The seamless flow of input tax credit (ITC) across the chain (from the origin of the goods/services till its consumer) is the backbone of GST. This is required to be monitored by way of the matching concept whereby fictitious/duplicate claims can 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.

In Pre GST Regime,under the Service Tax Law, there was 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.. 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 an attempt has been made to explain matching concept of ITC and the rate of interest applicable in different scenario for excess claim of ITC.

Interest related provisions – Section 50 of the Act read with notification 13/2017 CGST dated 28.06.2017

In terms of section 50(1) of the Act, where a person is liable to pay tax fails to pay the tax or any part within the period prescribed, interest payable at the rate of 18%.

When recipient has made an excess or undue claim of ITC as per section 42(10) of the Act, rate of interest applicable will be 24%.

Matching concept for inward supplies

The return in Form GSTR 2A is generated by the system on the basis of information received from GSTR 1 indicating outward supplies. When the supplier of the assessee files GSTR 1 in any particular month, its details are captured by GSTR 2A thus providing the details of purchases of the assessee concerned.

ITC claimed in GSTR 3B should ideally match with ITC available on all the purchases made by the recipient. A mismatch between GSTR 2A and GSTR 3B may arise due to following reasons :

(a) The supplier has not uploaded invoices for which the recipient have already claimed input tax credit by submitting the tax summary in his GSTR 3B return.

(b) ITC claimed by the recipient pertains to imported goods and /or services.

(c ) ITC claimed by the recipient is for tax paid under Reverse Charge Mechanism.

(d) Duplication of claim of ITC by the recipient.

The recipient need to reconcile GST returns data and ensure that ITC claimed is correct and permissible under the Act.

CBIC vide notification No 75/2019 dated 26.12.2019 inserted Rule 86A which has given drastic powers to the Department to restrict the credit of any person in certain cases where there is reason to believe that ITC is availed fraudulently or is ineligible.

In addition, as per sec 42 of CGST Act 2017, Any discrepancy arises either due to excess credit claimed by recipient or if the corresponding supplier fails to provide details of such supply in his return will be communicated to both supplier and recipient and If the discrepancy is not rectified, the ITC needs to be reversed b the recipient along with interest @ 18% as per section 50(1).

If the supplier declares details of such supply in his return filed within the prescribed time limit, the recipient can reduce the amount so added in his output tax liability and the interest paid also shall be refunded.

Further, According to provision of sec 42 (10) of CGST Act,in case, the unmatched credit is availed back by the recipient, before the supplier has shown such supply in his valid return within the prescribed time limit, he shall be liable to pay interest @24% on such amount of unmatched credit. The chargeability of rate of interest has been provided in sec 50(3) of the CGST Act..

It can thus be seen that the interest of 24% will be applicable only in a case where :-

The discrepancy is communicated after matching the returns of supplier and recipient,

Such credit is added back to the output tax liability of such recipient

The recipient has again taken back such credit before the supplier declares it in his valid return within the prescribed time limit as mentioned above.

The interest applicability on mismatched ITC can be well understood with the help of following cases :-

Case-1:

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.

Case-2:

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.

Case-3:

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%.

Case-4:

ABC Ltd. ordered goods which are received on installment 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.

Case-5:

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, on comparison of Form GSTR 3B and Form GSTR 2A the officer found a discrepancy and the same is communicated, 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 re claimed the ITC 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), first reversal in Oct 17 is treated as delay in tax payment to government and rate of interest applicable is 18% which would be paid by Hira Ltd. 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.

However, If the supplier declare such supply in his return of subsequent month, ie Jan 18, then Hira Ltd. can reduce the amount added earlier and the interest paid shall also be refunded.

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.

At present, 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.

Refer to below flowchart to better understand the above.

Special thanks to CA Shilpi Jain for vetting the article.

(Republished with Amendments. Amendments been made by CA Anita Bhadra)

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39 Comments

  1. Qazi umar says:

    hello sir,
    i am in the business of construction. My a/ctant has claimed itc of 30lacs in excess of what is shown appearing in 2A 14 lacs being the itc not claimed in previous year and out of the remaining 16 lacs i have bills from suppliers for 5.5 lacs and for the balance 10.5 lacs, i do not have even bills of suppliers.
    Now my question is do i have to reverse all the 16 lacs or my bills will my purchase invoices be accepted for 5.5 lacs? and if i reverse the itc what would be the intt rate applicable.
    Also please advice whether i have to pay the interest irrespective of whether i reverse the itc from credit ledger or cash ledger.
    Please reply on this one because i m not able to find a clear answer to this, it would be so kind of you.

    1. Palak Anandpara says:

      You have to reverse the credit of 16lakhs though you have bills of 5.5lac. since it is not appearing in the 2A credit, you have to reverse with interest 18% irrespective you reverse from cash or credit ledger

  2. Mr. SHANTANNA says:

    Wrongly claim excess ITC in the year 2018-19 and was not knowing, by mistake it was utilized in 2019-20 , what should I do at this situation.

  3. VINAY KISHORE PRASAD says:

    Sir,
    I have taken wrongly input of Rs. 15,000 in GSTR 3B in Dec 2018 and now reversed the same of Rs 15,000 in GSTR 3B of Nov 2020 and such amount adjusted with credit ledger
    no liability shown means such amount is not used by during the period from Dec 2018 to Nov 2020 from credit ledger, whether interest is payable for that amount and if any interest amount and rate

  4. Saurabh says:

    Hey I need to ask that someone have taken a credit of 2000 (CGST&SGST) in October month Return GSTR3B & GSTR1 but in November i have reversed the amount and again taken the input only in software not in return….Please suggest how to Treat the adjustment in November return

  5. M V NARASIMHA RAO says:

    we paid gst under RCM for exempted goods(Red Chillies) my mistake and climed itc, During the cource of GST department audit it was considered as in eligible pay the entire tax and with interest @24% and penaly 15%. is the department argument correct.

  6. Nagaraj hegde says:

    Hi sir, while filing an invoice pertaining to the period jan 2020 in GSTR-1, the date of an invoice was filed as 2019. Is there anyway to rectify this mistake??

  7. Shaashwath says:

    What is the start date to be considered while calculating Interest on incorrect ITC availed. Is it the date on which ITC availed as per books or date on which said ITC was claimed in the monthly return? Quoting relevant provisions of the act would add more essence to the answer.

  8. Ankit Pahariya says:

    Hello Sir, I have claimed ITC on director motor vehicle by mistake. Now i have to rectify that mistake so please suggest the possible way to correct my mistake and also if there is any interest also to be paid If yes than at what rate.is there any other option available to avoid interest penalty

  9. KAMLESH BAROD says:

    Dear Sir,
    We have taken twicly credit in the month of Mar-20 and reduce our output liability.

    today we have found this discrepancies, so that we reversed the ITC.

    please guide the treatment of ITC reversal in GSTR 3 B return.

  10. Adarsh says:

    Assesse entered wrong rate for 5% instead 18% for october 2019 CGST and SGST in GSTR1 and same amount is entered in GSTR 3B for oct 2019
    what solution for this?
    will this undue claim of ITC?
    Interest will be 24% or 18%

  11. Sanjeev says:

    An excellent article clearing many doubts on the interest applicable upon reversal of ITC. I have a question:

    If an entity registered in GST switches to composition scheme, and carries forward goods/inputs for which it has already availed ITC, then such entity would need to file ITC-03 to reverse the credit already availed on such goods, While filing ITC-03, will the entity also need to pay interest. If yes, then at what rate?

    Thanks!

  12. SHAILENDRA JAIN says:

    Dear Sir,
    i am dealing in non gst supplied but by mistake F.Y. 2017-18 monthly GSTR-3B ITC Claim (But not Utilizes) (CGST and SGST) in return and no any reversal up to march.2019. so advise how to reverse this ITC Claim and interest liabilities applicable how diffing in GSTR-9 F.Y. 2017-18

  13. Smitha says:

    IN JAN 19, CAR PURCHASED AND IGST CREDIT TAKEN AND ADJUSTED AGAINST CGST PAYMENT. IN MAY 19, THE IGST AMOUNT REVERSED AS INELIGIBLE. I WANT TO KNOW HOW MUCH INTEST IS PAYABLE. UNDER WHICH HEAD IGST OR CGST PAYABLE

  14. VENU GOPAL MISHRA says:

    Respected,

    I need to know while filing GSTR 3B form July 2017 till now claimed ITC of IGST goods in Table 4 (A) Column 1 i.e. in import of goods instead Table 4 (A) Column 5 i.e in All Other ITC.
    Please guide what to do in succeeding GSTR 3B as I have claimed the ITC rightly but in wrong head and can we rectify the same in GSTR 9.

    Thanks.

  15. Garima says:

    My supplier did not put my GST number in the invoices(from April) and filed the returns as unregistered recipient due to which i might be facing issues in claiming ITC (came to know in january). What should i do? He is not revising the invoices.

  16. DEEPAK NARANG says:

    I have import the material and PAID IGST and that was shown in Bill of Entry .
    But I show this IGST in all other ITC -IGST head of GSTR3B instead of showing it in Import of Goods .

    Shall I need to reverse the ITC . If I do this i have to pay penalty and reverse the ITC

    Pls suggest

  17. Abhishek jain says:

    What will be the position if supplier has not furnished the correct detail i.e purchase can’t be seen in gstr 2A
    And itc is not reversed till september

  18. divya says:

    If I mistakenly took excess credit and did not use it the next returns then m i liable to pay interst on that amount or i can just reverse the excess credit taken
    In the month of may return my igst credit was 6 lakh and by mistake i showed it as 6 crore will i be liable to pay the interest on diffrance or i can jst reverse the differance?

  19. Nitin says:

    Questions:
    I have purchased commercial car for business purpose (yellow Board) in July’17 with GST.
    Q1. Can i claim input on the purchased invoice ?
    Q2. In July’17 i didn’t registered for GST, but now i have registered GST, so can i claim input?
    Q3. How long can i carry forward input ?

  20. sn AGGERWAL says:

    wHAT WILL BE THE POSITION IF WRONG iNPUT CLIMED IN JULY17, BUT NOT UTILISED AND STIILL LYING IN CREDIT LEDGER AND REVERSED IN mARCH18 . wILL ANY INTERRST PAYABLE

  21. Vijay Kumar Dadoo says:

    There are businesses which are covered under GST, required to pay Income Tax, Recover TDS, TCS. The no. of persons including the employer/businessman is as low as 5, The owner should keep on running around the Government requirements only, keep on paying Late Filing Fees, interest etc.
    Is this fair?

  22. CA SANTOSH AGGARWAL says:

    what will be position if itc wrongly claimed in the next month but came into knowledge at the time of audit. pls calrify

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