GST DRC-01 Show Cause Notice: How to Read, Reply in DRC-06, and Reduce Your Demand Exposure (2026 Guide)
When Form GST DRC-01 appears in your notices tab, it means the GST department has already quantified what it believes you owe. This is not an informal query. It is the formal show cause notice that precedes a demand order, and the clock starts running the moment it is issued.
The difference between a DRC-01 that ends in closure and one that becomes a confirmed demand in DRC-07 often comes down to two things: how quickly you respond, and how well your reply addresses the specific issues raised. This guide covers the legal framework, the practical steps for drafting and filing your DRC-06 reply, the penalty implications under each section, and the post-order options if the demand is confirmed.
What Is Form GST DRC-01?
DRC-01 is the show cause notice (SCN) issued under Rule 142(1) of the CGST Rules, 2017. It is the formal communication from the proper officer stating:
- The demand: Tax short-paid, not paid, erroneously refunded, or input tax credit (ITC) wrongly availed or utilized.
- The legal basis: Whether the notice is under Section 73 (no fraud), Section 74 (fraud, suppression, wilful misstatement), or Section 74A (for FY 2024-25 onwards).
- The quantification: The exact amount of tax, interest under Section 50, and the applicable penalty.
- The response window: Typically 30 days from the date of issuance.
The notice is generated and served electronically on the GST portal. You receive it under Services, User Services, View Additional Notices/Orders. An email notification may or may not follow, so relying solely on email is risky.
DRC-01A: The Pre-Notice Intimation (Penalty Avoidance Route)
Before issuing DRC-01, the proper officer may (it is optional since 2020) issue a pre-notice intimation in Form DRC-01A under Rule 142(1A). This is a soft communication that tells you: "We have found a discrepancy of Rs X. Pay now under Section 73(5), 74(5) or the matching provision of Section 74A, and no show cause notice will be issued."
Why DRC-01A is your best-case scenario:
- No or low penalty. In a non-fraud case (Section 73, or Section 74A without fraud), paying the full tax and interest at this stage means no penalty and no SCN. In a fraud or suppression case, you also pay a 15% penalty before the SCN, still far below the 100% that applies later.
- No adjudication record. Unlike a DRC-01 followed by DRC-07, a DRC-01A resolved voluntarily does not create an adverse order on your GSTIN profile.
- Speed. You pay, file DRC-03, and the officer acknowledges closure in DRC-05.
Practical example
Your GSTR-3B for March 2025 shows ITC of Rs 8,00,000, but GSTR-2B reflects only Rs 6,50,000. The officer identifies the Rs 1,50,000 gap and sends DRC-01A.
- Tax payable: Rs 1,50,000
- Interest at 18% (say 12 months): Rs 27,000
- Penalty: Nil (paid at pre-notice stage)
- Total: Rs 1,77,000
If you ignore DRC-01A and the officer escalates to DRC-01 under Section 73, the penalty exposure is 10% of Rs 1,50,000 = Rs 15,000 (or Rs 10,000, whichever is higher). Under Section 74, it could be 100% of tax, Rs 1,50,000.
Section 73 vs Section 74 vs Section 74A: Which One Applies to Your Notice?
The section under which DRC-01 is issued determines everything: the time limit, the penalty rate, and the reduced-penalty windows. Read this field first when you open the notice.
| Point | Section 73 | Section 74 | Section 74A |
|---|---|---|---|
| Applies to | FY 2017-18 to FY 2023-24, no fraud | FY 2017-18 to FY 2023-24, fraud, wilful misstatement or suppression | FY 2024-25 onwards, both types |
| SCN time limit | At least 3 months before the order deadline (so within 2 years 9 months of the annual return due date) | At least 6 months before the order deadline (so within 4 years 6 months) | 42 months from the annual return due date |
| Order time limit | 3 years from the annual return due date | 5 years from the annual return due date | 12 months from the SCN, extendable by up to 6 months |
| Pay before SCN | No penalty | 15% penalty | No penalty (non-fraud) or 15% (fraud) |
| Pay after SCN | Within 30 days: no penalty | Within 30 days: 25% penalty | Within 60 days: no penalty (non-fraud) or 25% (fraud) |
| Pay after order | Penalty 10% of tax or Rs 10,000, whichever is higher | Within 30 days of order: 50%; otherwise 100% | Non-fraud: 10% or Rs 10,000; fraud: 50% within 60 days of order, otherwise 100% |
Why Section 74A matters for FY 2024-25 and beyond
Section 74A consolidates Sections 73 and 74 into a single provision for financial years starting from April 2024. The key changes:
- Longer response window for reduced penalty: 60 days instead of 30 days to pay and eliminate or reduce the penalty.
- Unified timeline: 42 months from the due date of the annual return, regardless of whether fraud is involved.
- Minimum threshold of Rs 1,000: No notice can be issued for trivial amounts below this floor.
- Fraud penalty capped at 100% of tax (equal to tax), not above it.
If your notice relates to FY 2024-25 or later, Section 74A applies. For earlier years, the officer must invoke Section 73 or 74 depending on whether fraud is alleged.
Common Grounds for Issuing DRC-01
Not every DRC-01 is about fraud. Most show cause notices arise from data mismatches that the system flags automatically. Here are the six most common triggers.
- ITC claimed in GSTR-3B exceeding GSTR-2A/2B, including credit from suppliers who did not file or whose registration was cancelled.
- Outward tax in GSTR-3B lower than GSTR-1 for the same period.
- Turnover in GSTR-9/9C or the income tax return higher than GST returns.
- E-way bill value exceeding reported outward supplies.
- Reverse charge not paid on services such as GTA, legal fees or rent from unregistered persons where RCM applies.
- Classification or rate disputes, and ITC blocked under Section 17(5) that was claimed anyway.
How to Read Your DRC-01 Notice
When you open the DRC-01 on the GST portal, focus on these five sections in order.
Step 1: Section invoked (73, 74, or 74A).** This tells you the penalty rate and whether the officer is alleging fraud. If it says Section 74, the officer is claiming suppression or wilful misstatement, and you should challenge this characterization if the facts do not support it.
Step 2: Tax period.** Which months or financial year the demand covers. Sometimes a single DRC-01 covers multiple tax periods.
Step 3: Demand breakup.** The notice specifies the tax amount (CGST, SGST/UTGST, IGST, Cess separately), the interest computed under Section 50 at 18% per annum (ITC wrongly availed and utilised also attracts 18%, since the 24% rate in Section 50(3) was reduced to 18% retrospectively from 1 July 2017), and the penalty applicable.
Step 4: Grounds.** The specific reason for the demand: ITC mismatch, turnover difference, classification dispute, etc. Read this paragraph carefully because your DRC-06 reply must address each ground individually.
Step 5: Response deadline.** The notice will state the date by which you must file your reply. The standard period is 30 days from the date of service.
Filing Your Reply in Form DRC-06: Step-by-Step
Form DRC-06 is the prescribed reply to a DRC-01 show cause notice. It is filed electronically on the GST portal and must address every issue raised in the notice with supporting documents.
Portal path
Login to GST Portal, then go to Services, User Services, View Additional Notices/Orders. Locate the DRC-01 under the "Notices" tab, and click "Reply." The system opens Form DRC-06.
What to include in your DRC-06 reply
Your reply must be specific to the grounds raised. Here is what to cover for the most common scenarios:
For ITC mismatch (GSTR-2B vs GSTR-3B):
- Reconciliation showing which invoices were claimed but not yet reflected in GSTR-2B because the supplier filed late
- Proof that the supplier has since filed and the ITC now appears in a later GSTR-2B period
- Any debit notes, credit notes, or amendments that explain the difference
- If ITC was wrongly claimed, acknowledge the specific amount and offer to reverse it with interest
For turnover mismatch (GSTR-1 vs GSTR-3B):
- Period-wise reconciliation of Table 3.1 of GSTR-3B with the summary of GSTR-1
- Credit notes issued but not reflected in GSTR-1 amendments
- Advances received and adjusted, where the tax was paid in GSTR-3B but the invoice was reported in a different GSTR-1 period
For classification disputes:
- HSN code justification with reference to the Customs Tariff Act headings
- Any advance rulings, circulars, or trade notices supporting your classification
- Industry practice evidence if available
Time Limits: When Must You Reply and When Does the Officer Lose the Right to Issue DRC-01?
Deadline Timeline
Key Deadlines in the DRC-01 Process
Missing any of these changes your penalty exposure
DRC-01 issued on the GST portal
The show cause notice is served electronically. The response clock starts.
Standard reply deadline in DRC-06
You must file your reply within 30 days. Failure to reply lets the officer proceed to pass a final order.
Reduced penalty window (Section 73)
If you pay the full tax and interest within 30 days of the SCN, the penalty is nil. This window closes on day 30.
Reduced penalty window (Section 74)
If you pay the full tax, interest and a penalty of 25% of tax within 30 days of the SCN, the proceedings are closed. (15% applies only if you pay before the SCN.)
Reduced penalty window (Section 74A)
Section 74A gives a longer 60-day window. Pay tax and interest within 60 days of the SCN and the penalty is nil (non-fraud), or pay a 25% penalty with it (fraud).
Order must be passed (Section 73)
Under Section 73, the final order in DRC-07 must be passed within 3 years from the due date of the annual return for the relevant FY.
Order must be passed (Section 74)
Under Section 74, the final order must be passed within 5 years from the due date of the annual return.
Order must be passed (Section 74A)
Under Section 74A, the SCN must be issued within 42 months from the due date of the annual return, and the order within 12 months of the SCN (extendable by up to 6 months).
Can the officer extend the reply deadline?
In practice, yes. Section 75(5) allows the officer to grant adjournments for sufficient cause, up to three per person. If you need more time to compile documents, file a written request for extension before the original deadline lapses. There is no guarantee the extension will be granted, but requesting it on record is far better than filing a late reply without explanation.
What Happens After You File DRC-06?
The DRC-01 to DRC-07 lifecycle follows a predictable sequence. Knowing where you stand in this process helps you prepare for each stage.
Deadline Timeline
The Full DRC-01 Lifecycle
From show cause notice to final order or closure
DRC-01A: Pre-notice intimation
Officer communicates the ascertained liability. You can pay tax + interest at this stage with zero penalty.
DRC-01: Show cause notice issued
Formal notice specifying the demand, the section invoked, and the grounds. Your reply window begins.
DRC-06: Your reply filed
You submit your reconciliation, supporting documents, and legal arguments through the portal.
Personal hearing under Section 75(4)
The officer grants you a hearing before passing any adverse order. You can appear in person or through an authorised representative.
Closure: officer drops the demand
If your reply is accepted, the officer issues an order dropping the proceedings.
DRC-07: Summary of final order
If the officer confirms the demand (in full or part), the order summary is uploaded in DRC-07. The demand becomes enforceable.
APL-01: Appeal within 3 months
If you disagree with the order, file an appeal in APL-01 within 3 months with a pre-deposit of 10% of the disputed tax (plus any admitted tax, interest, fine and penalty).
If you do not reply to DRC-01
The officer is not required to wait indefinitely. If no DRC-06 is filed and the reply window lapses, the officer can proceed to pass the order under Section 73(9), 74(9) or Section 74A on the basis of the material already available (after offering a hearing under Section 75(4)). This means:
- The demand is confirmed without your version of events being heard
- The full penalty applies (no reduced-penalty benefit, since you did not pay within the window)
- The order is uploaded in DRC-07 and becomes enforceable
You can still appeal under Section 107, but you are now contesting a confirmed order rather than explaining during the notice stage. The cost, complexity, and risk increase significantly.
Penalty Rates: A Worked Example Under Each Section
Understanding the financial impact of timing is critical. Let us work through a single demand of Rs 5,00,000 tax under each section.
Interest under Section 50 is payable in every case and is left out below.
Section 73 (Non-fraud, FY 2023-24 or earlier)
| When you pay | Penalty |
|---|---|
| Before SCN, or within 30 days of SCN | Nil |
| After the order | 10% of Rs 5,00,000 = Rs 50,000 (higher than Rs 10,000) |
Section 74 (Fraud/suppression, FY 2023-24 or earlier)
| When you pay | Penalty |
|---|---|
| Before SCN | 15% = Rs 75,000 |
| Within 30 days of SCN | 25% = Rs 1,25,000 |
| Within 30 days of the order | 50% = Rs 2,50,000 |
| Later | 100% = Rs 5,00,000 |
Section 74A (FY 2024-25 onwards, non-fraud)
| When you pay | Penalty |
|---|---|
| Before SCN, or within 60 days of SCN | Nil |
| After the order | 10% of Rs 5,00,000 = Rs 50,000 (higher than Rs 10,000) |
Section 74A (FY 2024-25 onwards, fraud)
| When you pay | Penalty |
|---|---|
| Before SCN | 15% = Rs 75,000 |
| Within 60 days of SCN | 25% = Rs 1,25,000 |
| Within 60 days of the order | 50% = Rs 2,50,000 |
| Later | 100% = Rs 5,00,000 |
Strategies to Strengthen Your DRC-06 Reply
Filing DRC-06 is not just about submitting documents. The quality of your reply determines whether the officer drops the demand, reduces it, or confirms it in full. Here are proven strategies.
1. Challenge the invocation of Section 74 when facts support Section 73
If the notice is under Section 74 (fraud/suppression), but your shortfall was due to a genuine error, interpretation difference, or late supplier filing, challenge the characterization. The burden of proving fraud or suppression is on the department (Supreme Court in Pushpam Pharmaceuticals Company vs CCE, 1995). If the officer cannot establish wilful intent, the demand should be under Section 73, which means a drastically lower penalty.
2. Check whether the SCN is time-barred
Count backwards from the date the DRC-01 was issued:
- Section 73: Was it issued within 2 years and 9 months from the due date of GSTR-9 for that year?
- Section 74: Was it issued within 4 years and 6 months?
- Section 74A: Was it issued within 42 months?
If the notice is beyond the time limit, raise this as your primary defence. A time-barred SCN is void and cannot result in a valid order.
3. Reconcile thoroughly, but do not over-concede
Present your reconciliation in a structured format: a table listing each discrepancy from the notice, your explanation, the supporting document, and the resulting difference. If you agree with part of the demand, pay that portion with interest using DRC-03 and contest only the balance. Partial payment demonstrates cooperation without surrendering your full defence.
4. Request cross-examination if the demand relies on third-party statements
Under Section 75(4), you have the right to be heard. If the demand relies on statements from suppliers, buyers, or third parties, request cross-examination. Reliance on untested statements without allowing cross-examination is a violation of natural justice (Delhi High Court in multiple GST matters).
5. Cite relevant circulars and advance rulings
If CBIC circulars or advance rulings support your position (e.g., on classification or ITC eligibility), include specific references. The officer is bound to follow CBIC circulars issued under Section 168, even if the officer's personal view differs.
Recovery: A Practical Consequence of Ignoring DRC-01
Once an order is passed and not paid or appealed, the demand becomes recoverable under Section 79. The officer can adjust it against refunds, attach bank accounts and direct your customers to pay the department instead of you. Beyond the penalty exposure, this makes a timely DRC-06 reply a business necessity.
After DRC-07: The Appeal Route
If your DRC-06 reply is not accepted and the officer passes a demand order (uploaded as DRC-07), you still have options.
First Appeal: Form APL-01
- Filed with the Appellate Authority within 3 months of the date of communication of the order
- Pre-deposit: 10% of disputed tax, capped at Rs 20 crore each for CGST and SGST after the Finance (No. 2) Act, 2024 (refundable with interest if you win)
- Once the pre-deposit is made, recovery of the balance is stayed
Second Appeal: GST Appellate Tribunal
- Filed within 3 months of the first appellate order
- Additional pre-deposit of 10% of disputed tax (total cap of 20% across both stages)
Writ petition (High Court)
- Available in exceptional cases where the order is passed without jurisdiction, without following principles of natural justice, or in violation of CBIC circulars
Checklist Before You Respond to DRC-01
Use this as a working checklist before filing your DRC-06:
- Identify the section invoked (73, 74, or 74A) and note the corresponding penalty rates
- Verify the tax period and confirm it matches your records
- Check whether the notice is within the statutory time limit
- Download all annexures including the officer's computation sheet
- Run a reconciliation for each discrepancy: GSTR-2B vs GSTR-3B, GSTR-1 vs GSTR-3B, Rule 42/43 workings
- Identify the portion of the demand you agree with (if any) and pay it via DRC-03
- Prepare a structured reply addressing each ground individually
- Attach all supporting documents: invoices, credit notes, reconciliation sheets, bank statements
- Request a personal hearing explicitly in your DRC-06
- File within the 30-day (or 60-day under Section 74A) window
- Save the DRC-06 acknowledgement for your records
This guide is based on Sections 73, 74, 74A, 75, and 107 of the CGST Act, 2017, Rules 142 and 143 of the CGST Rules, 2017, and the Finance (No. 2) Act, 2024 (which introduced Section 74A). Penalty rates, time limits, and portal procedures are subject to amendments through notifications and circulars issued by the CBIC. Always verify the current provisions on cbic.gov.in and the GST portal before acting. For case-specific advice, consult a qualified GST practitioner or chartered accountant.
