Interest Liability under GST… 18% or 24%?
It has been observed that The Goods and Services Tax (‘GST’) Authorities are demanding interest at 24 percent for Input Tax Credit (‘ITC’) claimed wrongfully or in excess or for any other matter and many taxpayers are made to pay 24 percent without protesting the same. The demand is clearly incorrect under GST laws for the reasons enumerated below.
Let us explain the legal position in respect of interest under GST and what will be the correct rate of interest to be paid by registered persons.
Legal Analysis
Section 50 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) deals with interest provisions. The Section has two following limbs:
a. Delayed payment of tax – Interest at 18 percent
b. Wrongful or excess claim of ITC under Section 42(10) and Section 43(10) – Interest at 24 percent
Now, wrongful or excess claim of ITC can, inter alia, be of the following three types:
a. Claim of ITC of inward supplies restricted under Section 17(5)
b. Claim of ITC for which supplier has either not paid the tax or not disclosed in his GSTR-1
c. Wrongful or excess re-claim of ITC in a case where ITC was earlier reversed as the supplier has not disclosed in its GSTR1 and recipient again re-claim the ITC later without the supplier disclosing the same in its GSTR1.
Example: Mr. A procured goods from Mr.B and availed ITC of Rs.1000/-, but Mr.B did not filed his GSTR1 and causing mismatch. Later GST department through mismatch mechanism communicated the same to both the parties. Thereafter as per provisions of Section 42(5) Mr.A added the ITC mismatch amount in its output liability. But later Mr. A re-avail the ITC without Mr.B filing its GSTR1. Only in this scenario section 42(10) will gets attracted and consequently Mr.A shall be liable to pay interest @24%.
It is only the situation in Point No. 3 which is being covered under Section 42(10) and not Point 1 or 2. In simple words, what is covered by Section 50(3) is the wrongful or excess re-claim of -credit earlier reversed due to mismatch.
Further, even the mismatch provisions have specifically been kept in abeyance under the CGST Rules.
Therefore, GST Authorities cannot demand 24 percent in any case and especially in situations mentioned in Point 1 & 2 above.
Our Remarks
There is continuous confusion in the industry about this 24 percent versus 18 percent. Some taxpayers are paying 24 percent and others are protesting the same.
Further in the recent judgment of Madras High Court in the case of F1 Auto Components Private Limited v. STO 2021 (7) TMI (600), held that where ITC availed was erroneous, Section 42 is not attracted.
In our view, thus, where a taxpayer is paying any interest for any reason, he may not pay more than 18 percent per annum and protest any excess demand of interest since only the situation covered by Section 42(10) and Section 43(10) cast the liability to pay interest @24%.
