Interest on Excess ITC Claimed, ITC Reversal and ITC Availed But Not Utilised

Within the GST framework, there are three key concepts related to Input Tax Credit (ITC) that businesses must understand - Interest on excess ITC claimed, interest on ITC reversal, and interest on ITC availed but not utilised. These concepts helps you calculate interest as per the situation. Let's take a closer look at each of these concepts.

Interest on excess ITC claimed

When an entity claims more Input Tax Credit (ITC) than it is eligible for, it is considered   as 'excess ITC claimed'. The government levies an interest of 18% on this over-claimed amount. The objective is to ensure compliance and deter businesses from claiming more credit than they are entitled to. This becomes pivotal in maintaining the fiscal discipline in the GST regime.

Mismanagement of ITC claims can adversely impact a firm's financial health, stressing the importance of correct ITC claims.

Interest on ITC reversal

Input Tax Credit reversal means reversing the previously availed ITC which proves to be ineligible upon further inspection. Such reversals can stem from various scenarios, such as returned goods or annulled services.

Example for Computation

Consider a business that avails an ITC of INR 10,000 in January but discovers that INR 2,000 was inappropriately claimed in February. This demands an ITC reversal of INR 2,000. Given the ITC reversal interest rate at, say, 18% p.a., the Interest would be assessed from the wrongful claim date to the payment date:

Interest = (INR 2,000 x 18/100) x (Number of days/365)

If wrongly availed for 30 days, Interest equates to:

Interest = (INR 2,000 x 18/100) x (30/365) = INR 30 approximately.

For a more extensive guide on ITC claims and reversals, check out ClearTax's detailed report.

Interest on excess ITC availed but not utilised

Under the evolving landscape of GST law, the treatment of interest on excess Input Tax Credit (ITC) availed but not utilised has seen significant changes. Initially, the position held was that interest should be paid on excess credits even if not utilised. However, Section 50(3) of the CGST Act, read with the retrospective amendments, brings clarity.

The retrospective amendment to Section 50 posits that interest only applies to the net tax liability paid via the electronic cash ledger. This move implies that for excess ITC that is merely availed but not utilised and subsequently reversed without being offset against any output tax liability, there should be no interest charge. This aligns with the principle that the interest is compensatory in nature and should only apply to amounts that have actually been utilised and resulted in a delayed payment to the government, leading to a revenue loss.

Example for Computation

Suppose a firm avails ITC of INR 50,000 in March, utilising only INR 40,000 to offset its output tax, leaving INR 10,000 as excess. As per the retrospective amendment, department willnot charge any interest in INR 10,000. However, taxpayer must pay interest on excess ITC availed and utilised at 18% p.a., interest on this unutilised ITC is:

Interest = (INR 40,000 x 18/100) x (Number of days/365)

For 60 unutilised days, Interest amounts to:

Interest = (INR 40,000 x 18/100) x (60/365) = INR 1183.56 

Conclusion 

Navigating Interest on excess ITC claimed, ITC reversal, and ITC availed but not utilised is key for businesses under the GST regime. Avoiding excess ITC claims is crucial as the 18% interest can impact financial health. Careful handling of ITC reversals and unutilised ITC helps prevent unnecessary interest burdens. Ensure to stay updated with changes and guidelines to prevent unnecessary financial burdens. For more insights on GST and related topics, explore this comprehensive guide by ClearTax.