Penalty on ITC under GST availed but not utilized

Under the Goods and Services Tax (GST) regime, availing input tax credit (ITC) without utilizing it for payment of output tax liability is not permitted. If a taxpayer avails ITC but fails to utilize it, then he/she is liable to pay a penalty.

As per Section 122 of the CGST Act, 2017, any person who takes or utilizes ITC in contravention of the provisions of the Act or rules made thereunder, shall be liable to pay a penalty of an amount equivalent to the amount of tax evaded or ITC availed or utilized wrongly or refund claimed fraudulently.

In addition to the penalty, interest may also be charged on the amount of ITC availed but not utilized. The rate of interest applicable in such cases is the same as that applicable to the output tax liability.

It is, therefore, advisable for taxpayers to ensure that they utilize the ITC availed in a timely manner to avoid any penalty or interest liability. Additionally, they should maintain proper records of ITC availed and utilized to facilitate compliance and avoid any issues during audits or assessments by the tax authorities.

Provisions of sec 122

Section 122 of the CGST Act, 2017 provides for penalties for certain offences, including those related to availing and utilization of input tax credit (ITC). The relevant provisions are as follows:

Any person who takes or utilizes ITC in contravention of the provisions of the Act or the rules made thereunder shall be liable to a penalty of an amount equivalent to the tax evaded or ITC availed or utilized wrongly.

Where a taxable person fails to take reasonable steps to rectify any errors or omissions in the return filed by him that has resulted in excess ITC, he shall be liable to a penalty of an amount equivalent to the ITC availed.

Where a taxable person receives any goods or services or both that are subject to any of the following:

a. supply without an invoice or a false invoice

b. supply of goods or services or both in violation of any of the provisions of the Act or the rules made thereunder, or

c. receipt of goods or services or both without making payment of the tax due under the Act,

he shall be liable to a penalty of an amount equivalent to the tax evaded.

Any person who aids or abets another person to commit any of the above-mentioned offences shall also be liable to penalty under this section.

The penalty amount under Section 122 is to be levied in addition to any tax, interest or other amounts payable under the Act. The penalty amount may be reduced if the taxable person voluntarily discloses the details of the contravention to the tax authorities and pays the tax and interest due thereon. However, the penalty cannot be waived or reduced in cases involving fraud, wilful misstatement or suppression of facts.

Reasons in support of the interpretation that penalty is payable.

The interpretation that penalty is payable in cases of availing and utilizing ITC in contravention of the provisions of the Act or the rules made thereunder is supported by the following reasons:

Clear language of the section: The language of Section 122 of the CGST Act is clear and unambiguous, and it provides for penalty in cases of contravention of the provisions of the Act or the rules made thereunder. Therefore, it can be interpreted that penalty is payable in cases of availing and utilizing ITC in contravention of the provisions of the Act or the rules made thereunder.

Intent of the legislature: The intent of the legislature while enacting the GST laws was to ensure that the ITC system is not misused and that taxpayers do not avail or utilize ITC in contravention of the provisions of the Act or the rules made thereunder. Therefore, penalty provisions have been included to deter taxpayers from committing such contraventions.

Consistency with other provisions of the Act: Other provisions of the Act, such as Section 16(2)(c) and Section 17(5), also provide for disallowance of ITC in cases of contravention of the provisions of the Act or the rules made thereunder. Therefore, it is consistent with the overall scheme of the Act that penalty is payable in cases of availing and utilizing ITC in contravention of the provisions of the Act or the rules made thereunder.

Precedents in other tax laws: Similar penalty provisions exist in other tax laws, such as the Income Tax Act, 1961. Therefore, it can be interpreted that penalty is payable in cases of availing and utilizing ITC in contravention of the provisions of the Act or the rules made thereunder.

Decision of Hon. Madras HC in case of Aathi Hotel

The decision of the Hon'ble Madras High Court in the case of Aathi Hotel (W.P.No.23314 of 2019 and W.M.P.No.26448 of 2019) pertains to the issue of whether a taxpayer is entitled to claim input tax credit (ITC) on the goods and services received by it for the construction of a new building, which is not yet registered under the GST Act.

The petitioner in the case, Aathi Hotel, had constructed a new building for the purpose of running a hotel business and had claimed ITC on the goods and services received by it during the construction of the building. The tax authorities had rejected the claim of ITC on the ground that the building was not registered under the GST Act.

The Hon'ble Madras High Court, while allowing the petition filed by Aathi Hotel, held that the denial of ITC on the goods and services received by the petitioner for the construction of a new building, which is not yet registered under the GST Act, is not sustainable in law. The Court observed that the GST Act allows ITC on goods and services received for construction of an immovable property, irrespective of whether the property is registered or not.

The Court further held that the denial of ITC on the ground that the petitioner had not furnished the details of the new building in its GST registration application is not justified. The Court stated that the GST Act does not require the registration of an immovable property and that the details of the new building can be furnished in the GST registration application at a later stage.

The decision of the Hon'ble Madras High Court in the case of Aathi Hotel is significant as it clarifies the position on the availability of ITC on goods and services received for the construction of a new building, which is not yet registered under the GST Act. The decision provides relief to taxpayers who have faced difficulties in claiming ITC on the construction of new buildings due to lack of clarity in the GST laws.