Penalty on ITC under GST availed but not utilized

Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. The GST regime has introduced Input Tax Credit (ITC) system, which allows taxpayers to claim credit for the tax paid on the inputs used for the manufacture or supply of goods or services. However, under certain circumstances, if ITC has been availed but not utilized, there could be a penalty imposed by the tax authorities.

What is ITC?

ITC is the credit that a taxpayer gets for the tax paid on the inputs used for the manufacture or supply of goods or services. It is an essential feature of the GST regime, which ensures that there is no cascading of taxes. ITC can be claimed by a taxpayer on the basis of an invoice, debit note, or any other document specified under the GST law. The tax paid on inputs can be set off against the output tax liability of the taxpayer.

When can a taxpayer claim ITC?

A taxpayer can claim ITC when the following conditions are satisfied:

The taxpayer must be a registered person under the GST law.
The goods or services must have been used for the purpose of business.
The taxpayer must possess a valid tax invoice or other documents specified under the GST law.
The tax charged on the invoice or other document must have been paid to the government.

What is the penalty on ITC availed but not utilized?

Under Section 16(4) of the CGST Act, if a taxpayer avails ITC but does not use it for payment of output tax liability, or for any other purpose other than those specified under the GST law, then he is liable to pay interest on the amount of such credit availed. The rate of interest is notified by the government from time to time. Currently, the rate of interest is 18% per annum.

Further, under Section 73 and 74 of the CGST Act, if a taxpayer avails ITC wrongly or fraudulently, or contravenes any provisions of the GST law with intent to evade tax, then he is liable to pay penalty equal to the amount of tax evaded or ITC wrongly availed or utilized.

What are the consequences of not utilizing ITC?

If a taxpayer avails ITC but does not utilize it for payment of output tax liability, or for any other purpose other than those specified under the GST law, then he will have to pay interest on the amount of such credit availed. The interest is payable from the date of availing ITC till the date of payment of such amount. The interest amount cannot be set off against any other liability of the taxpayer.

Moreover, if a taxpayer avails ITC wrongly or fraudulently, or contravenes any provisions of the GST law with intent to evade tax, then he will have to pay penalty equal to the amount of tax evaded or ITC wrongly availed or utilized. The penalty is in addition to the interest payable on such amount.

Conclusion

ITC is an important feature of the GST regime, which helps in avoiding the cascading effect of taxes. However, a taxpayer must be careful while availing and utilizing ITC, as any non-compliance with the provisions of the GST law can result in penalty and interest liability. Therefore, it is advisable for the taxpayers to consult with their tax consultants or Chartered Accountants before availing and utilizing ITC.