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Show Cause Notice — Response Required Within 30 Days
DRC-01 is more serious than a scrutiny notice. The department has already formed a preliminary view that tax is due. Ignoring this leads to an ex-parte demand order with maximum penalties.
Show Cause Notice under Section 73/74 of CGST Act, 2017
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If you've received a DRC-01 notice, take a deep breath — but don't take it lightly. Unlike ASMT-10 (which is just a scrutiny query), DRC-01 is a formal Show Cause Notice (SCN) where the GST department has already done their homework and concluded that you owe them money.
DRC-01 is issued under Section 73 or Section 74 of the CGST Act, 2017. The difference matters — a lot. Section 73 applies when there's no allegation of fraud (think: honest mistakes, calculation errors, late filings). Section 74 applies when the department believes there was deliberate fraud, suppression of facts, or willful misstatement.
The core issue is always one of these: tax that wasn't paid or was short-paid, Input Tax Credit that was wrongly claimed, or a refund that was granted but shouldn't have been. The notice will spell out exactly what the department thinks you owe, including the tax amount, interest under Section 50, and the proposed penalty.
You've got 30 days to respond using Form DRC-06 on the GST portal. If you don't respond, the officer passes a final order (DRC-07) based on their own calculation — and that's almost always worse for you.
The very first thing you should check on your DRC-01 notice is which section is invoked. This single detail determines your penalty exposure, the time window the department can cover, and your settlement options.
| Parameter | Section 73 (Non-Fraud) | Section 74 (Fraud) |
|---|---|---|
| When it applies | Genuine mistakes, calculation errors, omissions without intent to evade | Fraud, willful misstatement, suppression of facts to evade tax |
| Time limit for SCN | 3 years from due date of annual return | 5 years from due date of annual return |
| Penalty if order passed | Up to 10% of tax amount (minimum ₹10,000) | Up to 100% of tax amount — the tax amount again as penalty |
| Settlement before SCN | Pay tax + interest = no penalty at all | Pay tax + interest + 15% penalty |
| Settlement before order | Pay tax + interest = no penalty | Pay tax + interest + 25% penalty |
| Settlement within 30 days of order | Pay tax + interest + reduced penalty | Pay tax + interest + 50% penalty |
| Appeal pre-deposit | 10% of disputed tax | 10% of disputed tax |
Here's a real example: say the demand is ₹5,00,000 in tax. Under Section 73, if you pay tax + interest before the order, you pay zero penalty. Under Section 74, you'd pay ₹5,00,000 tax + interest + ₹75,000 penalty (15%) if you settle before the order — versus ₹5,00,000 penalty (100%) if the order is passed and confirmed. The difference is massive.
DRC-01 isn't triggered randomly. The department has already done a preliminary investigation — usually starting from ASMT-10 scrutiny, third-party data, or audit findings. Here are the most common triggers:
Tax Short-Paid or Unpaid
Your GSTR-3B shows lower tax liability than what the department calculated from your GSTR-1 sales data, e-way bills, or third-party information. Even a ₹10,000 shortfall can trigger DRC-01 if the pattern repeats across multiple periods.
Excess ITC Claimed
You claimed more Input Tax Credit in GSTR-3B than what's reflected in GSTR-2B. This could be because a supplier didn't file their return, or you claimed ITC on ineligible items like blocked credits under Section 17(5).
Outward Supplies Not Declared
The department found evidence of sales you didn't report — from e-way bill data, buyer's GSTR-2A/2B, bank transactions, or income tax returns showing higher turnover than your GST returns.
Wrong GST Rate Applied
You charged 5% on goods or services that attract 18%. Or you applied an exemption that doesn't apply to your specific supply. Rate disputes are common in mixed supplies and composite supplies.
Wrongful Refund
You received a GST refund (export refund, inverted duty refund, etc.) that the department now believes was incorrect — either the calculation was wrong or the underlying transactions were invalid.
ASMT-10 Escalation
Your earlier ASMT-10 scrutiny notice wasn't satisfactorily resolved. The officer wasn't convinced by your ASMT-11 reply and has now escalated to a formal demand via DRC-01.
This is critical: DRC-01 is not optional. If you don't file your DRC-06 response within 30 days, the officer will pass an ex-parte order — meaning they decide your case without hearing your side.
The ex-parte order is issued as Form DRC-07, and it becomes a confirmed demand. You'll owe the full tax amount plus interest plus the maximum applicable penalty. Under Section 74, that's 100% penalty — so a ₹2,00,000 tax demand becomes ₹2,00,000 tax + ₹2,00,000 penalty + interest. That's over ₹4,00,000 total.
Even after an ex-parte order, you can still appeal to the Appellate Authority within 3 months. But you'll need to pay 10% of the disputed tax amount as a pre-deposit just to file the appeal. And the entire process takes 6-12 months. It's always better to respond on time.
Real cost of ignoring DRC-01:
On a ₹5 lakh tax demand under Section 74: ₹5 lakh tax + ₹5 lakh penalty (100%) + ~₹1.35 lakh interest (18% for 18 months) = ₹11.35 lakh total. Had you responded and settled, it would have been ₹5 lakh + ₹75K penalty (15%) + interest = ~₹7.1 lakh. You save ₹4.25 lakh just by responding.
Responding to DRC-01 is more involved than replying to ASMT-10. Here's the complete process:
Identify Section 73 or 74
This is on the first page of your notice. Section 73 means non-fraud (lower penalty risk). Section 74 means fraud allegation (much higher stakes). Your entire response strategy depends on this.
Note the Demand Breakdown
DRC-01 contains a detailed computation showing: tax short-paid, interest calculated, and proposed penalty. Write down each figure. You'll need to address every line item in your response.
Gather All Evidence
Collect GSTR-1, GSTR-3B, GSTR-2B for the mentioned periods. Pull all purchase and sales invoices. Get e-way bills, bank statements, and any prior correspondence with the GST department. The more organized your evidence, the stronger your case.
Verify the Department's Calculation
Cross-check every number in the demand. Officers sometimes make arithmetic errors, pick wrong periods, or double-count certain amounts. If you find errors in their computation, document them clearly — this alone can reduce or eliminate the demand.
Decide: Contest or Settle
If the demand is wrong, prepare a detailed rebuttal. If it's partially correct, consider settling the valid portion (pay tax + interest for the accepted part) and contesting only the disputed amount. This shows good faith and reduces overall exposure.
File Form DRC-06 on GST Portal
Login → Services → User Services → My Applications → View Additional Notices and Orders → Find DRC-01 → Click Reply → Fill DRC-06 with detailed explanation → Attach all evidence documents → Submit before the deadline.
Attend Personal Hearing
If the officer schedules a personal hearing (common in Section 74 cases), attend personally or send your CA/advocate with proper authorization. Prepare a written submission to hand over during the hearing — don't rely on verbal arguments alone.
One of the smartest things about GST law is the built-in incentive to settle early. The penalty reduces dramatically the earlier you pay. Here's how it works:
| When You Settle | Section 73 Penalty | Section 74 Penalty |
|---|---|---|
| Before SCN is issued | Nil (0%) | 15% of tax |
| After SCN, before order | Nil (0%) | 25% of tax |
| Within 30 days of order | Reduced (case-specific) | 50% of tax |
| After 30 days / on appeal | Up to 10% of tax | Up to 100% of tax |
The takeaway is clear: if you know the demand is genuine, settle as early as possible. Under Section 73, settling before the order means zero penalty — just tax and interest. Under Section 74, settling before the order saves you 75% of the penalty amount.
❌ Confusing DRC-01 with ASMT-10
ASMT-10 is a query. DRC-01 is a formal demand with penalty implications. Your response strategy is completely different — DRC-01 requires a much more detailed, evidence-backed reply.
❌ Not hiring a professional for Section 74 cases
Section 74 involves fraud allegations. A wrong response can make things worse. If fraud is alleged, get a CA or GST advocate immediately — the stakes are too high to DIY.
❌ Paying the full demand without verification
Officers can make mistakes too. Many DRC-01 notices have computation errors, wrong period references, or duplicated amounts. Always verify before paying.
❌ Filing a generic one-line response
"We disagree with the demand" without supporting evidence is useless. Your DRC-06 response needs specific, point-by-point rebuttal with attached proof documents.
❌ Missing the 30-day deadline
Even if you plan to appeal later, missing the response deadline means an ex-parte order with maximum penalty. Always respond on time — even a partial response is better than none.
If the officer passes an unfavorable order (DRC-07) despite your response, you're not out of options. Here's the appeal hierarchy:
First Appeal
Appellate Authority (Commissioner Appeals) — file within 3 months of order. Pre-deposit: 10% of disputed tax. This is your best chance to overturn the order.
Second Appeal
GST Appellate Tribunal — if first appeal fails, file within 3 months. Additional pre-deposit: 20% of disputed tax (total 25% cap). Tribunal hearings take 6-12 months.
High Court
Only on questions of law, not facts. If the Tribunal got the law wrong, High Court can intervene. Requires a substantial question of law to be admitted.
Supreme Court
Last resort. Only if the High Court decision involves a matter of general importance. Rare in GST cases unless there's a conflicting interpretation across states.
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Disclaimer: This guide is for educational and informational purposes only. DRC-01 is a serious legal proceeding with significant financial implications. Every case is different. Always consult a qualified Chartered Accountant or GST advocate before responding to any show cause notice.
Last updated: March 2026 | Based on CGST Act 2017 and latest GST Council notifications