Case Study: The Notice Explained
Yashoda Enterprises (GSTIN: 11ABCY1234K5XZ), managed by Prashant Chowdhary, recently got a GST DRC-01 Show Cause Notice from the state tax department, for the financial year 2019-20. The notice claims that the business wrongly took Input Tax Credit (ITC) of ₹1,04,958 by using invoices from a supplier, M/s Dev Darbar Trading Co., but without any actual goods being supplied.
The tax department believes these invoices are fake. Because of this, they are demanding:
- Tax (IGST): ₹1,04,958
- Interest: ₹1,04,958
- Penalty: ₹1,04,958
- Total payable: ₹3,14,874
Yashoda Enterprises has to respond to this notice, appear for a hearing, and submit the necessary documents by October 29, 2025. If not handled properly, there could be serious financial and legal consequences.
Summary of Plan of Action
- Check if transactions with the supplier were genuine and supported by documents
- Collect all records (invoices, transport details, payment proofs, GST filings)
- Prepare and submit a clear response explaining your position before the due date
- Attend the hearing (with all supporting documents)
Read below to get more details on plan of action.
Detailed Plan of Action
1. Review the Notice and Allegations
Carefully read the DRC-01 Show Cause Notice received from the GST department. Note the financial year, the names and GSTIN involved, amount of tax, interest, and penalty demanded, and the reason for the dispute (in this case, alleged fake ITC claimed using bogus invoices from M/s Dev Darbar Trading Co.). Write down:
- Tax period and total disputed amount
- Exact allegations made by the department
- Deadlines to respond and attend hearing
2. Gather and Organize Documents
To respond effectively, collect all records that substantiate your position. These may include:
- Tax invoices from the supplier with proper GSTIN and relevant details
- Goods receipt notes, warehouse entry records, stock registers showing receipt and use of goods
- Transport documents (e.g., e-way bills, lorry receipts) proving movement of goods
- Payment proofs (bank statements, RTGS/NEFT transaction records, cheque images)
- Screenshots of GSTR-2A/2B showing supplier’s invoices appearing in your portal
- Evidence of supplier’s GST registration status and return filings during the transaction period
- GST returns (GSTR-1, GSTR-3B) of the disputed period
Also prepare a reconciliation sheet comparing your purchase records with GSTR-2A/2B and supplier filing data.
Related Blog: What to do if you have received notice for input tax reversal?
Supplier GST registration cancellation must not attract input tax reversal for buyer. Read more in this blog: How to respond to GST notices for ITC reversal when supplier’s GST registration is cancelled
3. Analyze the Department’s Claims
Break down each point raised in the notice:
- Was ITC wrongly claimed, or were there valid business purchases?
- Are there technical errors or mismatches between returns and portal records?
- Did the supplier file their returns correctly?
- Is there any evidence of fraudulent intent?
Identify strong areas of compliance, and document any gaps or errors honestly.
4. Prepare Your Reply
Draft a comprehensive reply, ideally in Form DRC-06 through the GST portal. Your reply should:
- State your GSTIN, business name, and reference to the notice
- Address each allegation point-wise
- Explain the compliance steps taken (diligence in supplier selection, regular GST reconciliation, documented receipt of goods, payment through banking channels)
- Attach all supporting evidence and documents
- Cite legal cases or GST provisions if relevant (e.g., no collusion with supplier, genuine business transactions)
- Request personal hearing if needed to clarify issues
Preview your reply before filing and ensure digital signature/OTP validation for successful submission.
5. Attend the Hearing
Appear as scheduled before the GST officer, bringing both originals and copies of documents. If sending a representative (CA/tax advisor), provide written authorization. Use this opportunity to:
- Present your case and highlight strong documentary evidence
- Clarify any doubts raised by the department
- Offer further proof if available
6. Optionally: Voluntary Payment Route
If evidence for genuine purchase is weak, assess opting for voluntary payment (tax + interest + 25% penalty within 30 days), which can substantially reduce penalty liability. Submit payment through Form DRC-03 and inform the department promptly.
7. Monitor Adjudication and Stay Prepared for Appeal
Track the status of your reply and any adjudication order (DRC-07). If the outcome is not favorable, consult your advisor about filing an appeal under Section 107 of the CGST Act, ensuring pre-deposit requirements are met.
Additional Preventive Strategies
- Verify supplier GSTIN status and compliance before every transaction
- Maintain complete records of suppliers and purchases
- Conduct periodic GST audits and reconciliations
- Respond promptly to all GST communications to avoid escalation
Timely, well-documented action is crucial—failure to reply or provide evidence can lead to ex-parte demand orders, recovery action (bank/property attachment), and loss of appeal rights.
Related Blog: Most frequently asked questions related to GST compliance
Read more in this blog: Ultimate Guide to GST Compliance in India: Comprehensive FAQ with Latest Updates
