Summary: The Finance Act, 2022, amended Section 50(3) of the Central Goods and Services Tax (CGST) Act, 2017, to impose interest on input tax credit (ITC) that is wrongly availed and utilized, effective from July 1, 2017. The amendment clarifies that interest is payable only when the wrongly availed ITC is used, not merely when it is wrongly claimed. A new Rule 88B was introduced, prescribing the manner for calculating interest on such credit, starting from the date of utilization until the credit is reversed or tax is paid. The interest is calculated based on the amount by which the electronic credit ledger falls below the wrongly availed ITC. In cases where the balance in the ledger does not fall below the availed ITC, no interest is due. The circular issued by CBIC in 2023 further clarified that interest is applicable on the total ITC available in the ledger, regardless of whether the credit was claimed under IGST, CGST, or SGST. However, compensation cess credits are excluded from this calculation. Therefore, interest applies only when the balance in the credit ledger falls below the wrongly availed ITC, and the interest is calculated accordingly.
Section 50(3) of the Central Goods and Services Tax Rules, 2017 (CGST Act) was amended by Finance Act, 2022, retrospectively w.e.f. July 01, 2017 so as to provide for levy of interest on input tax credit wrongly availed and utilized.
“(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, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed.”
Prior to substitution, sub-section (3) read as under-
“(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.”
With the said amendment, according to the department, interest is payable on input tax credit wrongly availed. Whereas, as per the taxpayer, interest is payable on input tax credit wrongly availed and utilized. To clear the position, the Central Government inserted Rule 88B into the Central Goods and Services Tax Rules, 2017. Notably, Rule 88B is inserted via Notification no. 14/2022-Central Tax dated 5th July 2022 (w.r.e.f. 01.07.2017). The newly inserted Rule 88B provides the manner of calculating interest on delayed payment of tax under GST. Rule 88(3) prescribes the method for calculating interest on the input tax credit wrongly availed and utilised. Interest will be calculated for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount. Rule 88(3) read as under-
“(3) In case, where interest is payable on the amount of input tax credit wrongly availed and utilised in accordance with sub-section (3) of section 50, the interest shall be calculated on the amount of input tax credit wrongly availed and utilised, for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount, at such rate as may be notified under said sub-section (3) of section 50.
Explanation–For the purposes of this sub-rule,-
(1) input tax credit wrongly availed shall be construed to have been utilised, when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, and the extent of such utilisation of 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.
(2) the date of utilisation of such input tax credit shall be taken to be, –
(a) 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; or
(b) the date of debit in the electronic credit ledger when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, in all other cases.”
It is to be noted that interest will be calculated on the amount of input tax credit which is wrongly availed and utilized. Meaning thereby, that interest is not payable on input tax credit which was only wrongly availed. Interest will be payable only when the wrongly availed input tax credit is utilized.
As per the Explanation (1), Input tax credit wrongly availed shall be construed to have been utilised, when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed. Also, the extent of such utilisation of 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.
In nutshell, interest will be applicable when in the electronic credit ledger falls below the amount of input tax credit wrongly availed. Suppose, the Eligible ITC is Rs. 5 lakhs and ITC wrongly availed is Rs. 50K and output liability is Rs. 5 lakh, then closing balance in ECL is Rs. 50 K. In this case the balance in ECL (Rs. 50K) does not fall below the amount of ITC wrongly availed (Rs. 50K). Therefore, interest will not be applicable. But where in this said case if output liability is Rs. 5.2 lakh and closing balance in ECL is Rs. 30K. Then the balance in ECL (Rs. 30K) falls below the amount of ITC wrongly availed (Rs. 50K). Therefore, interest will be applicable.
But now question is, on what amount interest will be applicable, means how much is utilization of ITC? As per the Explanation (1), the extent of such utilisation of 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. Accordingly, input tax credit wrongly utilized = amount of input tax credit wrongly availed (-) balance available in the electronic credit ledger. So, in the aforesaid case, the amount of utilization of ITC is Rs. 20K (ITC wrongly availed Rs. 50K (-) balance in ECL Rs. 30K).
Now the question is period for which interest is payable. Explanation (2) provides in this regard as under-
| In case where GSTR- 3B is to be furnished | Date of the utilization of input tax credit =
i) due date of the return or ii) actual date of filing of return whichever is earlier |
| In any other case | Date of debit in the electronic credit ledger |
Clarification on charging of interest under section 50(3) of the CGST Act, 2017, in cases of wrong availment of IGST credit and reversal thereof.
A Circular No. 192/04/2023-GST dated 17th July, 2023 was issued by CBIC for clarification regarding charging of interest under sub-section (3) of section 50 of the CGST Act in the cases where IGST credit has been wrongly availed by a registered person. The Board has clarified as under-
| S. No. | Issue | Clarification |
| 1 | In the cases of wrong availment of IGST credit by a registered person and reversal thereof, for the calculation of interest under rule 88B of CGST Rules, whether the balance of input tax credit available in electronic credit ledger under the head of IGST only needs to be considered or total input tax credit available in electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has to be considered. | Since the amount of input tax credit available in electronic credit ledger, under any of the heads of IGST, CGST or SGST, can be utilized for payment of liability of IGST, it is the total input tax credit available in electronic credit ledger, under the heads of IGST, CGST and SGST taken together, that has to be considered for calculation of interest under rule 88B of CGST Rules and for determining as to whether the balance in the electronic credit ledger has fallen below the amount of wrongly availed input tax credit of IGST, and to what extent the balance in electronic credit ledger has fallen below the said amount of wrongly availed credit.
Thus, in the cases where IGST credit has been wrongly availed and subsequently reversed on a certain date, there will not be any interest liability under sub-section (3) of section 50 of CGST Act if, during the time period starting from such availment and up to such reversal, the balance of input tax credit (ITC) in the electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has never fallen below the amount of such wrongly availed ITC, even if available balance of IGST credit in electronic credit ledger individually falls below the amount of such wrongly availed IGST credit. However, when the balance of ITC, under the heads of IGST, CGST and SGST of electronic credit ledger taken together, falls below such wrongly availed amount of IGST credit, then it will amount to the utilization of such wrongly availed IGST credit and the extent of utilization will be the extent to which the total balance in electronic credit ledger under heads of IGST, CGST and SGST taken together falls below such amount of wrongly availed IGST credit, and will attract interest as per sub-section (3) of section 50 of CGST Act, read with section 20 of Integrated Goods and Services Tax Act, 2017 and sub-rule (3) of rule 88B of CGST Rules. |
| 2 | Whether the credit of compensation cess available in electronic credit ledger shall be taken into account while considering the balance of electronic credit ledger for the purpose of calculation of interest under sub-rule (3) of rule 88B of CGST Rules in respect of wrongly availed and utilized IGST, CGST or SGST credit. | As per proviso to section 11 of Goods and Services Tax (Compensation to States) Act, 2017, input tax credit in respect of compensation cess on supply of goods and services leviable under section 8 of the said Act can be utilised only towards payment of compensation cess leviable on supply of goods and services. Thus, credit of compensation cess cannot be utilized for payment of any tax under CGST or SGST or IGST heads and/ or reversals of credit under the said heads.
Accordingly, credit of compensation cess available in electronic credit ledger cannot be taken into account while considering the balance of electronic credit ledger for the purpose of calculation of interest under subrule (3) of rule 88B of CGST Rules in respect of wrongly availed and utilized IGST, CGST or SGST credit. |
*****
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
Rate of Interest on ITC reversal / delayed payment of tax
Interest on Delayed Payment/ Reversal of ITC of GST
Interest on delayed payment of tax under section 50 of GST act – An analysis
Author Bio
