'Fraud' on Your GST Notice? Circular 258 Now Demands Proof of Intent
A GST notice arrives for an ITC mismatch, and the operative paragraph says 'fraud, wilful misstatement or suppression of facts'. That one phrase can turn a 10% penalty into a 100% penalty, and keep an old year open long after it should have closed.
On 26 October 2026, CBIC told its officers that the phrase is not a formality. Circular No. 258/04/2026-GST says the notice itself must show intent to evade tax, with evidence.
Quick answer: Section 74 or 74A(5)(ii) cannot be invoked only because tax was unpaid or a scrutiny discrepancy was found. The SCN must state the material showing deliberate evasion. If it does not, the adjudicating authority should confine the demand to section 73 or 74A(5)(i).
Contents
What did CBIC issue on 26 October 2026?
CBIC issued Circular No. 258/04/2026-GST dated 26 October 2026 under section 168(1) of the CGST Act. It is one of eight circulars issued that day after the 57th GST Council meeting of 8 October 2026.
The subject is 'Clarification on issues related to demand, adjudication and appeal proceedings'. In 18 pages it covers:
pre-SCN intimation in Part A of DRC-01A;
how an SCN should be structured and quantified;
when fraud, wilful misstatement or suppression can be alleged;
personal hearings, speaking orders and the use of AI tools;
rectification under section 161 and first appeals under section 107.
Circulars under section 168 guide the department's own officers. Paragraph 17 says officers must not cite the guidelines in notices or orders. Nothing stops a taxpayer from relying on them in a reply or an appeal.
Why does the fraud tag change the bill?
The fraud tag decides two things: the penalty, and for years up to FY 2023-24, how long the department has to act.
Provision | Applies to | Time limit | Penalty |
|---|---|---|---|
Section 73 | FY 2017-18 to 2023-24, no fraud | Order within 3 years of annual return due date | 10% of tax or ₹10,000, whichever is higher |
Section 74 | FY 2017-18 to 2023-24, fraud alleged | Order within 5 years of annual return due date | 100% of tax (15%, 25% or 50% if paid early) |
Section 74A(5)(i) | FY 2024-25 onwards, no fraud | Notice within 42 months; order within 12 months of notice (+6) | 10% of tax or ₹10,000, whichever is higher |
Section 74A(5)(ii) | FY 2024-25 onwards, fraud alleged | Same as above | 100% of tax (15%, 25% or 50% if paid early) |
Section 74A removed the time-limit gap for FY 2024-25 onwards, as paragraph 6 of the circular notes. The penalty gap remains, and it is large.
What must the officer now prove?
Paragraphs 5 to 5.5 of the circular set the standard. In short:
Specific allegations, not labels. Relying on the Supreme Court in G.R. Infra Project Ltd. v. State of Madhya Pradesh (19 August 2026), the SCN must set out the facts that led the officer to infer fraud. Repeating the words is not enough.
Intent is built into the phrase. An omission is not suppression unless intentional. An incorrect statement is not wilful misstatement unless knowingly false (citing Sriba Nirman Company, Andhra Pradesh High Court).
Facts known to both sides are not suppressed. If the department already had the information, an omission by the taxpayer does not amount to suppression.
No fraud from non-payment or scrutiny alone. Paragraph 5.3 says the provisions apply only where investigation discloses material evidence, which must be set out in the SCN.
No repeat fraud SCN on the same facts. For later periods on the same grounds, statements should typically issue under section 73 or 74A(5)(i), unless new and independent grounds exist.
Paragraph 13 carries this into the order. Where the SCN lacks clear evidence of intent, the authority should record findings and confine the demand to section 73 or 74A(5)(i).
Worked example 1: the same ₹12 lakh, two outcomes
A trader's GSTR-3B for FY 2024-25 claims ₹12 lakh of ITC that the department says is not supported by GSTR-2B. The mismatch surfaced in return scrutiny. The SCN proposes the demand under section 74A(5)(ii), citing 'suppression of facts', with no other material.
Tax: ₹12,00,000 either way.
Interest under section 50 at 18%: about ₹2,70,000 for 15 months, either way, running to the date of payment.
Penalty if contested to the order: ₹12,00,000 under 74A(5)(ii) against ₹1,20,000 under 74A(5)(i).
Penalty if paid within 60 days of the SCN: ₹3,00,000 (25%) under the fraud route against nil under the non-fraud route.
Pre-deposit to appeal: 10% of disputed tax, ₹1,20,000, on either route.
The fraud tag alone is worth ₹10.8 lakh of penalty if the case is fought, or ₹3 lakh if the trader settles early. Under paragraph 5.3, a scrutiny mismatch with nothing more should not carry that tag.
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GST Notices, Demands & Appeals: a working guide to show cause notices, replies, adjudication, section 107 appeals and GSTAT filings, with checklists. ₹299, or all four practice guides for ₹699.
Worked example 2: when the fraud tag is the only thing keeping an old year open
A manufacturer receives an SCN in November 2026 for FY 2021-22, alleging suppression under section 74. The GSTR-9 due date for FY 2021-22 was 31 December 2022.
Section 73 order deadline: 3 years, so 31 December 2025, with the notice needed at least 3 months earlier.
Section 74 order deadline: 5 years, so 31 December 2027, with the notice needed at least 6 months earlier.
An SCN issued in November 2026 can survive only if section 74 is validly invoked.
If the SCN shows no material evidence of intent, paragraph 13 points the authority to section 73. For this year, section 73's window has already closed, so the demand would generally fail as time-barred.
Practitioner note: Check whether any section 168A extension notification applies to the year before relying on the time bar. In older-year notices, limitation is often the strongest ground, and the fraud tag is what it turns on.
What else changes for notices, hearings and orders?
Pre-SCN intimation. Rule 142(1A) allows Part A of DRC-01A before a formal SCN. The circular says it may be issued wherever feasible, to encourage voluntary compliance.
SCN structure. Taxpayer profile, facts and evidence (using 'it appears that', not 'determined'), legal provisions linked to each act, a statement of charges, and demand quantified year-wise.
Separate quantification. Where both section 73 and 74 are alleged, or for FY 2024-25 onwards both limbs of 74A(5), each part needs its own grounds and amounts.
No parallel proceedings. Section 6 and the Supreme Court's Armour Security (India) Ltd. guidelines bar CGST and SGST officers from acting on the same subject matter.
Personal hearings. No more than three adjournments under section 75(5), so up to four hearing opportunities; virtual hearings encouraged; the order preferably within a month of the hearing.
Speaking orders. Every submission in DRC-06 must be dealt with; 'reply has been considered' is not enough. Under section 75(7), the order cannot exceed the SCN amount or go beyond its grounds.
AI with human oversight. Paragraph 11.7.1 says information from AI tools must be independently verified, and the officer remains responsible for the order.
Rectification. Section 161 covers only errors apparent on the face of the record: apply within 3 months, order within 6 months. It is not a substitute for appeal.
For how hearings are run in practice, see GST personal hearing under section 75.
What changes at the first appeal?
Limitation is a preliminary issue: 3 months under section 107(1), plus 1 month if sufficient cause is shown under section 107(4). A delay beyond that is not decided on merits.
Merits should not be rejected at the registration stage under rule 108.
Additional grounds under section 107(10) are allowed where the omission was not wilful or unreasonable; reasons must be recorded.
Additional evidence follows rule 112, and the department gets a chance to rebut it.
Appeals should be decided within one year where possible (section 107(13)), with cross-appeals decided together.
Pre-deposit rules for the same appeal are covered in GST appeal pre-deposit under Circular 259.
Decision checklist: reviewing a fraud-tag SCN
Is the SCN under section 74 or 74A(5)(ii)? Note the exact paragraph invoking fraud, misstatement or suppression.
List the evidence of intent the SCN actually discloses. If it is only a return mismatch, quote paragraph 5.3.
Was the information already with the department (returns, e-invoices, GSTR-2B)? If so, argue that facts known to both sides are not suppressed.
For FY 2017-18 to 2023-24, compute the section 73 deadline. If it has passed, limitation becomes the lead ground.
Is the demand split between fraud and non-fraud parts, with separate amounts, as paragraph 6 requires?
Is this a repeat fraud SCN on the same facts for a later period (paragraph 5.5)?
Run the numbers: early payment at 25% under the fraud route versus contesting, against the nil or 10% penalty if the tag fails.
Ask for a personal hearing in writing and record every adjournment.
Common mistakes
Replying only on merits. If the fraud invocation is not challenged expressly, the adjudicating authority has nothing to rule on under paragraph 13.
Paying the 25% penalty by reflex. Early payment is sometimes sensible, but compare it with the 10% or nil outcome first.
Missing the time bar on old years. For years up to FY 2023-24, the section 73 deadline can make the whole demand fall.
Treating the circular as law. It guides officers; the binding standard comes from section 74 and judgments such as G.R. Infra Project. Cite both.
Ignoring the pre-SCN stage. A clear DRC-01A reply with documents often stops the SCN, or at least the fraud tag.
Raising new facts first time in appeal. Rule 112 limits additional evidence. Put documents on record before the order.
A step-by-step reply format is in how to reply to a GST show cause notice.
Summary table
Issue | What Circular 258 says | Paragraph |
|---|---|---|
Pre-SCN intimation | DRC-01A Part A wherever feasible | 2 |
Fraud invocation | Needs specific facts and evidence of intent in the SCN | 5.1 to 5.4 |
Scrutiny mismatch | Not enough on its own for fraud | 5.3 |
Repeat SCN | Later periods typically under s.73 / 74A(5)(i) | 5.5 |
Mixed demands | Separate grounds and amounts | 6 |
Hearings | Max three adjournments; order within about a month | 10.1 |
AI tools | Human oversight and independent checks | 11.7.1 |
Fraud not proved | Confine demand to s.73 / 74A(5)(i) | 13 |
Appeal limitation | Decide as a preliminary issue | 15.2 |
Frequently asked questions
What is CBIC Circular 258/04/2026-GST?
It is a CBIC circular dated 26 October 2026, issued under section 168(1) of the CGST Act, laying down guidelines for show cause notices, adjudication orders and first appeals. Its best-known part says fraud provisions need evidence of intent to evade tax.
Can a GST officer invoke section 74 just because tax was not paid?
No. Paragraph 5.3 of the circular says section 74(1) or 74A(5)(ii) cannot be invoked merely for non-payment of GST, without specific evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax.
Can a scrutiny mismatch lead to a section 74 notice?
Not on its own. The circular says these provisions are not meant for scrutiny cases solely because a discrepancy has been noticed. Fraud may be alleged only where investigation discloses material evidence, and that evidence must be set out in the SCN.
What is the penalty difference between section 73 and section 74?
Under section 73 and 74A(5)(i), penalty is 10% of tax or ₹10,000, whichever is higher. Under section 74 and 74A(5)(ii), penalty equals 100% of the tax, reduced to 15%, 25% or 50% if paid at the stages the law allows.
What happens if the fraud allegation fails at adjudication?
Paragraph 13 tells the adjudicating authority to record findings and confine the demand to section 73 or 74A(5)(i). For older years, this can mean the demand falls entirely if the shorter section 73 time limit has already expired.
Can GST officers use AI to draft adjudication orders?
The circular allows AI and other tools only with human oversight. Information obtained through AI must be independently verified before it is relied on, and the officer remains responsible for the correctness of the order.
Is the pre-SCN intimation in DRC-01A mandatory?
Rule 142(1A) uses 'may', and the circular says the intimation may be issued wherever feasible. It encourages its use, but it does not make it compulsory in every case.
Related reading
Sources
CBIC Circular No. 258/04/2026-GST dated 26 October 2026; CGST Act, 2017: sections 6, 73, 74, 74A, 75, 107, 161, 168 and 169; CGST Rules, 2017: rules 108, 112, 142(1A). Figures in the examples are illustrative. Educational content only, reflecting the law as of 1 November 2026; check the current law and notifications for your facts.
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