Recently, many taxpayers have received notices from the GST authorities demanding interest on subsequent reversal of input tax credit (‘ITC’) wrongly availed by them. The said demands are generally pertaining to initial years of GST wherein the lawmakers and taxpayers, both were evolving to adopt the newly introduced statute. Due to the demands pertaining to such financial years, the interest exposure has increased multi-folds on account of huge differential time gap.

Accordingly, it is highly critical to discuss the said matter in order to safeguard the taxpayers from unnecessary interest exposure and guide as to how the same can be responded to.

text interest rate on the white paper card, on lens background

Given above, below are certain grounds basis which the said issue can be analysed and tackled with.

  • Interest is compensatory in nature and thus should not be levied in case ITC is not utilised for payment of output liability
  • It is a well settled principle that interest is compensatory in nature and can be levied only if there is a loss to the revenue. Further, in case the subsequently reversed ITC has not been utilised by the taxpayer for payment of output tax and the same merely reflects in the electronic credit ledger, then it can be held that the taxes due on the taxpayer are duly paid in full and no revenue loss per se has been incurred by the exchequer.
  • The Hon’ble Supreme Court in Pratibha Processors Versus Union of India [1996 (10) TMI 88 – SUPREME COURT OF INDIA] held that interest is compensatory in character and is imposed when tax is due and payable and the same has been withheld. The taxpayer does not withhold the payment of tax by subsequently reversing the availed ITC. Hence, the question of payment of interest on account of subsequent reversal of availed ITC does not arise.

Relevant extract of the above judgement is re-produced below:

“13. In fiscal Statutes, the import of the words — “tax”, “interest“, “penalty”, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforce by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty — which is penal in character.”

Similar judgements were also been pronounced in the following cases:

Megha Engineering & Infrastructures Ltd. vs. The Commissioner of Central Tax [TS-248-HC-2019 (Tel and AP)]

“31. Therefore, it is clear that the liability to pay interest under Section 50 (1) is self-imposed and also automatic, without any determination by any one. Hence, the stand taken by the department that the liability is compensatory in nature, appears to be correct.”

♦ Commissioner of Central Excise & Service Tax, Bangalore vs. Bill forge Pvt. Ltd. [2011-TIOL-799-HC-KAR-CX]

“21. Interest is compensatory in character, and is imposed on an assessee, who has withheld payment of any tax, as and when it is due and payable. The levy of interest is on the actual amount which is withheld and the extent of delay in paying tax on the due date. If there is no liability to pay tax, there is no liability to pay interest. Section 11 AB of the Act is attracted only on delayed payment of duty i.e., where only duty of exercise has not been levied or paid or has been short levied or short paid or erroneously refunded, the person liable to pay duty, shall in addition to the duty is payable from the date of book entry, showing entitlement of Cenvat credit. Interest cannot be claimed from the date of wrong availment of CENVAT credit and that the interest would be payable from the date CENVAT credit is taken or utilized wrongly.”

♦ Ganesh Dass Sreeram, Etc. A vs. Income Tax Officer, ‘A’ Ward, Shillong And Others Etc [1988 169 ITR 221 (SC)]

“As has been observed earlier, when the amount of tax due had already been paid in the shape of advance tax, the question of payment of compensation by way of interest does not arise and the Income-tax Officer was not, therefore, justified in charging interest. The assessee is, therefore, entitled to get refund of the amount paid by way of interest for the said assessment year. The Income-tax Officer is directed to refund to the assessee the amount paid on account of interest.”

As per the aforesaid judicial pronouncements, it can be construed that interest being compensatory in nature is a well settled principle and the same can be levied only if there is a loss to the revenue.

Further, no loss of revenue occurs to the exchequer due to availment of ITC by the taxpayer in case the same was not utilised to discharge any output liability and was reversed by the taxpayer on a suo-moto basis.

♦ Notwithstanding above, even if it is assumed that the taxpayer has incorrectly availed ITC, it is to be noted that mere wrong availment of ITC does not result in non-payment or short payment of tax. However, utilization of such availed ITC results in short payment of tax and hence interest is leviable on such wrongly utilised ITC.

♦ In the light of above-mentioned point, the fact that credit was merely availed but not utilized, can be ascertained and substantiated basis the amount of closing balance of ITC available after payment of tax on a monthly basis. A copy of reconciliation of closing balances of Electronic Credit Ledger vis-à-vis the subsequently reversed ITC by the taxpayer can be produced to substantiate that the closing balance of electronic credit ledger at the end of each tax period is higher than the ITC reversed by the taxpayer on a cumulative month on month basis.

♦ Accordingly, it can be construed that the taxpayer has not utilised the ITC subsequently reversed for discharge of tax liability as closing balance of credit ledger is always higher than the cumulative amount of ITC reversed, thereby concluding that the said ITC is never utilised.

♦ The aforesaid view is also upheld by Hon’ble Patna High Court in the in the case of M/s Commercial Steel Engineering Corporation vs. The State Of Bihar, The Joint Commissioner Of State Taxes Patliputra Circle, Patna, The Assistant Commissioner Of State Taxes Patliputra Circle, Patna [2019 (7) TMI 1452 – PATNA HIGH COURT] wherein it was held that transitioning of credit from VAT into GST does not amount to availment of credit and reversal of the same without utilization does not attract interest and penalty.

Relevant para of the judgement has been reproduced below for reference:

“The legislative intent present in these provisions is eloquent and I am in no confusion to hold that be it a charge of wrong availment or utilization, each is a positive act and it is only when such act is substantiated that it makes the dealer concerned, liable for recovery of such amount of tax as availed from the input tax credit or utilized by him but in each of the two circumstances, the tax available at the credit of the dealer concerned must have been brought into use by him thus, reducing the credit balance. A plain reading of Section 73 would confirm that it is only on such availment or utilization of credit to reduce tax liability, which is recoverable under section 73(1) read alongside the other provisions present thereunder. In fact the position is made even more clear by reading the said provision alongside sub-section (5), (7), (8), (9) to (11).”  

♦ Further, in case of M/s F1 Auto Components P Ltd Vs The State Tax Officer – Madras High Court [TS-339-HC(MAD)-2021-GST], the HC relied on its own decision in the case of Maansarovar Motors Private Limited and set aside the levy of interest in case of reversal made through utilization of ITC. Revenue also agreed on this position in light of the aforesaid decision.

♦ The Hon’ble Madras HC in the case of Maansarovar Motors Private Limited [TS-945-HC-2020(MAD)-NT] set aside the levy of interest and issued a direction to the appropriate authority to compute the interest liability for belated remittances of cash.

Relevant extract of the said ruling is re-produced below:

30. In W.P.No.12492 of 2020, learned counsel for the petitioner states that the interest liability relating to belated payment of tax both by cash and reversal of ITC has been coercively recovered. In light of my decision as aforesaid, a direction is issued to the appropriate authority to compute the interest liability for belated remittances of cash and refund the balance of the amount collected from the petitioner within a period of four weeks from date of uploading of this order.

♦ Further, in the case of F1 Auto Components (‘petitioner’), with respect of ITC reversal made through payment in cash, the petitioner had relied on Section 42 of the CGST Act, which provides for a notice to be issued in case of mismatch of details in the returns of the supplier and the recipient.

♦ In this regard, the HC observed that Section 42 was not relevant in the present case, as the petitioner had, on receipt of intimation of the wrongful claim of ITC, accepted the error and reversed the ITC. It further stated that provisions of Section 42 can be invoked only where the mismatch is on account of an error in the database of revenue or a mistake occasioned at the end of the revenue. It observed that the question of invoking Section 42 does not arise in a situation where the claim of ITC is erroneous. Accordingly, the court ruled that as far as the levy of interest on belated cash remittance is concerned, it is compensatory and mandatory and the levy was upheld to such extent only.

Relevant extract of the said ruling is re-produced below:

6. In this case, the provisions of Section 42 are not relevant, insofar as the impugned order itself records that the assessee has, on receipt of intimation of the wrongful claim of input tax credit (ITC), accepted the error in claim and has reversed ITC, both attributable to CGST and SGST through voluntary payment of tax in Form GST DRC-03.   

7. The provisions of Section 42 can only be invoked in a situation where the mismatch is on account of the error in the database of the revenue or a mistake that has been occasioned at the end of the revenue. In a case where the claim of ITC by an assessee is erroneous, as in this case, then the question of Section 42 does not arise at all, since it is not the case of mismatch, one of wrongful claim of ITC.

8. As far as the levy of interest on belated cash remittance is concerned, it is compensatory and mandatory and the levy is upheld to this extent. “

♦ On con-joint reading of the above judicial pronouncements, it can be evidently construed that interest is compensatory in nature and the same shall be leviable on reversal of ITC in case the said credit has been utilised for discharge of output liability and a loss has been incurred by the Revenue.

♦ In case, the taxpayer has suo-moto reversed the credit and has not even utilised the same for discharge of any output tax liability, then, levying of interest on such reversal of ITC is not compensatory in nature as no loss has been incurred by the Revenue in the said case. Consequently, the same is not aligned with the lawmaker’s intention.

♦ Case doesn’t fall under the ambit of Section 50 of the CGST Act, 2017

At the outset, for ease of reference, the provisions stated under Section 50 (i.e. charging Section for interest) of CGST Act, 2017 are re-produced below:

Section 50 

“(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].( Inserted vide FINANCE (NO. 2) ACT, 2019) 

(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. 

♦ Case is outside the purview of Sub-section (1) of Section 50:

Amendment to Section 50 of the CGST Act, 2017

Without prejudice to above, it is to be noted that the Government vide Section 100 of the Finance Act, 2019 inserted the below proviso in Section 50 of the CGST Act, 2017.

“100. In section 50 of the Central Goods and Services Tax Act, in sub-section (1), the following proviso shall be inserted, namely:– 

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..”

Further, Notification No. 63/2020-Central Tax dated 25 August 2020 had been issued to notify 01 September 2020 as the date on which the above proviso to Section 50(1) would be applicable.

In this regard, it is subservient to note that the Government had subsequently issued a Press Release dated 26 August 2020 assuring that no recoveries shall be made for the past period as well by the Central and State tax administration in accordance with the decision taken in the 39th Meeting of GST Council. Thereafter, the CBIC has issued GST Policy Wing Circular explaining administrative instructions for recovery of interest on net cash liability w.e.f. July 1, 2017.

On perusal of above, it is evident that the intent of policymakers is clearly on levying interest on net liability of GST i.e. the tax discharged in cash. Further, it can be construed from the said directions that levy of interest on reversal of ITC unless compensatory in nature is not in line with the spirit of law which evidently focuses on levying interest solely as a compensative measure.

Thus, levy of interest on the said ITC reversal is not in line with the provisions of Section 50(1) of CGST Act, 2017 as the same focusses upon levy of interest on net liability i.e. tax discharged in cash.

♦ Case is outside the purview of Sub-section (3) of Section 50:

Further, it is to be noted that interest is leviable under Section 50(3) of the ibid Act, where the taxable person makes an undue or excess claim of input tax credit under Section 42(10) of the said Act or undue or excess reduction in output tax liability under 43(10) of the said Act. However, the manner prescribed under Section 42 of the said Act is not in force.

Therefore, interest under Section 50(3) of the CGST Act, 2017 is not leviable since the above provision does not cover the cases of availment of ITC wherein the same is subsequently reversed.

The relevant provisions i.e. Section 42(10) and 43(10) of the CGST Act, 2017 has been reproduced for reference:

Section 42 (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) 

“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.”

Moreover, in absence of any specific provision under GST levying interest on subsequent reversal of ITC, interest on such account cannot be levied. 

Moreover, it is to be noted that the Government vide Press Release dated 17 September 2021 have issued the recommendations of the 45th GST Council Meeting held on 17 September 2021 in Lucknow wherein various matters with respect to GST rates, law and procedures have been deliberated.

In this regard, vide the said press release, kindly note that additional clarification has been issued on the chargeability of interest under Section 50(3) of the CGST Act, 2017. Relevant extract is as below:

III. Recommendations relating to GST law and procedure

….

2. In the spirit of earlier Council decision that interest is to be charged only in respect of net cash liability, section 50 (3) of the CGST Act to be amended retrospectively, w.e.f. 01.07.2017, to provide that interest is to be paid by a taxpayer on “ineligible ITC availed and utilized” and not on “ineligible ITC availed”. It has also been decided that interest in such cases should be charged on ineligible ITC availed and utilized at 18% w.e.f. 01.07.2017.

….”

Given above, it is to be noted that the GST Council has recommended that interest under Section 50(3) shall not be levied solely on availment of ineligible ITC and the same shall trigger in case of ‘ineligible ITC availed and utilised’. Accordingly, the yardstick recommended by the Council for levy of interest has been set upon utilisation of ineligible ITC and mere availment of the same is not a sufficient ground to charge interest.

Moreover, the said recommendation is proposed to be amended retrospectively w.e.f. 1 July 2017 in order to align with the spirit of earlier Council decision to charge interest only in respect of net cash liability and the same is expected to be notified shortly.

Having said above, it can be concluded that the levy of interest on subsequent reversal of ITC by the authorities is highly litigative and may not be sustainable due to the below grounds:

  • Interest is compensatory in nature and should be levied only in case of loss of revenue to the exchequer
  • The said case doesn’t fulfil the conditions listed under Section 50
  • The said levy is not in line with the lawmaker’s intention and the same is evident basis the recently issued press release on the subject matter

However, the said issue is evolving and it would be interesting to see how the authorities take up the said matter.

Author Bio

Qualification: CA in Practice
Company: Hari Ram Agarwala & Associates
Location: New Delhi, Delhi, India
Member Since: 22 Oct 2021 | Total Posts: 2
CA Kartik Bansal is a qualified Chartered Accountant with multiple All India Rank(s) at both CA-IPCC and CA-Final level. He graduated from Hansraj College, Delhi University and has worked with Ernst & Young for 5 years in the indirect taxation domain. He is a practicing Chartered Accountant s View Full Profile

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