Unlocking Growth: Interest on Un-Utilized ITC Under CGST Act

Facilitating Sabka Sath, Sabka Vikas, And Sabka Vishwas: Interest on Un-Utilized ITC Under CGST Act

Introduction: The Central Goods and Services Tax (CGST) Act plays a pivotal role in India’s tax regime. To foster economic growth and uphold the principles of Sabka Sath, Sabka Vikas, and Sabka Vishwas, it is essential to consider providing interest on un-utilized Input Tax Credit (ITC) under the CGST Act. This mechanism aims to encourage the trade and industry by addressing the challenges posed by large accumulations of un-utilized ITC. Below, we’ll explore the need for such a mechanism and propose modifications to the existing provisions.

Challenges of Un-utilized ITC:

1. Delayed Sales: Many businesses face situations where they cannot immediately utilize the ITC due to delayed sales. For instance, in sectors with seasonal demand or long production cycles, it may take time to convert raw materials into finished products etc.,

2. Market Fluctuations: Market conditions can be unpredictable. Businesses might delay sales in anticipation of better pricing, or they may need to wait for optimal market conditions to maximize their revenue.

3. Working Capital Constraints: The accumulation of un-utilized ITC ties up funds that businesses could otherwise use for operational purposes, such as paying suppliers, employees, or investing in growth initiatives.

Proposed Mechanism: To address these challenges and encourage trade and industry, the government and the GST Council should consider the following mechanism for providing interest on un-utilized ITC:

1. Eligibility Criteria: Eligibility for interest on un-utilized ITC should be based on the duration of non-utilization beyond a reasonable threshold, say 3 months from the date of credit availability.

2. Interest Rate: The interest rate should be aligned with market rates to make it a reasonable compensation for the loss of liquidity. This rate could be bench marked against the government’s short-term borrowing rates.

3. Calculation of Interest: Interest should be calculated on a monthly basis for the period of non-utilization, starting from the end of the threshold period until the ITC is finally utilized.

4. Modification of CGST Provisions: The CGST Act should be amended to include provisions for interest on un-utilized ITC, specifying the eligibility criteria, interest rate, and calculation method.

5. Refund Process: Taxpayers should apply for interest on un-utilized ITC through the GST portal, providing details of un-utilized credits and the reasons for non-utilization or can make auto calculation and credit in the credit ledger without any bodies interference.

6. Review and Approval: The tax authority should review and approve eligible claims after verifying the non-utilization period.

7. Disbursement: Once approved, the interest amount should be disbursed along with the ITC refund to the taxpayer’s registered bank account.

Benefits and Considerations:

Providing interest on un-utilized ITC yields several benefits:

1. Enhanced Liquidity: Businesses gain access to working capital, promoting growth, investment, and job creation.

2. Mitigation of Financial Constraints: Reduced financial stress allows businesses to meet their operational obligations and navigate market fluctuations effectively.

3. Encouragement for Timely Compliance: It incentivizes taxpayers to comply with GST regulations diligently.

4. Promotion of Sabka Sath, Sabka Vikas, and Sabka Vishwas: This mechanism aligns with the principles of inclusive growth and development.

However, it’s important to note that while providing interest on un-utilized ITC is essential, the government should continue to address compliance issues through appropriate penalties and late fees. This ensures a balanced approach that promotes both compliance and economic growth.

Conclusion: Interest on un-utilized ITC under the CGST Act is a pivotal step in fostering Sabka Sath, Sabka Vikas, and Sabka Vishwas. It addresses the challenges faced by businesses in managing unutilized credits and unlocks their potential for economic growth. By implementing a transparent and efficient mechanism, the government can encourage the trade and industry while maintaining the integrity of the tax system.