Calculation of Interest on 180-Days Reversals under GST

In terms of Section 50(3) of the CGST Act, 2017, where input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised.

In many situations, taxpayers and even professionals may find it practically difficult to compute interest on ITC wrongly availed and utilized, since for the purposes of GST law, availment is different from utilization and both availment and utilization should cumulatively be satisfied to trigger interest levy. Availment of ITC represents the ITC availed as per section 16, credited to Electronic Credit Ledger of a registered person and utilisation represents the set off of the ITC availed to discharge payment on output tax liability. The situation becomes even more complex, in the scenario of 180-days reversals requiring retrospective tracking of availment and utilization to be made to comply with the law.

This article is an attempt to numerically illustrate and clarify the same.

In terms of 2^nd proviso to section 16(2)(d) of the CGST Act, 2017 “where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.”

Rule 37(1) has been notified on the strength of 2^nd proviso to section 16(2)(d).

A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply [whether wholly or partly] along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay [or reverse] an amount equal to the input tax credit availed in respect of such supply  [proportionate to the amount not paid to the supplier] along with interest payable thereon under section 50 while furnishing the return in FORM GSTR -3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice

Where the recipient (of goods or services or both) has failed to pay the supplier within 180 days from date of invoice, input tax credit availed in proportion to such unpaid amount of the invoice shall be reversed by adding to recipient’s output tax liability along with interest as may be applicable.

Section 50(3) has been substituted with retrospective effect from 1^st July 2017 by Section 111 of Finance Act 2022 with effect from 05^th July 2022 vide Notification No. 09/2022 – Central Tax dated 5^th July 2022.

In terms of Section 50(3) where the input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised.

Rule 88B has been notified on the strength of Section 50(3) by Notification No. 14/2022 – Central Tax dated 5^th July 2022 with retrospective effect from 1^st July 2017.

Rule 88B(3) prescribes the method for calculating interest on the ITC wrongly availed and utilized. Interest is to be calculated for the period starting from the date of utilisation of such wrongly availed ITC till the date of reversal of such ITC or payment of tax in respect of such amount.

There is no concept of interest on interest under the GST law.

Explanation to Rule 88B(3) clarifies that Input tax credit wrongly availed shall be construed to have been utilized when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed and the extent of utilization of such input tax credit shall be the amount by which the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed.

Balance in the electronic credit ledger will fall below the amount of ITC wrongly availed only when the same is utilized for discharge of any output tax liability.

If payment has not been made to the supplier within a period of 180 days from the date of invoice of the supplier, ITC availed thereon upon the basis of the said invoice is deemed to be ITC wrongly availed warranting reversal.

Explanation 2 to Rule 88B clarifies that the date of utilisation of such input tax credit shall be taken to be the date, on which the return is due to be furnished under section 39 or the actual date of filing of the said return, whichever is earlier, if the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, on account of payment of tax through the said return.

In the absence of any prescribed mechanisms under the GST law, FIFO (First in First Out) method might generally be deemed to be appropriate. The method is more specifically relevant since, any ad hoc computations would lead to wrong calculation of interest amounts. Moreover, invoice wise ITC utilization tracking is mandatorily required for accurate calculations.

Let us consider a numerical illustration to understand the same:-

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In GSTR -3B of April -23, ITC of Rs. 24 lakhs is availed against 3 eligible invoices i.e., Invoice -1, 2, 3 subject to compliance with other conditions. Output tax liability for the month is Rs. 20 lakhs. Since 180-day reversals are to be tracked on an invoice-to-invoice basis, mapping of ITC utilization also takes place at an invoice level basis. ITC of Rs. 17 lakhs attributable to Invoice -1 and Invoice -2 (Rs.5 lakhs and Rs. 12 lakhs respectively) is availed and utilized in the same month for set off against output tax liability. Out of the total ITC of Rs. 7 lakhs availed against Invoice -3, Rs. 3 lakh is utilized in the same month (April-23). Balance unutilized ITC of Rs. 4 lakhs attributable to Invoice -3, is availed in April -23 but deferred to subsequent month for utilization since the output tax liability of April-23 has already been discharged completely. There is no cash payment for the month. Thus, the closing balance of electronic credit ledger on the GST portal after filing of GSTR -3B of April -23 is Rs. 4 lakhs.

FIFO method of ITC utilization is applied implying that ITC is utilized in the consecutive order of supplier invoice dates. In case, if ITC on any invoice is deferred due to non-reflection in GSTR -2B, the invoice would be considered on priority for utilization over the invoices of the month, in which it is reflected in GSTR -2B, since it relates to a prior tax period.  The ERP module of the taxpayer must have corresponding features to track the same.

In GSTR -3B of May -23, ITC of Rs. 20 lakhs is availed against 2 eligible invoices i.e., Invoice -4 & 5 subject to compliance with other conditions. Output tax liability for the month is Rs. 18 lakhs. Opening balance of electronic credit ledger for the month is Rs. 4 lakhs, representing the ITC deferred on Invoice -3 from the previous month. The same is first utilized for set off against output tax liability. ITC of Rs. 4 lakhs attributable to Invoice-4 is availed and utilized in the same month. Out of the total ITC of Rs. 16 lakhs availed against Invoice -5, Rs. 10 lakh is utilized in the same month (May-23). Balance unutilized ITC of Rs. 6 lakhs attributable to Invoice-5, is availed in May -23 but deferred to subsequent month for utilization since the output tax liability of May-23 has already been discharged completely. There is no cash payment for the month. Thus, the closing balance of electronic credit ledger on the GST portal after filing of GSTR -3B of May -23 is Rs. 6 lakhs.

In GSTR -3B of June-23, ITC of Rs. 8 lakh is availed against 1 eligible invoice i.e., Invoice -6 subject to compliance with other conditions. Output tax liability for the month is Rs. 16 lakhs. Opening balance of electronic credit ledger for the month is Rs. 6 lakhs, representing the ITC deferred on Invoice -5  from the previous month. The same is first utilized for set off against output tax liability. ITC of Rs. 8 lakhs attributable to Invoice-6 is availed and utilized in the same month. There is a cash payment of Rs. 2 lakhs for the month. Thus, the closing balance of electronic credit ledger on the GST portal after filing of GSTR -3B of June -23 is Nil.

Assume that there has been a default in payment on Invoice -3 and Invoice -5 to the supplier within a period of 180 days from invoice date. For the purposes of highlighting the intricacy of the conceptual calculations, it is assumed that there has been a complete default in payment against Invoice -3 and a partial default in payment against Invoice -5 within 180 days.

The amount of proportionate ITC to be reversed thereon is highlighted hereunder:-

In GSTR -3B of Oct -23 an amount of Rs. 7 lakhs is to be reversed representing the ITC availed and utilized on Invoice -3. Of the total ITC of Rs. 7 lakhs availed against Invoice -3, Rs. 3 lakhs is utilized in GSTR -3B of Apr-23 and Rs. 4 lakhs is utilized in GSTR -3B of May-23 as highlighted above. Thus, the ITC utilization ratio against Invoice -3 is 3 : 4 (3 parts of the total availment utilized in April-23 and 4 parts of the total availment utilized in May-23).

The date of utilisation of ITC shall be taken to be the due date of filing GSTR -3B or the actual date of filing of GSTR -3B, whichever is earlier. In the instant case, GSTR -3B for the month of Apr-23 is filed on 20-05-2023 which is also the due date for filing. Accordingly, the same is considered as the date of utilization. GSTR -3B for May-23 is filed on 18-06-2023 and due date for the same is 20-06-2023. Date of utilization is earlier of the two, i.e., 18-06-2023.

The corresponding interest computation for the same is as under:-

In GSTR -3B of Nov -23 an amount of Rs. 6 lakhs is to be reversed representing the proportionate ITC availed and utilized on Invoice -5. Of the total ITC of Rs. 16 lakhs availed against Invoice -5, proportionate ITC of Rs. 6 lakhs to the tune of non-payment is liable for reversal as highlighted above. It can be observed that ITC utilization against Invoice -5 has occurred over 2 tax periods i.e., May -23 and June -23. Of the total ITC of Rs. 16 lakhs availed against Invoice -5,      Rs. 10 lakhs is utilized in GSTR -3B of May-23 and Rs. 6 lakhs is utilized in GSTR -3B of June-23 as highlighted above. Thus, the ITC utilization ratio against Invoice -5 is 10 : 6 or 5 : 3 (5 parts of the total availment utilized in May-23 and 3 parts of the total availment utilized in June-23). The total ITC to be reversed of Rs. 6 lakhs is apportioned in the ratio of utilization i.e., 5 : 3.

The date of utilisation of ITC shall be taken to be the due date of filing GSTR -3B or the actual date of filing of GSTR -3B, whichever is earlier. GSTR -3B for May-23 is filed on 18-06-2023 and due date for the same is 20-06-2023. Date of utilization is earlier of the two, i.e., 18-06-2023. GSTR -3B for June-23 is filed on 25-07-2023 while due date for the same is 20-07-2023. Date of utilization is earlier of the two, i.e., 20-07-2023.

The corresponding interest computation for the same is as under:-

It is to be noted that, tracking of utilization date is required only for the purpose of computation of interest under section 50(3) and not for the purpose of ITC reversal contemplated in Rule 37.

Rule 37 read with 2^nd proviso to section 16(2)(d) requires reversal of input tax credit availed in proportion to unpaid amount within 180 days from date of invoice and not input tax credit utilized.

On payment of the value of the invoice, amount of credit reversed may be reclaimed without any time limit as per Rule 37(4).

The aforementioned method of computation of ITC reversal and interest represent the ideal manner in compliance with law. But however, it may not be practically possible for many taxpayers to have such accurate details for tracking utilization. In the absence of sufficient records, the department may contend payment of interest from the date of availment. So it is advisable in the interest of taxpayers, to maintain appropriate records for claiming the benefit as provided by law.