DRC-01 is a Show Cause Notice (SCN) for tax demand. It is a formal notice proposing a specific amount of tax, interest, and penalty that the officer believes is payable. It is issued under Section 73 (for cases not involving fraud or wilful misstatement) or Section 74 (for fraud, suppression, or wilful misstatement). DRC-01 is a critical notice — if not responded to properly within the deadline, it results in DRC-07 (final demand order), which is enforceable as a tax arrear.
Common Triggers — Why You May Have Received This
Unsatisfactory reply to ASMT-10 scrutiny notice
Officer detects under-payment of tax through audit or investigation
Excess ITC claimed beyond GSTR-2B entitlement
Wrong classification of goods/services leading to tax short-payment
Non-payment of RCM liability
ITC claimed on ineligible items (Section 17(5) violations)
Turnover suppression detected through cross-data analysis (e-way bills, bank data)
How to Respond — Step by Step
Response form: Written reply + DRC-03 (optional) | Deadline: 30 days
1
Download and analyse the DRC-01
Note the exact tax, interest, and penalty amounts proposed. Note the section (73 or 74) — this affects penalty rates. Note the period and the specific allegation.
2
Calculate the actual liability
Independently compute the correct tax for the period. Compare with the officer's proposed demand. The difference may be legitimate (different interpretation) or genuine (actual error).
3
Option A — Pay via DRC-03 (fastest resolution)
If you agree with the demand or want to avoid further proceedings: pay the tax + interest via DRC-03 on the portal. For Section 73 cases, if paid before DRC-01 reply deadline, penalty is only 15% (not 100%).
4
Option B — File written reply contesting demand
If you dispute the demand: draft a detailed reply citing legal provisions, Supreme Court judgments, CBIC circulars, and attach supporting documents. File via the portal → Notices → Reply.
5
Attend personal hearing if scheduled
The officer may schedule a personal hearing. Attend with documents and your CA. Present your case clearly. Hearings are usually informal at the adjudicating officer level.
6
Track DRC-07 outcome
After your reply and hearing, the officer passes the final order in DRC-07. If adverse, file appeal within 3 months with 10% pre-deposit.
Penalty Implications
⚠️ Section 73 (non-fraud): Penalty is 10% of tax or ₹10,000 — whichever is higher. If tax is paid before DRC-01 is issued: no penalty. If paid within 30 days of DRC-01: 15% penalty. After DRC-07 order: 100% penalty. Section 74 (fraud/suppression): Minimum 100% penalty, may go up to 100% of tax.
Expert Tips
The difference between Section 73 and 74 is critical — Section 73 penalties are much lower and can be significantly reduced by early payment.
If you receive DRC-01, consult a CA immediately — the response strategy matters enormously for the final outcome.
Partial payment of agreed portions via DRC-03 (for the non-disputed amount) can reduce interest accrual and signal good faith.
Keep all correspondence with the GST department — dates and delivery proof matter in appeal proceedings.
Calculate your penalty or interest if you missed a deadline:
Section 73 (non-fraud): penalty ranges from zero (if paid before SCN) to 15% (within 30 days of DRC-01) to 100% (after DRC-07). Section 74 (fraud): mandatory minimum 100% penalty, which can be reduced to 50% if paid within 30 days of DRC-01.
There is no formal negotiation in GST. However, the adjudicating officer has discretion in determining the final demand. A well-reasoned reply with evidence can reduce or eliminate the demand. Alternatively, settlement through the GST Appellate Authority or Tribunal is possible.
DRC-01A is an intimation of tax ascertained under Section 73(5) — it is sent before DRC-01 to give the taxpayer a chance to pay voluntarily. It is not a formal SCN. Paying in response to DRC-01A attracts zero penalty.
