Reversal of ITC Wrongly Availed but Not Utilized under GST?

Reversal of ITC Wrongly Availed but Not Utilized under GST?

The Goods and Services Tax (GST) law in India focuses on correct compliance, particularly in the Input Tax Credit (ITC). ITC is one's right to claim credit on tax paid on purchases or inputs that are being used to produce goods or services. However, if ITC have wrongly availed but not utilised, taxpayers are only required to reverse such ITC. In this article, we explore the concept of ITC reversal and related notifications, relevant case laws, and the penalty provisions under GST law.

What Does "Wrongly Availed but Not Utilized ITC" Mean?

Wrongly availed ITC" means cases where a taxpayer takes input tax credit (ITC) under GST rules, even though they are not allowed to. For example:

(a) Claiming ITC on ineligible goods or services.

(b) Claiming ITC without valid tax invoices.

(c) Claiming ITC beyond the time limit prescribed under GST law.

When such ITC is availed but not utilized to set off GST liabilities, the taxpayer must reverse the credit in their GST returns.

Legal Framework

The rules for reversing ITC (Input Tax Credit) that was wrongly claimed but not used are explained in Section 73(1) of the Central Goods and Services Tax (CGST) Act, 2017. This section says:

(a)  If ITC is availed inappropriately, it is treated as tax not paid.

(b)  The taxpayer must reverse the wrongly availed ITC, even if it hasn’t been used.

Notification and Circular Reference

Several GST notifications and circulars clarify the process of reversing wrongly availed ITC. Key references include:

Circular No. 58/32/2018-GST dated 4.09.2018:  as per para no 3 of this circular says "it is clarified that as an alternative method, taxpayers may reverse the wrongly availed CENVAT credit under the existing law and inadmissible transitional credit through Table 4(B)(2) of FORM GSTR-3B. The applicable interest and penalty shall apply on all such reversals which shall be paid through entry in column 9 of Table 6.1 of FORM GSTR-3B. 

Case Law Reference

In the case of M/s Aathi Hotel vs. Assistant Commissioner (ST), 2021

The Hon. Madras High Court ruled that interest and penalties cannot be levied on ITC wrongly availed but not utilised. While the judgment favored the taxpayer, it emphasized the importance of invoking Section 122 of the GST Act for imposing penalties, which was overlooked in this case. The ruling suggests that penalties may not apply in such situations, but compliance with GST provisions is essential.

Interest on excess ITC availed but not utilised

Under the evolving GST law, significant changes have been made regarding interest on excess Input Tax Credit (ITC) that is availed but not utilised. Initially, interest was charged even if the excess credit was unused. However, with retrospective amendments to Section 50(3) of the CGST Act, interest now applies only to the net tax liability paid through the electronic cash ledger. This means no interest is charged if excess ITC is availed but not utilised and later reversed without being offset against output tax liability. This reflects the principle that interest is compensatory and applies only when government revenue is delayed due to utilisation of the credit.

Penalty Provisions

GST law outlines penalties for wrongful ITC claims under the following sections:

1. Section 122(2): A penalty of ₹10,000 or the amount of ITC wrongly availed (whichever is higher) can be imposed.

2. Section 73(5): If the taxpayer voluntarily reverses ITC and pays applicable interest before the issuance of a show cause notice (SCN), penalties can be avoided.

3. Section 50(3): Interest is applicable only on ITC that has been utilized, not merely availed.

Steps to Reverse Wrongly Availed ITC

1. Identify the Error: Review ITC claims in GST returns and identify any credits wrongly availed.

2. Reverse in GSTR-3B: Declare the reversal in Table 4B of Form GSTR-3B.

3.  Pay Tax, If Utilized: If ITC has been utilized, pay the equivalent tax amount along with interest.

4. Maintain Records: Keep documentary evidence to support voluntary compliance.

Conclusion

This is all for "Reversal of ITC wrongly availed but not utilized gst" where Wrongly availed ITC is to reversed is a critical compliance under GST law. While interest and penalties can be avoided in cases where such ITC is not utilized, timely correction is necessary to prevent legal complications. Businesses should regularly reconcile their ITC claims to ensure accuracy and adhere to GST provisions. By doing so, they not only avoid penalties but also build a culture of compliance.