Applicability of 24% GST Interest in case of reversal of Input Tax Credit

In this article, I have tried to analyze if 24% GST Interest should apply in case of reversal of Input Tax Credit [ITC] when higher credit was taken by the taxpayer in GSTR-3B than what was reflecting in GSTR-2B.

Now let us see the relevant provisions related to Interest on delayed payment GST:

50(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent, as may be notified by the Government on the recommendations of the Council

50(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (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 percent, as may be notified by the Government on the recommendations of the Council.

Now here we can understand that interest@ 24% is applicable specifically in the case of:

• the undue or excess claim of input tax credit [Section 42(10)] or 
• undue or excess reduction in output tax liability (via Credit Note) [Section 43(10)]

What does Section 42 talk about?

Section 42 is related to Matching, reversal, and reclaim of input tax credit [ITC]. This section came in view of the Original GST Returns system which was filing of GSTR-1, & GSTR-2, and GSTR-3.

As per the Matching Concept of ITC, the details of every inward supply furnished by a registered person in GSTR-2 shall be matched:

(a) with the corresponding details of outward supply furnished by his supplier in GSTR-1

(b) with the integrated goods and services tax [IGST] paid to Custom Authorities in respect of goods imported by him

Duplicate Invoices

Excess ITC due to Duplicate Invoices shall be added to GST Liability. Interest @18% is applicable on the same. [Section 42(8)]

Communication Between Supplier and Receiver

In case of Discrepancy between ITC claim by RP in GSTR-2 and Outward supply shown by his supplier in GSTR-1, the same shall be communicated.

In case of Discrepancy, what about the ITC that was already claimed by the Receiver?

ITC claimed by RP should be reversed and will be added in the Output Liability. [Section 42(5)]

Is there any interest applicable on ITC reversal?

Yes, interest amounting to 18% shall be applicable on the same. [Section 42(8)]

What if the Mistake is later Rectified by the Supplier?

ITC can be reclaimed if the mistake is later rectified by the supplier. But here please note that when ITC reversed u/s 42(5) is reclaimed, and then also supplier fails to rectify his return, only in that case 24% interest will be applicable. [Section 42(10)]

Similar provisions related to the reversal of Credit Note are there in Section 43.

Conclusion:

• 24% interest is applicable only in case of ITC reversal under section 42(10) or Credit Note reversal 43(10).
• In all other cases while doing ITC reversal 18% interest will apply.
• Practically, 24% interest rate is not applicable as the concept of GSTR-2 and communication between seller and buyer, never came into the picture.
• Also now when the concept of monthly matching of ITC is there due to rule 36(4), the main motive of this article was to draw a distinction where 24% Interest should apply and where 18% interest should apply.