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Published on:
February 20, 2023
By
Paramita

ITC wrongly availed but no utilised shall not draw penal proceedings under GST

The Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. Input Tax Credit (ITC) is a significant feature of GST that allows businesses to claim a credit on the taxes paid on the purchase of goods and services.

However, there have been cases where businesses have availed ITC but have not utilised the same. This has raised concerns regarding the penal proceedings that could be initiated against such businesses.

What is ITC?

Input Tax Credit (ITC) is a mechanism that allows businesses to reduce their tax liability by claiming a credit on the taxes paid on the purchase of goods and services used for business purposes. The ITC can be claimed on the GST paid on inputs, input services, and capital goods that are used or intended to be used for making taxable supplies.

ITC is a critical feature of GST as it helps in preventing the cascading effect of taxes, i.e. tax on tax. For instance, if a company purchases raw materials worth Rs. 1,00,000 and pays a GST of Rs. 18,000, then it can claim a credit of Rs. 18,000 as ITC. If the company sells the finished product for Rs. 1,20,000 and pays a GST of Rs. 21,600, then it can deduct the ITC of Rs. 18,000 from the GST liability of Rs. 21,600. Hence, the company has to pay a net GST of Rs. 3,600.

What is the issue with ITC?

There have been instances where businesses have availed ITC but have not utilised the same for paying the GST liability. This has been a concern for the GST authorities as it has led to revenue leakage.

As per the GST law, if a registered person has availed ITC but has not utilised the same for paying the GST liability, then he is required to reverse the ITC and pay interest on the same.

What is the penalty for wrongly availing ITC?

Section 73 and Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act) deal with the penalty for wrongly availing ITC. The penalty for wrongly availing ITC is equivalent to the amount of ITC claimed. In addition, interest is also payable at the rate of 18% per annum on the amount of ITC claimed.

However, the penalty for wrongly availing ITC can be avoided if the registered person pays the amount of ITC claimed along with interest before the issuance of a show-cause notice.

What is the position of law on ITC wrongly availed but not utilised?

The issue of ITC wrongly availed but not utilised was discussed in the case of M/s Brand Equity Treaties Limited vs. Union of India (2020). In this case, the petitioner had availed ITC on the basis of a tax invoice issued by a vendor. However, the vendor had not paid the tax to the government. Hence, the petitioner was not able to utilise the ITC.

The petitioner contended that since the ITC was not utilised, there was no revenue loss to the government. Hence, no penalty or interest could be imposed on the petitioner.

The Delhi High Court in its judgement held that if ITC is availed on the basis of a tax invoice issued by a vendor, and the same is reflected in the GSTR-2A of the recipient, then the registered person cannot be denied the benefit of ITC only because the vendor has not paid the tax to the government. The court also held that it is not necessary for the registered person to establish that the tax has been paid by the vendor; it is sufficient if the tax invoice is genuine.

The court further held that if the ITC is not utilised, then there is no revenue loss to the government, and hence, no penalty or interest can be imposed on the registered person.

Conclusion

The issue of ITC wrongly availed but not utilised has been a matter of concern for businesses and the GST authorities. The recent judgement of the Delhi High Court in the case of M/s Brand Equity Treaties Limited vs. Union of India has provided relief to businesses as it has held that if ITC is availed on the basis of a tax invoice issued by a vendor, and the same is reflected in the GSTR-2A of the recipient, then the registered person cannot be denied the benefit of ITC only because the vendor has not paid the tax to the government. The court has also held that if the ITC is not utilised, then there is no revenue loss to the government, and hence, no penalty or interest can be imposed on the registered person.

The issue of ITC wrongly availed but not utilised has been a matter of concern for businesses and the GST authorities. The recent judgement of the Delhi High Court in the case of M/s Brand Equity Treaties Limited vs. Union of India has provided relief to businesses as it has held that if ITC is availed on the basis of a tax invoice issued by a vendor, and the same is reflected in the GSTR-2A of the recipient, then the registered person cannot be denied the benefit of ITC only because the vendor has not paid the tax to the government.

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Updated on:
March 16, 2024