One of the fundamental features of GST is the seamless flow of input tax credit (ITC) across the chain (from the origin of the goods/services till its consumer). This seamless flow was to be monitored by way of the matching concept under GST whereby fictitious/duplicate claims were to be identified and reversed. Thus, ITC claimed by the person would be matched with the details specified by the supplier in his return and in case of any discrepancy the same would be communicated to the supplier and the recipient. Further in case of wrong claims, ITC needs to be reversed along with interest.
Under earlier laws, for example under the Service Tax Law, there is a clear provision regarding the rate of interest i.e. service tax collected but not paid @ 24 % p.a. and in any other case it will be 18% p.a. However, the provisions relating to determination of the rate of interest under GST are not on similar lines, but are more connected with the matching concept for ITC. Under GST also there are only 2 rates of interest i.e. 18% and 24%. Though, the higher rate of interest is applicable only in case of contravention of a certain provision of section 42 & 43 of the Act. In this article we have attempted to look at the rate of interest applicable to various scenarios in case of excess claim of ITC.
Relevant provisions of the Act: Following are the important provisions that need to be understood before analysing the rate of interest.
It can thus be seen that the interest of 24% will be applicable only in one case i.e. where
a. The discrepancy is communicated after matching the returns of supplier and recipient,
b. Such credit is added back to the output tax liability of such recipient
c. Such recipient again takes back such credit before the supplier declares it in his valid return within the prescribed time limit as mentioned above.
On or before the due date of filing the September month return following the end of the financial year or date of filing annual return, whichever is earlier
To understand the above provisions more clearly, we can look into the following cases:
X Ltd, a manufacturing company has taken credit relating to food and beverages which is ineligible as per section 17(5) of the Act, However, such credit is matched with the supplier return. Now, X ltd wants to reverse credit along with interest. What is the rate of interest applicable to X Ltd?
Answer: In this case, X Ltd has claimed ineligible ITC which is not covered by section 42(10) or 43(10) of the Act. The rate of interest applicable shall be 18% as specified in section 50(1) of the Act.
A company claimed ITC relating to an invoice on which consideration was unpaid for more than 180 days. Now, the company wants to reverse ITC along with interest. What is the rate of interest applicable?
Answer: Similar to Case-1, here also there is no mismatch and section 42 / 43 shall not be applicable. Therefore, the rate of interest specified in section 50(1) of the Act i.e.18% shall be applicable.
A person named Rahul, claimed ITC of Rs. 2,500 in his return and the corresponding supplier disclosed GST liability in this regard of only Rs. 2,000 in his return. Here arose a discrepancy and the same is known to Rahul on verification of Form GSTR-2A. Rahul wants to reverse the excess claimed along with interest. What is the interest rate applicable?
Answer: In this case, there is mis-match between details furnished by recipient and supplier.
Hence, interest applicable as per Section 50(1) shall be applicable i.e. 18%.
ABC Ltd. ordered some goods which are received on instalment basis. ABC Ltd claimed ITC at the time of receipt of first lot. ABC Ltd has to reverse such credit along with interest. What is the rate of interest applicable?
Answer: In this scenario, ABC Ltd can claim ITC on receipt of last lot as provided in section 16 of the Act. Thus, ABC Ltd has made an early availment of ITC. Therefore, interest needs to be paid at the rate of 18% as per section 50(1) of the Act.
Hira Ltd. has claimed a credit of Rs. 2,000 in the month of Aug`17 but the corresponding supplier has not provided any details of such supply in his Form GSTR-1. Now, a discrepancy arose and the same is communicated by officer on comparison of Form GSTR 3B and Form GSTR 2A of Hira Ltd. along with Form GSTR-1 of supplier, to both Hira Ltd. and the supplier in the month of Oct`17. Supplier failed to rectify such discrepancy and Hira Ltd. has to reverse such credit in Oct ‘17.
What is the rate of interest applicable at the time of reversal? Further Hira ltd claimed the ITC which is reversed earlier in the month of Dec`17 under the belief that the supplier has declared in his return, in such case what is the rate of interest applicable at second time reversal?
Answer: As per section 50(1), this is treated as delay in tax payment to government and rate of interest applicable is 18% which would be paid by Hira Ltd. during Oct ‘17. Subsequently when Hira Ltd. takes back the credit in Dec ’17, it will have to pay interest @ 24% from Dec ’17 till the date of reversal of such credit/inclusion of such supply in the suppliers’ valid return. The following points shall also be noted in this regard.
Refer to below flowchart to better understand the above.
From the above examples, it can be noted that the interest rate of 24% would not be applicable in all cases and would be restricted only to those cases where the unmatched credit is again availed back by the recipient, before the supplier has shown such supply in his valid return within the prescribed time limit.
As of now the concept of matching has been deferred and if the matching concept is introduced in future, it is not certain whether it would be introduced in the portal retrospectively, and if not, whether the officers would manually ensure adherence of the matching concept.
Even though, matching concept is not in place in principle, but since the provision still exists in the law, the rate of 24% can be applicable in cases where say, the department communicates discrepancy by way of a notice and the assessee reverses initially the amount stated by the department. Here 18% interest would be payable. Subsequently, if the assessee re-avails such credit and if it happens that the supplier has not declared such supply in his valid return within the prescribed time, then 24% interest would be applicable. Hence care shall be taken by the assessee when reversal of credits is done, since re-availing such credit would be liable to 24% interest if not eligible.
Hence at present, it seems like payment of interest @ 24% is remote. Further, it is not clear what does communication of discrepancy mean? Whether it would mean that Form GSTR-2A appearing in the assessee’s return dashboard is a communication, or a notice issued by department communicating the discrepancies in the ITC availed by comparing Form GSTR-2A and Form GSTR-3B is a communication?