How to Reply to GST DRC-01 Show Cause Notice: A Practical Guide for CA’s [2026]

If you’re handling GST compliance for clients, there’s a good chance you’ve already encountered — or will soon encounter – Form GST DRC-01. It’s the show cause notice that the department issues when it believes there’s a short payment of tax, wrong availment of ITC, or any other GST demand situation. 

And unlike some routine notices that can be dealt with quickly, a DRC-01 requires a careful, well-structured response. Get it right, and you can settle the matter or get it dropped. Get it wrong or worse, ignore it and you’re looking at a confirmed demand order under DRC-07 with interest and penalties. 

This guide covers everything a CA needs to handle DRC-01 notices confidently when and why they’re issued, to drafting a reply that actually works. 

“In our practice, DRC-01 notices related to ITC mismatches have increased significantly since the department started using automated data analytics. The key is responding early and with the right documentation.”

What Exactly is Form GST DRC-01? 
Form GST DRC-01 is the show cause notice issued by the proper officer under the GST Act when he has reasons to believe that tax has not been paid, short paid, erroneously refunded, or input tax credit has been wrongly availed or utilised. 

In plain terms -the department is saying: “We think you owe us money. Here’s why. Now tell us why we shouldn’t confirm this demand.”

 It’s issued before any demand is confirmed. That’s the important part. You still have the opportunity to respond, present your case, and potentially get the matter resolved without any demand order being passed.

DRC-01 can be issued under two sections, and which section it falls under changes everything: 

The first thing you check when you receive a DRC-01: Is it under Section 73 or Section 74? This determines the severity, the penalty exposure, and your entire response strategy.

“I’ve seen cases where the department issues a DRC-01 under Section 74 (fraud/suppression) for what is clearly a genuine computational error. If you can demonstrate that there was no intent to evade, you can argue for it to be treated under Section 73 instead — which significantly reduces the penalty exposure.”

Common Reasons Why DRC-01 Notices Are Issued 

The GST system has become increasingly data-driven. The department now cross-references multiple data points, and mismatches automatically trigger scrutiny. Here are the most common reasons CAS encounter DRC-01 notices: 

ITC mismatch between GSTR-3B and GSTR-2A/2B. This is probably the single biggest trigger. If you’ve claimed ITC in GSTR-3B that doesn’t reflect in your GSTR-2A/2B-because the supplier didn’t file, filed late, or reported different figures  -expect a notice. 

Output tax short payment. The department compares your GSTR-1 (outward supply details) with GSTR-3B (summary return). If GSTR-1 shows higher liability than what’s paid in GSTR-3B, a DRC-01 follows. 

GSTR-1 vs GSTR-3B mismatch. Even beyond tax amounts, if the turnover reported in GSTR-1 doesn’t match GSTR-3B, it raises a flag. 

Wrong availment of ITC. This includes claiming ITC on blocked credits under Section 17(5), ITC on supplies from cancelled registrations, ITC without actual receipt of goods/services, or ITC on invoices older than the prescribed time limit. 

Non-reversal of ITC. Under Rule 42 and 43, ITC proportional to exempt supplies or non-business use must be reversed. Non-reversal triggers notices. 

E-way bill mismatches. Goods moved without proper e-way bills, or e-way bill data not matching with invoices and returns. Late filing leading to auto-populated differences. When returns are filed late, the system sometimes captures data differently, creating artificial mismatches.


The DRC-01 to DRC-07 Journey: Understanding the Process 

It helps to understand the full lifecycle, so you know exactly where your client stands at each stage: 

Stage 1 – DRC-01A (Pre-SCN Communication). Before issuing the formal SCN, the officer may send an intimation under DRC-01A, pointing out discrepancies and giving the taxpayer an opportunity to pay or explain. This is like an informal nudge. If you pay up at this stage (via DRC-03), no SCN is issued. 

Stage 2 – DRC-01 (Show Cause Notice). If the matter isn’t resolved at DRC-01A stage, the formal SCN is issued in DRC-01. This specifies the exact tax, interest, and penalty demanded, along with the grounds. 

Stage 3 – DRC-06 (Your Reply). The taxpayer’s reply to DRC-01 is filed in Form DRC-06 on the GST portal. This is where your arguments, evidence, and legal submissions go. 

Personal Hearing. The proper officer may grant a personal hearing — either on request or 

Stage 4 – Personal Hearing. The proper officer may grant a personal hearing — either on request or suo motu. This is your chance to present the case verbally and supplement your written submission.

Stage 5 – DRC-07 (Order). After considering the reply and hearing, the officer passes an order in DRC- 07 – either confirming the demand (fully or partially), modifying it, or dropping it. 

Stage 6 — DRC-08 (Rectification) / Appeal. If the order has errors, you can seek rectification. If you disagree, you appeal to the Appellate Authority. Key takeaway: The DRC-06 reply is your primary defence. Everything after that — hearing, order, appeal flows from how strong your written response is.

Key takeaway: The DRC-06 reply is your primary defence. Everything after that — hearing, order, appeal flows from how strong your written response is.

How to Draft a Strong Reply in Form DRC-06 
Here’s the practical approach that works:

First: Verify the Basics 
Before drafting substance, check these:

• Is the SCN issued within the time limit under Section 73 or 74? If it’s time-barred, raise it as a preliminary objection.
• Is it issued by an officer of proper jurisdiction? The proper officer must have jurisdiction over the taxpayer’s registration. 
• Is the correct section invoked? If Section 74 is invoked but there’s no evidence of fraud or suppression, challenge the invocation itself.
• Are the figures correct? Cross-verify the tax amount, period, and ITC figures mentioned in the SCN with your actual returns and records.

Then: Build Your Substantive Response 

For ITC mismatch cases:

• Download GSTR-2A/2B for the relevant period and reconcile with your GSTR-3B claim
• Identify invoices where the supplier filed late show that ITC was legitimately claimed on valid invoices and the supplier has since filed
• Provide supplier-wise reconciliation with invoice copies, payment proof (bank statements), and goods/service receipt evidence
• Cite Rule 36(4) and relevant circulars on the extent of ITC claim permissible 

For output tax short payment: 

• Reconcile GSTR-1 with GSTR-3B and identify the specific mismatch 
• If it’s a timing difference (credit notes, amendments), explain with supporting documents 
• If it’s a genuine error, consider paying via DRC-03 with interest to close the matter 

For wrong ITC availment: 

• If the ITC was correctly claimed, demonstrate with invoices, contracts, and business purpose documentation
• If it was an error, voluntarily reverse via DRC-03 with interest – this shows good faith and often. avoids penalty under Section 73

For Section 74 (fraud/suppression) cases: 

• The burden of proving intent to evade is on the department 
• If you can demonstrate it was a genuine error bona fide mistake, system glitch, interpretation  difference argue for re-classification to Section 73
• Cite relevant tribunal/court decisions where Section 74 was struck down in absence of evidence of fraud

Always Include: 

•  Period-wise and invoice-wise reconciliation tables
• Copies of all supporting invoices, payment proofs, and ledger extracts
• Reference to applicable rules, circulars, and notifications 
• Any correspondence with the department during earlier stages 

The DRC-03 Route: When Voluntary Payment Makes Sense 
Not every DRC-01 needs to be contested. Sometimes, the smarter approach is to pay and close. 

When to consider DRC-03 voluntary payment: 

Important: Filing DRC-03 doesn’t necessarily mean you accept the entire demand. You can pay the undisputed part and contest the balance. Make this distinction clear in your DRC-06 reply.

Key Circulars and Legal Provisions to Cite 

Mistakes to Avoid When Responding to DRC-01 

Ignoring the notice or missing the deadline. If you don’t reply within the specified time, the officer can pass an ex-parte order under DRC-07. Once that happens, your only option is appeal expensive and time-consuming.

Filing a generic reply. “The demand is not correct and should be dropped” — this achieves nothing. Address every specific allegation with evidence and legal backing.

Not reconciling the data. The department works with data. Your reply must be data-driven too. Provide invoice-wise, period-wise reconciliations that directly address the discrepancies alleged.

Ignoring the DRC-01A stage. If you receive a DRC-01A (pre-SCN intimation), treat it seriously. Resolving it at this stage avoids the formal SCN process entirely.

Not requesting a personal hearing. Under Section 75(4), you have the right to a personal hearing before an adverse order is passed. Always request one—it gives you an additional opportunity to present your case and clarify any misunderstandings. 

Mixing up Section 73 and 74 responses. The defence strategy differs significantly. For Section 73, focus on explaining the error and showing good faith. For Section 74, the primary battle is proving there was no intent to evade.

How Al Tools Help CAS Handle DRC-01 Notices Faster 
GST notices are data-heavy. The reconciliations, the invoice matching, the period-wise breakdowns detailed, repetitive work that eats into your productive hours. Especially during peak season when you might be handling 15-20 DRC-01 notices simultaneously.

NoticeAI is built specifically for this. Upload the DRC-01 notice, and the platform: 

• Identifies the section, period, and specific allegations automatically 
• Pulls relevant provisions, circulars, and case law references 
• Generates a structured DRC-06 reply draft with all required elements 
• Tracks deadlines across all your clients’ notices in a single dashboard 
• Keeps client data confidential with built-in masking 

You still review, customize, and sign off — but the research and drafting time drops from hours to minutes.

CAs who have been using NoticeAI tell us the biggest relief isn’t just the time saved — it’s the confidence that nothing falls through the cracks when you’re juggling multiple notices across multiple clients

Start your free trial 

Frequently Asked Questions 

What is the difference between DRC-01 and DRC-01A? 
DRC-01A is a pre-SCN intimation – essentially an informal communication from the department pointing out discrepancies and giving you a chance to pay or explain before a formal notice is issued. 
DRC-01 is the formal show cause notice under Section 73 or 74. If you resolve the issue at the DRC- 01A stage (by paying via DRC-03 or providing an explanation), no DRC-01 is issued.

How much time do I get to reply to a DRC-01 notice? 
The SCN itself specifies the time for reply – typically 30 days. You can request an extension by writing to the proper officer. It’s important to reply within time, or at least seek an extension before the deadline, to avoid an ex-parte order.

Can penalty be avoided in a DRC-01 case under Section 73? 
Yes. Under Section 73, if the taxpayer pays the tax along with interest within 30 days of issuance of the SCN, no penalty is levied and the proceedings are concluded. This is a significant incentive for cases where the demand is genuine and the amount is not disputed.

What if I partially agree with the DRC-01 demand? 
You can pay the undisputed portion via DRC-03 and file your reply in DRC-06 contesting the remaining amount. Make it clear in your reply which part you are accepting and which part you are disputing, with reasons and evidence for the disputed portion.

Is personal hearing mandatory before the officer passes an order? 
Under Section 75(4), an opportunity of personal hearing must be given where a request is received in writing, or where an adverse decision is contemplated. Always request a hearing in your DRC-06 reply it’s your right and provides an additional opportunity to present your case.

Disclaimer: This article is for general informational purposes only and should not be treated as professional or legal advice. Readers are advised to verify the applicable provisions independently and consult a qualified professional for specific cases. NABS AI Solutions Pvt. Ltd. is not responsible for any decisions made based on this content.

Related reads:
Complete Guide to Replying to GST Notices in India 
How AI Software Simplifies Tax Notice Responses for CAs