Form DRC-01 is a show cause notice (SCN) issued by the GST department in cases of:

• Non-payment or short payment of tax,
• Erroneous refunds,
• Wrong availment or utilisation of Input Tax Credit (ITC).

• DRC-01 is not a demand order – it is only a notice calling for an explanation.
• The final liability arises only if the officer issues Form DRC-07 (demand order) after considering the taxpayer’s reply.

Legal Provisions Governing DRC-01

The issuance of DRC-01 is governed by Section 73, Section 74, and Section 74A of the CGST Act, 2017, along with Rule 142 of CGST Rules.

1. Section 73 (Non-Fraud Cases)

• Applicable where tax has not been paid/short-paid without fraud, suppression, or willful misstatement.
• Time Limit for Order: Within 3 years from the due date of filing the annual return.
• Notice (DRC-01) Timeline: Must be issued at least 3 months prior to order.

1. Section 74 (Fraud Cases)

• Applicable where non-payment/short-payment arises due to fraud, suppression, or willful misstatement.
• Time Limit for Order: Within 5 years from the due date of filing the annual return.
• Notice (DRC-01) Timeline: Must be issued at least 6 months prior to order.

1. Section 74A (Applicable from FY 2024–25 onwards)

• Introduced to consolidate both fraud and non-fraud cases.
• Time Limit for Order: 12 months from the date of issuance of DRC-01.
• Notice (DRC-01) Timeline: Within 42 months from the due date of filing the annual return.

Forms Used in the DRC Process

Step-by-Step Process Flow

1. DRC-01 Issued – Officer issues notice citing grounds (Sec 73/74/74A).
2. Reply by Taxpayer in DRC-06 –
   • Reply must be detailed with documents, legal grounds, reconciliations, and supporting evidence.
   • Taxpayer may also pay part of liability voluntarily through DRC-03 if partially agreeing.
3. Officer’s Action –
   • If satisfied → issues DRC-05 (Closure Order).
   • If not satisfied or no reply → issues DRC-07 (Demand Order).
4. Demand Recovery – Once DRC-07 is passed, the liability becomes enforceable, and recovery proceedings can begin.

Timelines for Notices and Orders

Examples for Better Understanding

Example 1 – FY 2023–24 (old provisions apply)

• Annual return due date: 31-Dec-2024
• Sec 73 (Non-Fraud):
  • Order by: 31-Dec-2027
  • Notice by: 30-Sep-2027
• Sec 74 (Fraud):
  • Order by: 31-Dec-2029
  • Notice by: 30-Jun-2029

Example 2 – FY 2024–25 (new Sec 74A applies)

• Annual return due date: 31-Dec-2025 (assuming no extension)
• Sec 74A (Fraud/Non-Fraud):
  • Notice (DRC-01) by: 30-Jun-2029 (within 42 months)
  • Order (DRC-07) by: 30-Jun-2030 (within 12 months from notice date)

Practical Guidance – How to Deal with DRC-01

1. Immediate Steps Upon Receiving DRC-01

1. Read the Notice Carefully – Understand the grounds cited (tax shortfall, ITC mismatch, refund issue).
2. Check Section & Year – Verify whether it is under Sec 73, 74, or 74A and whether time limits are valid.
3. Collect Evidence – Books of accounts, invoices, GSTR-1, GSTR-3B, GSTR-2B reconciliations.
4. Prepare Reply in DRC-06 –
   • Point-wise reply to each allegation.
   • Attach documentary evidence.
   • Quote legal provisions, CBIC circulars, and judicial precedents if applicable.

1. Options Available to Taxpayer

• Fully Aggrieved: File detailed reply in DRC-06. No payment required.
• Partially Aggrieved: Pay admitted liability via DRC-03 and contest the balance through DRC-06.
• Seek Extension: Application for extension of time to reply can be filed in DRC-06 itself (no separate form prescribed).

1. Officer’s Response

• If reply accepted → DRC-05 issued (case closed).
• If reply rejected → DRC-07 issued (demand order).

1. Important Points

• DRC-01 cannot be issued again for the same grounds in the same year.
• However, different grounds in the same year can invite fresh DRC-01.
• Separate notices will be issued for different financial years.

Key Challenges for Taxpayers

• Mismatch-based Notices: Many DRC-01 notices arise due to GSTR-2B vs GSTR-3B or GSTR-1 vs GSTR-3B mismatches.
• Erroneous Refunds: Exporters and inverted duty structure refunds often face notices.
• Time-bound Response: Failure to reply in time results in straight demand order.

Compliance Strategy

1. Maintain regular reconciliations (GSTR-1, 2B, 3B vs books).
2. Keep documentary trail ready (invoices, agreements, refund applications).
3. Use legal defense appropriately (interpretation of Sec 73, 74, 74A).
4. Always file reply in DRC-06 online – even after expiry, reply can be uploaded on GST portal.
5. If demand order (DRC-07) is passed unfairly → appeal can be filed before GST Appellate Authority (Form GST APL-01).

Conclusion

• DRC-01 is an opportunity notice – not a final liability.
• Taxpayers should treat it seriously and file a detailed reply in DRC-06 within the prescribed time.
• From FY 2024–25 onwards, Section 74A simplifies provisions, but also shortens timelines, so prompt action is critical.
• Proper accounting, reconciliations, and timely compliance are the best safeguards against adverse GST notices.