What is a GST DRC-01 notice?

DRC-01 is a Show Cause Notice issued under Section 73 (non-fraud cases) or Section 74 (fraud/wilful misstatement) of CGST Act before raising a final tax demand. It gives the taxpayer an opportunity to explain why the proposed tax, interest, and penalty should not be confirmed. The response window is typically 30 days.

What happens if I ignore a DRC-01 notice?

If you do not respond to a DRC-01 within the specified period, the GST officer will issue an ex-parte order in DRC-07 confirming the full demand. Recovery proceedings then begin — your bank accounts can be attached under Section 79, and the officer can recover dues from debtors directly. Interest at 18% p.a. continues to accrue until full payment.

What is the difference between Section 73 and Section 74 demand?

Section 73 covers cases of short payment, non-payment, or wrongful ITC claim without fraud or wilful misstatement. The penalty is 10% of tax (minimum ₹10,000) if paid before DRC-07, nil if paid within 30 days of SCN. Section 74 covers cases involving fraud, wilful misstatement, or suppression of facts. The penalty is 100% of tax (mandatory) and prosecution is possible for demands above ₹5 crore.

How do I appeal a GST demand order?

File an appeal in FORM GST APL-01 to the Appellate Authority within 3 months of the DRC-07 order. You must pre-deposit 10% of the disputed tax amount (excluding interest and penalty). The Appellate Authority must decide within 1 year. Further appeal to GST Appellate Tribunal (GSTAT), then High Court, then Supreme Court.

GST Demand Notice — Complete Response Guide

Received a DRC-01 or DRC-07? Understand the full demand lifecycle, your response options, penalty consequences, and how to file an appeal.

⚠ Never ignore a GST notice. An unanswered DRC-01 automatically results in an ex-parte DRC-07 final demand order. The officer can then attach your bank accounts and recover dues from your debtors under Section 79 of CGST Act.

The GST Demand Lifecycle

Stage 1 — Trigger

Discrepancy Detected / Audit Finding

The demand process starts with a system-generated flag (GSTR-1 vs 3B mismatch, excess ITC vs GSTR-2B) or a field officer's audit finding. You may first receive a pre-show cause notice for explanation — this is informal and must still be responded to.

Stage 2 — SCN

DRC-01 — Show Cause Notice

The formal Show Cause Notice proposing a specific demand of tax, interest, and penalty. Issued under Section 73 (non-fraud) or Section 74 (fraud). Contains the exact amount, period, and legal grounds for the demand.

⏱ Respond within 30 days

Stage 3 — Your Response

Pay via DRC-03 or File Written Reply

Two paths: (a) Pay the demand via DRC-03 (voluntary payment challan) to close the proceedings — pay before the SCN response deadline for maximum penalty relief. (b) Contest by filing a detailed written reply with evidence through the GST portal.

✓ Paying now = lowest penalty (10% or nil)

Stage 4 — Hearing

Personal Hearing (if contested)

The officer schedules a personal hearing after reviewing your reply. Attend with your CA and all supporting documents. The officer considers your arguments and evidence before passing the final order. You can request an adjournment if needed (usually granted once).

Stage 5 — Final Order

DRC-07 — Final Demand Order

The final order for tax, interest, and full penalty. Issued whether your reply was accepted (reduced demand) or rejected (full demand). If no reply was filed, the full DRC-01 amount is confirmed ex-parte. Interest at 18% p.a. continues until payment.

⏱ Appeal within 3 months

Stage 6 — Recovery / Appeal

Pay or Appeal to Appellate Authority

Pay the DRC-07 demand in full, or file an appeal in APL-01 to the Appellate Authority with a 10% pre-deposit of disputed tax. If unpaid and not appealed, recovery proceedings begin: bank account attachment, debit from debtors, seizure of property.

Section 73 vs Section 74 — Penalty Comparison

Section 73 — Non-Fraud Cases

Applies to cases of short payment, non-payment, or wrong ITC claim without fraud, wilful misstatement, or suppression of facts.

Pay before SCN (DRC-01): No penalty
Pay within 30 days of DRC-01: No penalty
Pay after DRC-01, before DRC-07: 10% of tax (min ₹10,000)
After DRC-07 confirmed: 10% of tax (min ₹10,000)
Interest: 18% p.a. on unpaid tax
Time limit: 3 years from due date of return

Section 74 — Fraud Cases

Applies to cases involving fraud, wilful misstatement, or suppression of facts to evade tax.

Pay before SCN (DRC-01): 15% of tax
Pay within 30 days of DRC-01: 25% of tax
Pay before DRC-07 order: 50% of tax
After DRC-07 confirmed: 100% of tax
Interest: 18% p.a. on unpaid tax
Time limit: 5 years from due date of return
Prosecution possible for demands above ₹5 crore

Do's and Don'ts When You Receive a Demand Notice

✓ Download the notice immediately

✓ Note the exact response deadline

Response deadlines are strict. Calendar the date and set a reminder 7 days before.

✓ Engage a CA for demands above ₹1 lakh

Complex legal arguments require professional representation. A good reply can reduce or eliminate the demand.

✓ Pay via DRC-03 if demand is valid

Early voluntary payment drastically reduces or eliminates penalty under Section 73.

✗ Never ignore the notice

Even if you believe the demand is wrong, file a reply. Silence = ex-parte DRC-07 + recovery.

✗ Don't pay demand from wrong head

GST is credited to specific tax heads (IGST, CGST, SGST). Paying from wrong head is not valid settlement.

✗ Don't miss the appeal window

APL-01 must be filed within 3 months of DRC-07. Missing this is fatal to contesting the demand.

✗ Don't assume old demands are time-barred

Officers sometimes issue demands beyond the normal limitation period. Challenge it legally — don't pay it silently.

Appeal Hierarchy After DRC-07

Appellate Authority (Joint/Additional Commissioner) APL-01 within 3 months of DRC-07. Pre-deposit: 10% of disputed tax. Decision within 1 year.

GST Appellate Tribunal (GSTAT) APL-05 within 3 months of AA order. Pre-deposit: 20% of disputed tax (additional 10%). Decision within 1 year.

High Court Writ petition on questions of law only. No time limit specified but should be filed promptly.

Supreme Court Final appellate authority on constitutional or substantial questions of law.

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Frequently Asked Questions

DRC-01 is the Show Cause Notice — it is a proposal to raise a demand. It gives you the opportunity to respond and contest the demand before any order is passed. DRC-07 is the Final Demand Order — it is passed after considering your reply (or in your absence). DRC-07 is a confirmed liability that must be paid or appealed within 3 months.

Yes. You can pay an undisputed portion of the demand via DRC-03 and file a reply contesting the remaining amount. This is a common strategy — paying the undisputed portion reduces the interest exposure on that amount while the dispute on the remaining amount is adjudicated.

DRC-03 is the voluntary tax payment form under GST. It is used to pay tax, interest, and penalty on your own — without being forced by a demand order. Paying via DRC-03 in response to a DRC-01 within 30 days of the SCN date eliminates or significantly reduces the penalty under Section 73. It also demonstrates cooperation and can lead to the proceedings being closed.

Bank attachment under Section 79 is a recovery measure after a DRC-07 has been issued and the time for payment/appeal has passed. Immediate options: (1) Pay the full demand to get the attachment lifted immediately. (2) File an appeal in APL-01 with 10% pre-deposit and request a stay on recovery. (3) File a writ petition in High Court challenging the attachment if procedural errors exist. Contact a tax lawyer immediately.

For Section 73 cases (non-fraud): demands can be raised within 3 years from the due date of the annual return for the relevant year. For Section 74 cases (fraud/wilful misstatement): the extended period is 5 years. Demands issued beyond these periods are time-barred and can be challenged on limitation grounds.