As you are aware the Input Tax Credit is the tax already paid by the person at the time of goods or services which is available as a deduction from tax payable.
You must be wondering what is the Interest on the reversal of ITC under GST.
Here, we have curated all the essential information related to the topic.
Let’s have a look!
What is ITC?
The term ‘input tax credit’ refers to the process of recovering GST paid on goods and services purchased for business purposes. One of the main reasons for introducing GST is the underlying input tax credit mechanism. As GST is a single tax levied across India (from the manufacture of goods or services to receipt by a final consumer), the chain is unbroken, everyone benefits and credit flows smoothly.
What is the Interest on the reversal of ITC under GST?
You are liable to pay Interest if ITC has been wrongly availed and utilized at a rate not exceeding 24% as notified by Government.
At the time of reversal of input credit, Interest at the rate of 18% is to be calculated as per section 16(2).
In the event you fail to pay the invoice amount within 180 days, the ITC will be reversed.
In various scenarios, ITC is reversed, some of these are mentioned below:
| Circumstances | When is ITC reversal required |
| The recipient fails to pay consideration to the supplier (whether fully or partly) for a particular supply | Within 180 days from the date of issue of the invoice. |
| Depreciation under the Income Tax Act has been claimed on the GST component of capital goods purchased | Reversal is required at the time of closing books of accounts for that financial year. |
| Inputs have been used to make an exempt supply | On a periodic basis (monthly/yearly) using a formula given below for common credits if inputs are exclusively used for making exempt supply, then reverse it as and when identified to have been claimed. |
| Inputs have been used for manufacturing supplies some of which were used for non-business or personal purposes | On a periodic basis (monthly/yearly) using a formula given below for common credits (if inputs used are exclusively attributable to a supply used for consumption, reverse such ITC upon identifying as having been claimed). |
| Cancellation of GST registration | While filing form REG-16 under various situations explained in detail in our article on the cancellation of GST registration. |
| Reversal of 50% of ITC by banking and other financial companies under special rules | At the time of filing regular returns. |
| Reversal of 5/6th of the ITC taken on gold dores in stock as on 1st July 2017 | At the time of supply of either the gold dore bar or the gold/gold jewellery. |
| ITC has been availed on ‘blocked credits’ | At the time of filing regular returns up to the date of filing annual returns. |
| Inputs used in goods that were lost, destroyed, stolen, etc. | At the time of filing the regular returns in relation to the month in which such loss had occurred. |
| Inputs used in goods that were given out as free samples | At the time of filing the regular returns in relation to the month in which such free samples were given out. |
How is interest calculated on ITC reversal under GST?
The total ITC can be divided into:
Specific credit: ITC that may be directly attributable to the supply, whether taxable, tax-exempt or issued for personal use.
Separate this ITC amount from the total ITC as it is easily identifiable. You can use the portion of the ITC that is attributable only to certain taxable supplies. You can check it on the electronic credit ledger.
It is only in the case of erroneous acquisition that the taxpayer must directly reverse the ITC amount as a result of certain supplies used for tax-exempt/personal consumption.
Common Credit: It is an ITC amount, which cannot be tied to a specific supplier, but is used to use both taxable and tax-exempt supplies/deliveries for personal consumption.
Is interest payable on the wrong availment of ITC under GST?
Yes, the interest on the wrong availing of input tax credit (ITC) would only apply in cases where such credit is utilized.
In the event the input tax credit is wrongly claimed, the payment should be reversed in the next month.
Is there any time limit for reversal of ITC?
Yes, within 180 days from the date of issue of the invoice, reversal of ITC needs to be done.
At the end of the financial year, a reversal is required.
What is ITC reversal as per Rule 37?
- According to Rule 37, if you fail to pay the invoice amount to the supplier within 180 days the ITC will be reversed.
- You as the taxpayer are liable to pay interest from the date of availment of ITC till the date of its reversal, in case of reversal of ITC for non-payment of consideration within 180 days.
- In either case, the ITC will be reversed proportionally on the basis of the portion of the invoice paid.
On which amount of interest is calculated in GST?
Interest on GST is calculated as net GST liability after reducing eligible ITC from total output tax.
In other words, interest will be calculated on the cash payment made to discharge the GST liability.
Until the tax is paid, interest will begin to be calculated on the day following the due date for filing.
Will ITC reversal apply even if payment is made by book entries?
ITC reversal is not warranted even if payment is made by book entries within 180 days
You may also refer to Board Circular No. 122/3/2010‐ST dated 30/4/10 issued in the context of reversal under the CENVAT Credit Rule, 2004 wherein the said interpretation has been accepted.
What is the Rule 37 and 39 of GST?
All registered individuals should be aware of Rule 37 and Rule 39 of CGST/SGST. Key points of both rules are provided in the table below. Please find-
| RULE 37 | RULE 39 |
| 180 Days Non-Payment | Credit note issued to ISD |
| The ITC will be reversed, if you fail to pay the invoice amount to the supplier within 180 days | The ITC will be reversed, when ISDs (Input Service Distributors) receive a Credit Note from a supplier |
| Applied in specific circumstances | Lay down the procedure for the Input Service Distributors for distributing Input Tax Credit |
Can DRC 03 be used for the reversal of ITC?
No, you can not use DRC-03 for the reversal of ITC.
DRC-03 is a voluntary tax payment form that is used to pay the GST liability voluntarily or in response to a show-cause notice (SCN).
Can I claim GST credit for previous years?
No, ITC can only be claimed for tax invoices and debit notes which are less than a year old.
Other than that, you have until the earlier of the following dates to claim ITC:
The invoice must be submitted before filing a valid GST return for the month of September following the end of the financial year.
FAQ: What is the Interest on reversal of ITC under GST?
What if payment is done after 180 days in GST?
The ITC and interest will be payable if payment is not received within 180 days under GST.
Can we claim ITC on RCM next year?
If tax is paid under RCM in a month, it can be claimed as ITC in the following month.
What is the time limit for ITC?
CBIC has extended the time limit for claiming ITC (including for FY 21-22) till 30th November.
Can we claim ITC on reverse charge in the same month?
Yes, when you paid the GST under RCM then, you can claim the Input Tax Credit on RCM in the same month.
Wrapping Up
We hope you found this article on What is the Interest on reversal of ITC under GST
informative and helpful.
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