Interest On Wrongly Claimed ITC - Comprehensive Discussion

As we know that while claiming the input tax credit in respect of the tax paid on inward supply of goods or services the taxpayer has to comply with the conditions of section 16 & 17 of CGST Act 2017. However, sometimes the situation arises where the ITC is wrongly availed by the taxpayer. In that case there are the provisions of interest under GST law. In this article we will discuss various points like when such interest is applicable, how to calculate such interest amount when ITC is wrongly claimed by the taxpayer.

When Interest would be applicable:

Earlier, the position was that interest should be paid on excess credits even if not utilised. However, vide Section 111 of Finance Act 2022 a retrospective amendment was made in Section 50(3) of the CGST Act which was notified on 5th July 2022 vide Notification No. 09/2022-Central Tax, by stating that the interest would be applicable when such input tax credit is wrongly availed and utilised. Thus it is clear that no interest would be payable if such ITC is not utilised by the taxpayer.

Let us discuss the same with the help of an example:
The registered person Mr. A has availed the excess ITC of Rs. 1,50,000 and utilised only Rs. 50,000 against its output tax liability, while Rs. 1,00,000 remained unutilised. Thus as per amended Section 50(3) the interest would be payable @ 18% p.a on the utilised amount i.e., on Rs. 50,000/- but no interest would be leviable on the unutilised amount of Rs. 1,00,000/-.

Period of interest calculation:

Till now we have discussed that the interest @ 18% p.a is payable on the amount of ITC wrongly availed and utilised and no interest would be payable on the unutilised amount of ITC. Now the question arises what would be the period of interest ?

In this respect attention is drawn to sub rule 3 of rule 88B of CGST Rules 2017 which states that interest would be payable for the period starting from the date of utilisation of such wrongly availed ITC  till the date of reversal of such credit or payment of tax in respect of such amount. 

For example: Mr. X has wrongly availed & utilised the ITC of Rs. 50,000/- in the GSTR-3B of April 2024 and while filing the GSTR-3B of February 2025 Mr. X wants to reverse such ITC. Thus Interest @ 18% p.a would be applicable for the period of 10 months i.e., from April 2024 to January 2025.

How to check that credit is utilised:

Further the explanation to Rule 88B of the CGST Rules, 2017, states that input tax credit (ITC) wrongly availed shall be deemed to have been utilised when the balance in the electronic credit ledger falls below the amount of such wrongly availed ITC.

Thus from the above it is clear that when the balance of credit ledger falls below the amount of ITC wrongly availed then it shall be considered that such credit is utilised by the taxpayer. However, there can be a situation where the balance of the credit ledger of a particular month falls below the amount of ITC which was wrongly claimed. But next month the balance credit ledger is more than the said amount and thereafter again in next month the said balance of credit ledger falls below the amount of ITC wrongly claimed. Then in said situation how the interest would be calculated.

Let us discuss the same with the help of an example;
Suppose XYZ Ltd. has availed the excess ITC of Rs. 2,50,000/- under CGST head & Rs. 2,50,000/- in the month of July 2024. The position of credit ledger of the subsequent months was as follows; 

Now, in the month of February 2025, XYZ Ltd. wants to reverse the excess ITC claimed. How the interest would be calculated in this respect?

In our above example, since in the month of August 2024 the balance of credit ledger did not fall below the amount of ITC wrongly availed, hence no interest would be payable in August 2024 as the ITC is not utilised in that month.

However, in the month of September 2024 the balance of credit ledger had fallen below the ITC wrongly availed hence the ITC is being utilised in September 2024 and accordingly, the interest would be applicable in the month of September.

Now, the main question arises whether the interest would be payable or not in the month of October 2024 as the balance of credit ledger has not fallen below the ITC wrongly availed?

In this respect it is important to note that as per the wordings of sub rule 3 of rule 88B, it is very clear that the interest shall be calculated on the amount of input tax credit wrongly availed and utilised, for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount.

Thus in our example the interest would be calculated from the date of utilisation i.e., when the balance of credit ledger fallen below the ITC wrongly availed till date of reversal of such credit. In our example the balance of credit ledger fell below in the month of September 2024 and XYZ Ltd. wants to reverse the said ITC in the month of February 2025. Hence as per rule 88 B(3) the period of interest would be calculated from September 2024 to February 2025.   

Interest on IGST Credit Utilisation:

The CBIC vide Circular No. 192/04/2023-GST dt.17.07.2023 has clarified that in cases where IGST credit has been wrongly availed and subsequently reversed on a certain date, there will not be any interest liability, if during the time period starting from such availment and up to such reversal, the balance of input tax credit (ITC) in the electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has never fallen below the amount of such wrongly availed ITC, even if available balance of IGST credit in electronic credit ledger individually falls below the amount of such wrongly availed IGST credit.

However, when the balance of ITC, under the heads of IGST, CGST and SGST of electronic credit ledger taken together, falls below such wrongly availed amount of IGST credit, then it will amount to the utilization of such wrongly availed IGST credit and will attract interest as per sub-section (3) of section 50 of CGST Act.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.