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

When dealing with Goods and Services Tax (GST), businesses must be aware of three important aspects of Input Tax Credit (ITC):

• Interest on excess ITC claimed

• Interest on ITC reversal

• Interest on ITC availed but not utilised

Each of these impacts how interest is calculated in different situations. Let’s break them down in simple terms.

Interest on Excess ITC Claimed

If a business claims more ITC than it is eligible for, it is known as excess ITC claimed. The government imposes an interest of 18% per year on the extra amount claimed.

The main reason for this is to ensure businesses do not claim more than they are entitled to and to maintain financial discipline within the GST system.

Incorrectly claiming ITC can negatively impact a company’s finances. Therefore, businesses should ensure they claim the correct ITC amount to avoid unnecessary interest payments.

Interest on ITC Reversal

Sometimes, businesses may need to reverse ITC that was previously claimed. This happens when the claimed ITC turns out to be ineligible due to reasons such as returned goods or canceled services. In such cases, interest needs to be paid on the reversed amount.

Example of ITC Reversal Calculation

Imagine a business claims INR 10,000 as ITC in January. Later, in February, they realize that INR 2,000 was mistakenly claimed and needs to be reversed. Since the interest rate for ITC reversal is 18% per year, the interest would be calculated from the date of the incorrect claim until the payment date.

Formula:

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

If the ITC was wrongly claimed for 30 days, the interest would be:

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

This example highlights the importance of proper ITC management to avoid unnecessary interest charges.

Interest on Excess ITC Availed But Not Utilised

The rules regarding interest on excess ITC that is availed but not used have changed over time. Initially, businesses had to pay interest on excess ITC even if they didn’t use it. However, a retrospective amendment to Section 50(3) of the CGST Act has clarified the rules.

Now, interest is charged only on the net tax liability paid through the electronic cash ledger. This means if ITC is only availed but not used and is later reversed without being adjusted against any output tax liability, no interest is charged.

This amendment ensures that interest is applied only on amounts that were actually used, preventing unnecessary penalties.

Example of Interest on Availed but Not Utilised ITC

A company avails INR 50,000 as ITC in March. However, it uses only INR 40,000 to offset its tax liability, leaving an excess of INR 10,000 unutilised.

• As per the updated rules, no interest is charged on the INR 10,000 unutilised ITC.

• However, interest must be paid at 18% per year on the INR 40,000 that was actually utilised.

Formula:

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

For 60 days, the interest would be:

Interest = (INR 40,000 x 18/100) x (60/365) = INR 1,183.56

This update ensures businesses are only charged interest on ITC that has actually been used, reducing unnecessary financial burdens.

Conclusion

Understanding interest on excess ITC claimed, ITC reversal, and ITC availed but not utilised is crucial for businesses under the GST system. Claiming more ITC than allowed can lead to 18% interest charges, impacting financial health. Similarly, businesses should carefully handle ITC reversals and unutilised ITC to avoid unnecessary penalties.

To stay compliant and avoid extra costs, businesses should regularly check their ITC claims and keep up with any changes in GST regulations.