New
February 23, 2023
By
Pranjal Gupta

Interest on Reversal of Unutilised ITC under GST Explained

Are you a business owner or a startup founder in India? If you are registered under the Goods and Services Tax (GST) regime, you might be aware of the Input Tax Credit (ITC) system, which allows you to claim credit for the tax paid on inputs used in your business. However, there are certain situations where the ITC claimed may have to be reversed or returned, which can result in a liability for interest payments. In this article, we will discuss the concept of interest on reversal of unutilised ITC under GST.

Understanding Input Tax Credit (ITC)

Before we delve into the topic of interest on reversal of unutilised ITC under GST, let us first understand what Input Tax Credit is.

Input Tax Credit (ITC) is a mechanism that allows businesses to claim credit for the tax paid on inputs used in the manufacturing or distribution of goods or services. Under the GST regime, a business can claim ITC for the GST paid on inputs such as raw materials, capital goods, and services used in the course of business.

For example, let’s assume that a manufacturer purchases raw materials worth Rs. 1,00,000, and the GST rate applicable is 18%. In this case, the GST paid would be Rs. 18,000 (18% of Rs. 1,00,000). If the manufacturer sells the final product for Rs. 1,50,000, and the GST rate applicable is also 18%, the GST liability would be Rs. 27,000 (18% of Rs. 1,50,000). However, the manufacturer can claim ITC for the GST paid on inputs, which in this case is Rs. 18,000. Hence, the net GST liability would be Rs. 9,000 (Rs. 27,000 - Rs. 18,000).

Reversal of Input Tax Credit (ITC)

There are certain situations where the ITC claimed by a business may have to be reversed or returned. Some of these situations are as follows:

  1. If the goods or services are used for personal consumption, or are not used in the course of business, the ITC claimed would have to be reversed.
  2. If the goods or services are used to make exempt supplies, the ITC claimed would have to be reversed.
  3. If the goods or services are used for non-business purposes, the ITC claimed would have to be reversed.
  4. If the supplier of goods or services does not pay the tax due to the government, the ITC claimed would have to be reversed.

The reversal of ITC can result in a liability for interest payments, which we will discuss in the next section.

Interest on Reversal of Unutilised ITC under GST

Under the GST regime, if a business claims ITC for the tax paid on inputs, but does not use the credit for payment of GST liability on output supplies, the unutilised credit would have to be reversed or returned. This is known as the reversal of unutilised ITC.

As per the GST rules, if the reversal of unutilised ITC results in a liability for payment of tax or interest, the taxpayer would have to pay interest at the rate of 18% per annum on the amount of ITC reversed or returned. The interest would be calculated from the date of availing ITC till the date of reversal or return.

For example, let’s assume that a manufacturer claims ITC worth Rs. 50,000 for the tax paid on inputs. However, the manufacturer is unable to use the credit for payment of GST liability on output supplies, and hence has to reverse the unutilised ITC. If the reversal of ITC results in a liability for payment of tax or interest, the manufacturer would have to pay interest at the rate of 18% per annum on the amount of ITC reversed or returned.

Conclusion

The concept of interest on reversal of unutilised ITC under GST can be complex and confusing for many business owners and startup founders in India. However, it is important to understand the implications of ITC reversal and the resulting interest payments to avoid any penalties or legal issues. We hope that this article has provided you with a clear understanding of the topic.

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