Penalty on Wrong Availment of ITC Under GST

What is the Penalty for Wrong Availment of ITC Under GST?

The penalty mechanism makes sure that taxpayers stay compliant with the GST laws, rules, and regulations. If a taxpayer does any misuse of the Input Tax Credit (ITC), there are certain penalties -

• Wrongful Availment - As per the GST provisions, if an entity wrongly avails ITC but has not utilized it yet, it should reverse the credit and the interest within a specified period. Failing to do this can result in proceedings related to penalties against the availing of ITC.
• Penalty Amount - In case you have availed of ITC by mistake and also utilized it, the penalty amount can go up to 100% of the ITC amount availed or Rs.10,000, whichever is higher.
• Interest Component - Section 50 of the CGST Act was amended in 2017, and it was established that interest is only chargeable on ITC wrongly availed and utilized at such rate not exceeding 24%, not just on wrongly availed.
• Specific Provisions - Section 122 of the GST Act makes it clear that the penalty can be levied for wrongly availed or wrongly utilized ITC. Therefore, even if ITC is available but not used, a penalty may apply.
• Intention - If the department finds that there is any malafide intention to evade taxes, it can increase the penalty amount and impose higher penalties.

What are the Judgements Around the Wrong Availment of ITC?

Over the previous years, various courts have provided judgments on the wrong availment of ITC. Given below are some major judgments provided by courts that provide greater clarity in the matter -

• Judgement 1 - M/S Aathi Hotel vs Assistant Commissioner (ST), 2021
  In this case, the honorable Madras High Court dealt with the wrong availment of ITC, where credit was availed but not utilized. The main issue in this case was the confusion regarding imposing penalties and interest on ITC wrongly availed but not utilized. The court rules that the taxpayer does not have to pay any interest or penalty. This judgment also highlighted the importance of invoking section 122 for the levy of penalties. However, this need was overlooked in this case. Therefore, it was established that there would be no interest or penalty if the entity wrongly avails ITC and doesn't need to utilize
• Judgment 2 - Pratibha Processors vs. Union of India, 1996
  In this case, the Supreme Court clarified the difference between and the intricate relationship between tax, interest, and penalty. As per the apex court, interest acts as a compensatory measure to the government for withholding tax revenue. Similarly, a penalty is levied as a punishment for deliberate violation of tax laws. When it comes to Input Tax Credit (ITC), the court's differentiation helps determine whether a taxpayer's actions resulted from a simple oversight, leading to interest, or a deliberate act, resulting in penalties.
• Judgement 3 - Refex industries LTD. vs. Assistant Commissioner, 2020In this judgment by the Madras High Court, the issue revolved around the denial of ITC on input services used in the pre-GST regime. The petitioner argued that the denial of ITC was causing hardships. The court provided its decision in favor of the taxpayer/petitioner. It said that the transitional provisions should be interpreted liberally to fulfill the objectives of the GST regime.

What are the Provisions of Section 122 of the GST Act?

Given below are the penalties for certain cases as mentioned under section 122 of the GST Act -

• A registered person supplying goods or services or both on which tax has not been paid, less amount paid or wrongly refunded, or if the input tax credit has been availed or utilized wrongly.
• For any reason other than fraud, any wilful misstatement, or suppressing facts to evade taxes. In such a case, a penalty of upto 10% or Rs.10,000, whichever is higher, might be leviable.
• For fraud, suppression of facts, or willful misstatement to evade tax, the taxpayer shall have to pay a penalty of either Rs.10,000 or 10%, whichever is higher.

Hence, it is evident from the aforementioned details that a penalty is applicable when Input Tax Credit (ITC) is incorrectly claimed or utilized. Even if the ITC is inaccurately claimed but not utilized, a penalty of either 10% or 100%, depending on the circumstances, may be imposed. Typically, the tax department aims to assert that there was a deliberate intent to evade tax, leading to the imposition of the higher 100% penalty. Given that section 50 has been amended while section 122 remains unchanged, it appears that a penalty for an incorrect claim (without utilization) can still be imposed.

It is extremely important for taxpayers to understand the provisions regarding the penalty for wrong availment and utilization of ITC (input tax credit). It helps taxpayers avoid legal complications and financial repercussions. Given the evolving nature of law and the ever-changing provisions, it is recommended that you consult tax professionals to ensure compliance with GST laws. Get tax advice now!