A DRC-01 notice is not a final demand — it is only a show cause notice. Most cases can be resolved by timely reply, reconciliation, and voluntary payment if mistakes exist. Businesses that handle notices properly avoid heavy penalties and litigation.

📌 Received a GST DRC-01 notice? Need expert help with reply, reconciliation, or appeal?
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