Across the country objections have raised by the GST Department on erroneously availed but not utilized ITC. In this article we will discuss on such objections and the legal provisions in this regard.

First as per Sec 50(3) read with sec 42(10) of CGST Act, payment of interest is only triggered where there is a reduction in output tax liability. Hence in instances where there is no reduction in output tax liability but only erroneous availment of excess input credit, which has not been utilized by the assessee, interest liability is not triggered.

Secondly there is no financial benefit of availment of excess ITC to the assesse and therefore no revenue loss to the exchequer. Hence it is against the Rule of Law. Rule of law contemplates governance by laws and provision of justice by the men to whom the governance is entrusted for the time being. The rule of law means that decisions should be made by the application of known principles and rules and, in general, such decisions should provide Justice and remove hardship of the citizens.

Thirdly, this scenario was also considered by the 31st Meeting of the GST Council  held on 22nd December 2018, wherein the council has agreed that Section 50 (3) of the CGST Act shall be amended so as to provide that interest would be leviable only “on the amount payable through the electronic cash ledger” of the taxpayer. The Press Note stated as under -

“Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger”.

Hence in our view, in the cases where the excess input credit was erroneously availed but not utilized and was reversed through unutilized credit balance available in the electronic credit ledger in the GST Portal , there was no amount payable through the electronic cash ledger. Therefore there is no question of interest at all.

The above submission is also supported by the following judgements -

The Punjab & Haryana High Court had addressed the issue in its decision in Ind-Swift Laboratories Ltd. Vs Union of India [ 2009 (7) TMI 98 - PUNJAB & HARYANA HIGH COURT ], wherein it was held that no interest was payable if the CENVAT Credit is merely availed and not utilised for payment of tax.

The Punjab and Haryana High Court, again in CCE vs. Maruti Udyog Ltd. [ 2006 (10) TMI 63 - PUNJAB & HARYANA HIGH COURT ], held that an assessee was not liable to pay interest where credits had only been availed erroneously but were not subsequently utilised

To invoke interest even when it is abundantly clear that no interest is payable incase ITC is merely availed and not utilised for payment of tax would certainly be arbitrary and restricting the freedom to carry on trade without any justification and would be in violation of Articles 14, 19 & 301 of The Constitution of India.