BlogITCNo Interest liability for reversal of wrongful claim of ITC

August 11, 2021by Shyam Agarwal

Interest on reversal of Input Tax Credit: Background

With GST assessments in place, the interest on reversal of input tax credit is one of the most controversial topics. Any erroneous claim of input tax credit along with interest liability requires reversal under GST regulations. Such reversal of erroneous credit and subsequent interest liability has always been a matter of argument by the taxpayers before the authorities.

Section 50 of the CGST act, 2017 lays down the following two circumstances in which interest would be required to be paid.

  • Where a person liable to pay tax and fails to pay the same Section 50(1)
  • Where a person makes an undue or excess claim of input tax credit under the provisions relating to matching of ITC Section 50(3)

Further, Section 50(3) provides for levy of interest under the following situations:

  • When a taxable person makes an undue or excess claim of input tax credit u/s 42(10) of CGST Act, 2017;
  • When a taxable person makes an undue or excess reduction in output tax liability u/s 43(10) of CGST Act, 2017

Section 42(10) covers those cases where there is a discrepancy in claim of input tax credit by the recipient vis-à-vis the supplies uploaded by the supplier. Further, such discrepancy is neither added to the output tax liability of the recipient nor the same is rectified by the supplier.

Section 50(3) specifies that interest rate should not exceed 24% p.a. and intends to exclusively cover cases of contravention as per section 42 (10) and section 43 (10). Whereas section 50(1) is a residuary section which covers all cases other than cases falling under section 50(3). Interest rate specified u/s 50(1) is 18% p.a.

Recent Ruling of Madras High Court

Recently, the Madras High Court in the matter of F1 Auto Components P Ltd (‘petitioner’) v/s The State Tax Officer Survey Cell-1 Intelligence – II, Chennai (2021-VIL-543-MAD), delivered its judgement clarifying the scope and intent of provisions of section 50 r.w. section 42 of CGST Act, 2017 charging interest under the GST regulations.

  • The petitioner received an intimation for ‘wrongful claim’ of ITC and had accepted the same;
  • The said erroneous ITC was reversed by the petitioner through voluntary payment of tax in DRC-03. The authorities issued notice for demand of interest on such wrongful claim of ITC. The ‘Petitioner’ aggrieved by the order of the authorities filed a writ petition before the Madras High Court against the said order levying interest under section 50 of the CGST Act;
  • It was contented by the petitioner that Section 50 r.w. section 42 of the CGST Act, 2017 covers cases of mismatch of particulars at the end of the assessee, in relation to the details furnished by the returns of the selling/purchasing dealer. Accordingly, the said section is not relevant for self-reversal by the petitioner of credit so wrongfully availed.

Ruling of the High Court

  • The High Court relied upon the ruling of Maansarovar Motors Private Limited v. The Assistant Commissioner, Poonamallee Division, Chennai (2020-VIL-524-MAD), interest would be charged on the net tax liability of the assessee;
  • The question of interest u/s 50 r.w sec. 42 of the Act does not arise as since it is not a case of ‘mismatch’ but a case of wrongful or erroneous claim of ITC by the recipient.

Key Takeaways

The levy of interest has always been a matter of debate under the GST regulations. The aforesaid ruling might provide some relief in cases of wrongful claim of ITC which however, needs to be supported by the corresponding facts.

Further, it is reiterated that the concept of ITC claim is based on the matching concept considering the supplies of the outward supplier and that claimed by the recipient. Hence, any wrongful claim of ITC apart from the aforesaid, being a ‘unilateral’ act on the part of the recipient shall not be considered as a case of mismatch between the supplier and recipient, which the aforesaid ruling has provided a guidance thereto.

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This article has been contributed by:

Shyam Sunder Agarwal

Manager- Accounting & Compliance

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Disclaimer: Information in this note is intended to provide only a general update of the subjects covered. It is not intended to be a substitute for detailed research or the exercise of professional judgment. KNM accepts no responsibility for loss arising from any action taken or not taken by anyone using this publication.

Shyam Agarwal

KNM Management Advisory Services Pvt. Ltd.Corporate Office
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