Penalty on Wrong Availment of ITC Under GST

The Goods and Services Tax (GST) framework introduced the Input Tax Credit (ITC) concept. But what happens if a taxpayer avails ITC incorrectly? This article explains the penalty for wrong availment of ITC under GST.

What is the penalty for wrong ITC availment under GST?  

In the GST framework, the penalty mechanism ensures adherence and compliance by taxpayers. If a taxpayer misuses the Input Tax Credit (ITC), certain penalties apply:

• Wrongful Availment: As per the GST provisions, if an entity wrongly avails ITC but hasn't utilised it, it must reverse the credit along with interest within a specific period. Failing to do so may lead to penalty proceedings.
• Penalty Amount: If you have wrongly availed and utilised the ITC, the penalty can range up to 100% of the ITC amount availed or INR 10,000, whichever is higher.
• Interest Component: Following the retrospective amendment in Section 50 of the CGST Act from 1.7.2017, interest is now chargeable only on ITC wrongly availed and utilised, not just on wrongly availed.
• Specific Provisions: Section 122 of the GST Act clarifies that penalty can be levied for ITC wrongly availed or utilised. Thus, even if ITC is availed but not used, a penalty may still be applicable.
• Intention Matters: The Department may seek to imply mala fide intention to evade tax and, hence, could levy a higher penalty. For a detailed understanding of offences and their corresponding penalties under GST, read here.

Judgments around wrong availment of ITC 

Over the years, various courts have provided judgments on the wrong availment of ITC. Below, we discuss some prominent judgments that provide clarity on this topic.

Judgement 1: M/s Aathi Hotel vs. Assistant Commissioner (ST), 2021

In this landmark case, the Hon. Madras High Court dealt with the wrongful availment of ITC where credit was availed but not utilised. The core issue revolved around whether interest and penalty could be levied on ITC wrongly availed but not utilised. The court ruled in favour of the taxpayer, stating that neither interest nor penalty was payable. However, the judgement also highlighted the necessity of invoking section 122 for levying penalties, which was overlooked in this particular instance. This ruling indicated that even if an entity wrongly avails the ITC without utilising it, penalties might not apply, but the provisions of the GST Act must be carefully followed.

Judgement 2: Pratibha Processors vs Union of India, 1996 

The Supreme Court, in this case, took up the intricate relationship between tax, interest, and penalty. The apex court ruled that interest serves as a compensatory measure to the government for withholding tax revenue. In contrast, the penalty addresses deliberate violations of the tax provisions. Concerning ITC, the distinction highlighted by the court plays a pivotal role in determining whether a taxpayer's actions were a mere oversight (leading to interest) or a willful act (leading to penalties).

Judgement 3: Refex Industries Ltd vs. Assistant Commissioner, 2020

In a more recent judgement by the Madras High Court, the court faced the denial of ITC on input services used in the pre-GST regime. The petitioner argued that the denial was causing undue hardship. The court ruled in favour of the taxpayer, emphasising that transitional provisions should be interpreted liberally to fulfil the objectives of the GST regime. Any restrictions on the availability of ITC, especially from the previous regime, should be viewed in light of the overarching principles of GST.

Conclusion

Understanding the nuances around the penalty for wrong ITC availment under GST is crucial for businesses to avoid legal complications and financial repercussions. Given the intricacies and evolving nature of the law, it's recommended to consult tax professionals or refer to authoritative articles to stay updated and compliant. While ITC significantly relieves businesses, wrongful availment can be a double-edged sword, leading to potential litigations. For further insights on GST penalties and the appeal process, read here.