Understanding Interest on Excess ITC Claimed, ITC Reversal, and ITC Availed But Not Utilized
Within the GST framework, businesses encounter three critical scenarios related to Input Tax Credit (ITC) that involve interest implications:
- Interest Calculation in Wrong Claimed ITC: When a business claims more ITC than it is entitled to, resulting in ‘excess ITC claimed,’ it incurs interest liabilities. The government imposes an interest rate of 18% per annum on this overclaimed amount. This measure aims to promote compliance and deter incorrect ITC claims, maintaining fiscal discipline in the GST regime.
- Interest on ITC Reversal: ITC reversal occurs when previously claimed ITC is deemed ineligible upon further examination. This may occur due to various reasons such as returned goods or annulled services. Interest on ITC reversal is calculated based on the amount reversed and the period for which it was incorrectly claimed.
- Interest on ITC Availed But Not Utilized: Initially, interest was payable on excess ITC availed but not utilized. However, with retrospective amendments, interest now applies only to the net tax liability paid via the electronic cash ledger. Therefore, for excess ITC availed but not utilized and subsequently reversed without offsetting against any output tax liability, no interest is charged.
Example Calculation:
Consider the following scenario:
- A business avails ITC of INR 10,000 on January 1st, 2023, but later discovers that INR 2,000 was wrongly claimed on February 1st, 2023, necessitating an ITC reversal.
The table below illustrates the calculation of interest for the ITC reversal:
| Item | Details |
|---|---|
| Amount of ITC Reversed | INR 2,000 |
| Date of Wrongful Claim | February 1st, 2023 |
| Date of Reversal | March 1st, 2023 |
| Number of Days | 28 days (February) |
| Interest Rate | 18% per annum |
| Calculated Interest | (INR 2,000 * 18% * 28) / 365 |
| Resulting Interest Amount | ≈ INR 30 |
In this example, the interest payable on the ITC reversal is approximately INR 30, calculated based on the overclaimed amount, the number of days for which it was wrongly claimed, and the applicable interest rate.
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