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January 27, 2021

Companies approach Gujarat High Court over penalty, interest payment on ITC

by CA Shivam Jaiswal in GST

Companies approach Gujarat High Court over penalty, interest payment on ITC

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Several companies have taken the indirect tax department to court over the slapping of penalties and interest on unpaid GST and ITC amounts.

Why have companies filed a writ petition against the indirect tax department?

  • Several companies have filed a writ petition in the Gujarat high court against the indirect tax department.
  • The input tax credit mechanism under the GST allows companies to set off part of the tax paid against future tax liabilities.
  • So, when companies pay GST, it is typically paid in two parts, tax and tax credit set-offs.
  • In cases where the tax department estimates a shortfall or mismatch between the GST a company is required to pay and the amount it has actually paid, penalties and interest are charged.
  • The companies say such penalties and interest should be applicable only on the actual GST to be paid and not the entire amount.
  • The issue was whether the restriction of benefit with respect to interest was applicable when there was utilisation from the credit register in case the investigation has started under the GST provisions or not.

Let us understand the same with the help of an example:

A company with a tax liability of Rs 10,000 that has Rs 7000 in its credit ledger should have to pay only Rs 3000 as tax. However, upon the discovery of any discrepancies in the tax payment, the question is whether penalty and interest should be levied on Rs 10,000 or Rs 3000.

The companies that have approached the court argue that penalty and interest should be charged only on the pending amount.

What are the interest and penalty provisions on late payment of GST?

According to the GST regulations, an interest will be charged at the rate of 18% per annum from the taxpayers who fail to pay their taxes on time. The interest will be levied for the days after the due date.

For instance, if your tax liability is Rs. 2,000 and you have not paid tax on time for a given month. Now, if you pay tax after one day from the due date, your interest will be calculated as 2000*18/100*1/365 = Rs. 0.98 Per day.

In case of fraud, an offender has to pay a penalty amount of tax evaded/short deducted etc., i.e., 100% penalty, subject to a minimum of Rs. 10,000.

In cases other than fraud, an offender not paying tax or making short-payments has to pay a penalty of 10% of the tax amount due, subject to a minimum of Rs.10,000. 

Issues regarding revision of returns

Even when a company wishes to revise its tax payments, it is not possible due to the way the GST framework operates.

GST returns cannot be revised in the present filing system. The mistake made in a return can be rectified in the subsequent return when such mistake comes into notice.

Although, the rectification is not allowed in following cases:

  • An error is found as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities.
  • After any of the following dates
    (a) due date of return of month of September or quarter July to September of following year
    (b) actual date of furnishing annual return of the relevant year

The revision of returns is not possible for the financial year after September of the next year and this leads to problems in cases when differential tax has to be paid due to classification misunderstandings or interpretational clarity.

The denial of benefit of reduced interest after utilizing credit is arbitrary and is now challenged.

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