By CA. Gaurav Gupta
The rate of interest on reversal of Input Tax Credit (“ITC”) is one of the controversial topics today. Rate of interest is provided under Section 50 of the CGST Act, 2017 which provides as under:
“Interest on delayed payment of tax .
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- (1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent, as may be notified by the Government on the recommendations of the Council:
Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.
(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.
(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent, as may be notified by the Government on the recommendations of the Council.
As required, the rates were notified vide Notification No. 13/2017-Central Tax dated 28.6.2017 prescribed 18% as rate of interest for Section 50(1) and 24% under Section 50(3). Accordingly, we find that a higher rate of interest is applicable in case of Section 50(3) [covering cases of non matching of ITC], than in case of Section 50(1) [non payment of tax]. This clearly shows that the legislature has placed wrongful availment of ITC as a higher offense than non payment of tax. However, the section was particular in placing limited action of the taxpayer in respect of ITC under Section 50(3). Section 50(3) provides for levy of interest only in two cases:
Case 1: When a taxable person makes an undue or excess claim of input tax credit under sub-section (10) of section 42: or
Case 2: When a taxable person makes an undue or excess reduction in output tax liability under sub-section (10) of section 43.
Section 42(10) of the CGST Act, 2017 provides as under:
“(10) The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes place and such recipient shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.”
Thus, the contravention of sub section (10) of Section 42 of the CGST Act, 2017, attracts interest at the rate of 24%. However, Section 42(10) is an extreme condition where despite being given an opportunity, the taxable person fails to reverse the ineligible ITC and pays the same. Section 42(10) is applicable only when Section 42(7) is contravened by the taxable person. Section 42(7) allows the taxable person to reduce the amount added to his output liability under Section 42(5) if the supplier (from whom, he has purchased goods /services on which ITC is claimed) pays the amount claimed by him as his output tax. Section 42(5) requires that the amount in respect of which any discrepancy is communicated under Section 42(3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in such manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated. Thus, there is a mechanism required for communication of discrepancy to the recipient and then, the provision requires him to reverse such unavailable ITC (which shall be added to his output liability). The discrepancy is the input tax credit claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns. Thus, to arrive at the discrepancy, matching is required to be done under Section 42(10).
Further, the as per Rule 71, any discrepancy in the claim of input tax credit in respect of any tax period, specified in sub-section (3) of section 42 and the details of output tax liable to be added under sub-section (5) of the said section on account of continuation of such discrepancy, shall be made available to the recipient making such claim electronically in FORM GST MIS-1 and to the supplier electronically in FORM GST MIS-2 through the common portal on or before the last date of the month in which the matching has been carried out. Thus, such discrepancy is communicated to both recipient and supplier. And only when such discrepancy is not rectified, an amount to the extent of discrepancy shall be added to the output tax liability of the recipient in his return to be furnished in FORM GSTR-3 for the month succeeding the month in which the discrepancy is made available.
The discrepancy is worked out by matching of claim of input tax credits provided under Rule 69 of CGST Rules, 2017. As per the Rule, the following details relating to the claim of input tax credit on inward supplies including imports, provisionally allowed under section 41, shall be matched under section 42 after the due date for furnishing the return in FORM GSTR-3-
- Goods and Services Tax Identification Number of the supplier;
- Goods and Services Tax Identification Number of the recipient;
- invoice or debit note number;
- invoice or debit note date; and(e)tax amount:
It is specifically provided that where the time limit for furnishing FORM GSTR-1specified under section 37 and FORM GSTR-2 specified under section 38 has been extended, the date of matching relating to claim of input tax credit shall also be extended accordingly.
Thus, the entire levy of higher interest is provided in case as under:
Thus, the entire process in terms of filing of GSTR 2 and 3 and intimation under forms MIS -1 and MIS-2 is required to evoke provisions of Section 50(3) and in absence of such mechanism, the higher interest is not applicable. Moreso, the provision specifically provides that where the time limit for furnishing FORM GSTR-1 specified under section 37 and FORM GSTR-2 specified under section 38 has been extended, the date of matching relating to claim of input tax credit shall also be extended accordingly. The higher rate was prescribed only in cases of chronic defaulters who even after intimation are not ready to pay the tax so claimed wrongfully. It was not the intent to punish every tax payer with such high rate in normal cases and without matching facility being made available to recepient. At present, date of filing of GSTR -2 has been extended and thus, matching is also extended till such time. In such a scenario, Section higher interest under Section 50(3) cannot be imposed on the taxpayer who has availed an Input Tax Credit which is liable to be reversed by him. The same should be equated with tax not properly paid by such taxpayer and should be exigible to interest at the rate of 18%.
Similar provisions are provided in respect of Credit notes under Section 43(10) of the CGST Act in case of Credit notes issued by supplier requiring reduction of ITC by the recipient.
In conclusion, ITC reversal is not exigible to interest at the rate of 24%. It is further suggested that interest should be levied from the due date of month in which such ITC is utilised for payment of output tax and not availment of such ITC as only short payment of tax is at present exigible to interest.
