Interest on irregular availment of ITC under GST

Interest, in common parlance, is understood to be the cost of borrowing money. Alternatively, it is a compensation paid to the lender who could have benefited in value had he not parted with the money. In simple terms, interest is payable only when there is a loss of commercial opportunity of usage of funds. The same or similar principle should be applicable in matters of taxation in relation to the tax revenues collected by the concerned authorities. However, the indirect tax legislation has had a different take on the matter of interest, specifically with regard to the irregular availment of input tax credit (ITC).

Interest on irregular ITC has been a matter of perpetual contention under the indirect tax legislation. The service tax regime saw numerous litigations on this matter with the tax authorities proposing to levy interest on mere irregular availment of ITC and the assessees contending that unless such irregular ITC has been utilized, there is no loss of tax or revenue to the government and hence no interest is payable. In order to address this issue, Rule 14 of the Cenvat Credit Rules, 2004 which dealt with recovery of wrongly availed ITC along with interest was amended in March 2012. The words “Cenvat credit has been taken or utilized” in Rule 14 were replaced with “Cenvat credit has been taken and utilized”. This amendment leads to the interpretation that interest is chargeable on any irregular service tax ITC only when such ITC is utilized.

The Goods and Services Tax (GST) regime gave the Central Government a white paper to write fresh legislation and address various legacy issues. In this article, we shall explore on how the GST legislation addresses the issue with regard to interest on irregular ITC.

Interestingly, the GST legislation is silent on the key aspect of treatment of any irregular availment of ITC in relation to the restricted ITC under Section 17(5) of the CGST Act, 2017 (‘Act). The Act covers only certain specific instances of irregular ITC and applicability of interest in such specific cases. The following instances are covered by the legislation on irregular ITC:

1. Where the ITC availed by the recipient is not declared by the supplier in the GST return; and

2. Duplicate claim of ITC by the recipient.

Interest is levied on the above irregular ITC in terms of the provisions under Section 50(3) and Section 42(10) of the Act. Section 50(3) of the Act provides that a taxable person who makes an undue or excess claim of the ITC under Section 42(10) shall pay an interest at the rate not exceeding 24% on such undue or excess claim. It is important to note here that, the interest of 24% on undue or excess claim of ITC is subject to the availment of excess credit in a manner and for the reasons prescribed under Section 42(10) of the Act.

Section 42 of the Act contains provisions with regard to matching of invoices of the supplier with the ITC of the recipient and other provisions in relation to reversal and reclaiming of ITC. Section 42(10) of the Act provides that, the amount reduced from the output tax liability in contravention of the provisions of sub-section (7) of Section 42 of the Act shall be added to the output tax liability on the return of the supplier and such supplier shall be liable for payment of interest as prescribed under Section 50 (3). Subsection (7) of Section 42 contains provisions which allow the recipient to reduce the ITC from the output tax liability of the recipient where the supplier has declared the invoice or debit note details in the GST returns.

A collective reading of Section 50(3) and Section 42(10) of the Act provides that in the event any output tax liability is offset by undue or excess ITC availed in violation of the provisions of the Act (say credit availed without a tax invoice or credit availed without supplier declaring it in return, etc.) then such excess ITC adjusted shall be treated as an output liability for the recipient and the same would be payable along with interest of 24% as prescribed under Section 50(3) of the Act.

Based on the above provisions it can be inferred that, excess or irregular ITC would be charged interest only if such credit has been utilized (reduction of output liability) by the assessee and mere availment of ITC without utilization would not be charged to interest under Section 50(3) of the Act.

While Section 50(3) of the Act indicates an interest liability only upon utilization of irregular ITC, Section 73 of the Act seems to give scope for deviation from the above interpretation. Section 73 of the Act provides that a proper officer can issue a notice, where it appears that input tax credit has been wrongly availed or utilized, for recovery of the amount along with the interest payable under Section 50 of the Act. Here, it can be seen that, recovery of interest on irregular ITC under Section 73 would be subject to the provisions of Section 50 of the Act. Hence, where there is no utilization of the irregular ITC it could be argued that the provisions of Section 50 would be inapplicable and hence no demand for interest lies under Section 73 of the Act. However, the words used under Section 73 of the Act is ”wrongly availed OR utilized” leading to a possible interpretation that the ITC wrongly availed but not utilized can also be subject to recovery of interest. Further, the department could also adduce an argument that the reference to Section 50 of the Act under Section 73 of the Act is limited in scope to the interest rate prescribed therein and hence Section 73 of the Act stands independent and empowers them to recover ITC wrongly availed but not utilized.

Further, in a recent ruling that raised eyebrows, the Hon’ble Telangana High Court, in the case of Mega Engineering & Infrastructures Ltd., in relation to the question on whether the interest is applicable on the total tax liability or net tax liability (after adjustment of ITC) of the assessee, held that:

1. Until a return is filed there is no entitlement to ITC;

2. The credit becomes ITC only upon filing of the GST return; and

3. Consequently, interest liability automatically arises on the gross tax liability and not on the net liability.

If the above ruling of the Hon’ble High Court holds, then the ITC (either eligible, ineligible or irregular ITC) in the books of accounts of the assessee and/or in the electronic credit ledger would only be recording of transactions without any availment of ITC. Further, if entitlement to credit is dependent on the filing of the GST return, then there does not exist any scope under Section 73 of the Act for the department to invoke interest on mere wrong availment in the books of accounts or in the electronic credit ledger, until such credit has been utilized by way of filing of GST return.

While the existing GST provisions indicate applicability of interest only upon utilization of the irregular ITC availed in specific cases, the matter is not free from dispute given the wordings of Section 73 of the Act. In order to mitigate litigation, it would be worthwhile for the Central Government to clarify the stand on payment of interest on irregular ITC [including restricted ITC under Section 17(5)] which is not utilized.