Wrong ITC claim attracts 18% annual interest and penalty under GST, traders warned
Traders who claim and use input tax credit they were not entitled to face interest at 18% a year and a possible penalty, and must meet several conditions to claim it.
For businesses that pay GST, input tax credit (ITC) matters a great deal. It lets a trader deduct the GST paid on purchases from the GST liability arising on sales, easing both business costs and cash flow.
But ITC is not available on every purchase. A trader who takes ITC on a purchase it was not entitled to, or who uses wrongly claimed ITC, can land in trouble. Interest and a penalty are levied in such cases. The interest rate on ITC that was wrongly taken and used is 18% a year.
An example illustrates the point. Suppose a trader paid Rs 18,000 in GST while buying goods. Later, while selling the same goods, the trader collected Rs 30,000 in GST. Under the rules, if the trader is eligible to claim ITC of Rs 18,000, it can be adjusted against the GST liability, so the full Rs 30,000 does not have to be paid to the government. Once the ITC is adjusted, the tax liability falls. But this benefit is available only when both the purchase and the ITC meet the GST rules.
A bill alone is not enough to claim ITC, and a tax invoice alone does not establish a claim either. The trader has to meet several conditions. The goods or services must actually have been received, the supplier must have correctly entered the required details in the GST system, and the buyer must have reconciled their entries with a statement such as GSTR-2B.
If the supplier has not entered the invoice at all, or has made an error in it, the buyer's ITC can also be affected. It is therefore important for traders to match their purchase entries with GSTR-2B.
Another important GST rule is the 180-day rule. If a trader buys goods and does not pay the supplier within 180 days of the invoice date, the ITC taken on that purchase may have to be added back.
The question is when the 18% interest applies. There is a difference between claiming ITC wrongly and merely under-utilising it. Under the GST rules, interest is charged on ITC that was wrongly taken and used, and the rate is fixed at 18% a year. The interest is calculated from the date on which the wrong ITC was used.
Consider another example. If a trader mistakenly claims ITC of Rs 1 lakh and also uses it, returning only Rs 1 lakh will not be enough. Depending on the circumstances of the case, interest and a penalty can be imposed under the rules.
