QUESTION

Registered person wrongly availed credit of ITC (Entire credit remains un utilized throughout the period), now want to reverse the wrongly availed and un-utilized ITC available in his ECL. 1. Whether he can reverse such wrongly availed ITC by using his credit of ITC available in ECL or need to be paid only in cash ? 2. Whether he is liable to pay any interest or penalty, as he availed such credit based on High court decision without any evil Intention ?

ANSWER

FACTS OF THE CASE:

ITC was wrongly claimed but has never been utilised towards payment of any tax. Now the same is to be reversed.

LAW APPLICABLE:

1. Subsection (3) of section 50 CGST dictates that;

" A taxable person who makes an undue or excess claim of input tax credit under subsection (10) of section 42 or undue or excess reduction in output tax liability under subsection (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. "

2. Section 111 of the Finance Act, 2022 brings about the following amendment to section 50(3) of CGST and the same is laid as under;

" 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. "

INTERPRETATION:

If ITC is claimed in excess then the interest is applicable under section 50(3) CGST. Currently the bare act states that this interest would be applicable if the ITC is wrongly claimed, even if it is not utilised towards payment of tax. However, after multiple representations from the trade and industries, Finance Act 2022 brings about a retrospective amendment to this section to incorporate the condition of utilisation of ITC for levying interest under section 50(3).

It is important to note here that this amendment is not yet notified therefore it is not a part of the CGST Act right now. However the amendment is retrospective and will apply from 1st July 2017 whenever the same is notified.

After amendment of section 50(3), interest would be applicable only if the excess ITC is utilised towards payment of tax.

CONCLUSION:

So to answer your questions;

Question 1: Whether he can reversed such wrongly aviled ITC by using his credit of ITC availeble in ECL or need to be paid only in cash ?
Answer 1: ITC can be reversed by debiting the electronic credit ledger. Payment through cash ledger is not mandatory.

Question 2: Whether he is liable to pay any interest or penalty, as he availed such credit based on High court decision without any evil Intention ?
Answer 2: Penalty shall not be levied. Interest under section 50(3) is leviable. However whenever the retrospective amendment of section 50(3) is notified the same will not be leviable. Therefore, interest should not be deposited since it is against the principles of natural justice. Only reversal of excess ITC shall be made. (Reply dt. 14/04/2022)