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Interest on reversal of wrongful ITC

INTEREST CAN BE LEVIED IF ITC WRONGLY AVAILED BUT NOT UTILIZED?

In this article we have tried to analyse the fact that Sec 50(3) of CGST Act will not be applicable on wrongful claim of ITC and therefore no Interest is applicable if such wrongful ITC is not utilised against any tax liability.  

To start with we need to understand the provision of Sec 50 of CGST Act-

 Section 50:- Interest on delayed payment of tax.—

  1. Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, 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.

 

Section 42(10):- Matching, reversal and reclaim of input tax credit.—

 (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.

Section 43(10):- Matching, reversal and reclaim of reduction in output tax liability.—

The amount reduced from output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the supplier in his return for the month in which such contravention takes place and such supplier shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.

 

Further Section 42 talks about the details of Inward supply furnished in GSTR 2 be matched with the corresponding details of outward supply furnished in GSTR 1.  In case of mismatch the discrepancies shall be communicated to recipient and Supplier in MIS 1 and MIS 2 (refer Rule 70 to 72 of CGST Rules 2017). Non availability of entire mechanism as prescribed above can be considered as that section 42/43 is not yet operational.

 

Recent judgment of Madras High Court in the case of M/S F1 Components Private Ltd V/S The State Tax Officer, Chennai [W.P No. 6631 of 2021 And WMP No. 7188 of 2021, Dated 09/07/2021.

The High Court referred to the decision of M/S Maansarover Motors Private Ltd Dated 29/09/2020 wherein the Court set aside the orders levying interest on ITC as applied on delayed payment in line with GST Council Recommendation of levying interest on Net Cash Liability only w.e.f July 1, 2017 and it was held that this proviso to Section 50 of the CGST Act is retrospective.

Analyzed the provisions of Section 42 of the CGST Act and noted that, the same is not applicable as the Petitioner has accepted the error in claim of ITC by the Respondent and has accordingly reversed ITC through Voluntary Payment of Tax in Form GST DRC – 03

 

Author View

As per Section 42(10) & Section 43(10) both talks about Matching Concept with Section 38 i.e GSTR 2 and Section 39 i.e GSTR 3 both the returns has been suspended by the government. In GSTR 2 recipient were able to accept/reject/modify/ add the invoices or Debit note

Instead of GSTR 2 Government has provided GSTR 2A which has been challenged in front of multiple high courts as there is no corresponding provision in GST Act which gives the power to Rule 36(4). Further new provision inserted by Finance Act 2021 i.e. Section 16(2)(aa) has not been notified till date which can be termed as a legal backing to Rule 36(4)

Further instead of GSTR 3 government introduced GSTR 3B which after many litigations which were filed before many Authorities and High Courts which was now amended to be a return of Section 39.

Further as per the proviso to Section 50(1) which is effective from 1st July 2017 that Interest will be levied on Net Cash Liability Only. So if ITC is wrongly availed but not utilized against output tax liability then reversal will not attract any interest.

In other word we can say where the claim of ITC by an assessee is erroneous, then the question of Section 42 of the CGST Act does not arise at all, since it is not the case of mismatch, one of wrongful claim of ITC.

Now with this Madras High Court Judgment of M/S F1 Components Private Ltd V/S The State Tax Officer it was held that No Interest will be Levied on Wrongful Availment and not Utilizing ITC which is a very landmark Judgment for the Taxpayers.