An Analysis of GST's Limitation Periods and Pre-Deposit Requirements: Bureaucratic Overreach and the Consequent Financial Burden on Taxpayers

-By Satyam Khandelwal, Associate Editor at CBLT

Introduction

Since its introduction in 2017, the Goods and Services Tax (“GST”) regime has been a topic of intense debate and controversy. Even after more than 8 years since its implementation, it is plagued with significant structural deficiencies that lead to an increased burden on the taxpayers. One of the major points of contention has been the lengthy limitation period granted to the tax authorities for issuing a show-cause notice under this act under sections 73 & 74 of the Central Goods and Services Tax (CGST) Act, 2017.

Earlier, the authorities had 5 years just to issue a show-cause notice under section 74 and 3 years under section 73, but it has since been changed to 42 months for both through section 74A introduced in the Finance Act, 2024. This time period, when combined with the fact that throughout this time interest is charged on the tax amount in dispute at the rate not exceeding 18% and 24% per annum for delayed tax payments and wrongful input tax credit claims, respectively as per the provisions of section 50 of the CGST Act, leads to an unfavourable situation for the taxpayers.

The provision for appeals under this act, as given in section 107, specifies that in order to appeal against an order under this act, a fee of 10% of the total amount in dispute has to be pre-deposited subject to the limit of 20 crores for CGST (A further 20 crore for State Goods and Services Tax (SGST) would also be applicable, causing the total limit for deposit amount to reach 40 crores). A further 10% in addition to the previous amount has to be deposited to appeal under section 112, which has been reduced from an earlier 20% requirement. This pre-deposit requirement causes businesses to bear extraordinary difficulties, especially considering the lengthy nature of judicial proceedings.

All these provisions combine to create a situation where the taxpayer faces constant harassment and which leads the tax authorities to focus more on revenue extraction rather than equitable and just tax administration. This blog will shed some light on this very issue and through its analysis offer suggestions and recommendations for the same.

Limitation Period

Sections 73, 74 & 74A of the CGST Act all deal with the determination of tax not paid, short paid, or erroneously refunded or input tax credit wrongfully availed or utilised. The main difference between them is that Sections 73 and 74 are pre-Financial Year 2024-25, with 73 dealing with cases not involving fraud, while 74 deals with cases involving fraud. Section 74A deals with both fraud and non-fraud cases, but is only applicable from the Financial Year 2024-25. The shift to section 74A can be considered an attempt to unify these frameworks and provides a time frame of 42 months for the authorities to issue a show cause notice to the taxpayer under this section. The above read in consonance with Section 50 of the Act, which outlines that the interest rate for delayed tax payments, with failure to pay the tax resulting in an interest rate of up to 18% and wrongfully availing the input tax credit resulting in an interest rate of up to 28% illuminates a particularly troubling picture.

These extended limitation periods have created a system where tax authorities deliberately delay the issuance of the notice until the very end of the permissible period in order to increase their revenue generation. A timely notice would allow an honest taxpayer who committed an error in filing to rectify their mistake, but after accumulating interest for 3-5 years, the liability almost doubles, making even them reluctant to pay. This also increases the uncertainty for business planning, as sudden liability could be created without their knowledge at any time. The GST mechanism is highly digitized, and all returns are filed online, which further calls into question the requirement of such a long limitation period. The digital tracking mechanisms under GST allow for quick detection of any discrepancy, and given that the tax authorities can issue a show-cause notice merely on a detected discrepancy between the GSTR2A and GSTR3B, which makes the period of 3-5 years highly unreasonable.

Bureaucratic Concerns

The long limitation period by itself would still not be a concern if not for the incentive that the tax authorities have in delaying the issuance of the notice. The unreasonably high interest rates accumulate a heavy amount of interest till the end of the limitation period for issuing a notice by the tax authorities, practically ensuring that they delay issuing the notice till the end of the limitation period making the mechanism skewed heavily towards revenue generation rather than effective tax administration. The authorities seem to use this mechanism as not merely a method of claiming the government’s due, but as a way of harassing businesses. This bureaucratic overreach is now a systematic issue, especially so for the small and medium enterprises who lack the resources to effectively challenge the administrative actions due to the mandatory pre-deposit requirement.

The GST laws are vast, including separate legislations for CGST, IGST, Union Territory Goods and Services Tax (UGST), and separate SGST acts for each state.  While they provide vast discretionary powers to the officials as necessary for administration, they fail to concurrently assign adequate accountability. Tax officials often assign arbitrary penalties for minor discrepancies, issue notices for issues that a cursory check would resolve, and demand excessive documentation as a means of harassment, all of which creates a situation akin to ‘tax terrorism’, i.e. the undue exercise of power by tax authorities to levy taxes using legal or extra-legal means.

The GST Network (GSTN) portal is often plagued with technical issues and faces outages quite frequently, which results in situations where taxpayers are penalized for technological malfunction. The GST regime has rigid compliance deadlines, which further complicate situations where technical failures result in penalties and late fees. GST, being a relatively new law, makes it so that judicial precedents are quite lacking for operational purposes, which results in the tax administration having a much greater scope of actions than in old regimes, which already have established principles and methods of operation. This, coupled with the lack of accountability, causes even arbitrary and oppressive actions to be met with minimal consequences.

Pre-deposit Mechanism

The provisions under sections 107 & 112 provide for appeal to the appellate authority and the tribunal, respectively. The taxpayer may appeal to an order by the tax authority within 3 months of such an order, but they may only do so if they submit 10% of the disputed tax amount as a pre-deposit as per section 107(1) & 107(6) of the CGST Act subject to a maximum amount of 20 crores (earlier 25 crores) per CGST and SGST, which leads to Intestate Goods & Services Tax (IGST) being a total of 40 crores. Section 112 subsection 8 only further compounds this by demanding a further 10% (20% before the Finance Act 2024) pre-deposit for an appeal to the appellate tribunal.

This pre-deposit requirement creates a system where significant financial backing is a prerequisite for legal merits to be heard, and justice is paywalled. The pre-deposit requirements have particularly severe implications for certain business segments. Exporters were historically required to make cash deposits to appeal, blocking their working capital despite them having substantial input tax credit balances due to zero-rated supplies. MSMEs (Micro, Small & Medium Enterprises) do not have the financial capacity of bigger businesses and are hence unable to balance their own operational requirements with the mandatory pre-deposit requirements. This creates a disproportionate burden, which further puts these businesses at a competitive disadvantage.

The decision of the Supreme Court to allow the taxpayers to use their Electronic Credit Ledger for the purpose of this pre-deposit in Union Of India vs M/S Yasho Industries Ltd (2025) recognized that when legitimate input tax credit is available then taxpayers should not be mandated to make cash deposits. This provides a much-needed relief to the taxpayers and allows them to continue their business operations without added financial hardship. However, the implementation is yet to be uniform across all jurisdictions and case types.

Conclusion

The extended limitation periods, high interest rates, and mandatory pre-deposit requirements create a burden that exponentially increases the financial and operational challenges faced by taxpayers. Tax authorities delay issuing show cause notices until the end of permissible periods, leading to the taxpayers facing accumulated interest at punitive rates over several years, only to then have to be subjected to the mandatory pre-deposit requirements that also represents a substantial portion of the inflated amounts.

The prolonged uncertainty due to the lengthy limitation period and financial stress of unfairly accumulated interest followed by the pre-deposit requirements to dispute the claims creates a psychological impact on the taxpayers that makes them often simply accept the incorrect demands due to either not being willing to be further burdened by the procedural challenges or due to financial incapacity to engage in prolonged litigation. This creates a system where substantive justice is disregarded and administrative convenience is prioritized.

Section 74A was meant to be a simplification in the benefit of the taxpayer, but has instead further increased the burden for the innocent taxpayer. It has increased the limitation period of 3 years for cases under section 73 to 42 months, an increase of 6 months for matters not involving fraud. It indirectly punishes honest, non-fraudulent taxpayers for simple clerical mistakes, which is compounded by the fact that now even fraudulent offenders face the same limitation period of 42 months instead of the previous 5-year period.

There is an evident and urgent need for reform. Interest rates need to be made commercially reasonable, pre-deposit requirements need to be reassessed and alternative methods of calculation need to be considered, and measures should be adopted to instil administrative accountability and prevent the abstract use of powers by the tax officials.