Query

Rate of Interest

The querist has claimed ITC. However, subsequently there is found to be mismatch between ITC claimed in GSTR 3B vis-à-vis GSTR 2A. The querist is ready to reverse ITC and pay difference. However, what will be the rate of interest, whether 18% u/s.50(1) or 24% u/s.50(3) of CGST Act?

Reply

To see correct position, it will be better to see where section 50(3) applies. If section 50(3) is not applicable then safely it can be said that it will attract interest u/s.50(1) i.e.@ 18%.

Section 50(1) to 50(3) of CGST Act reads as under:

“50. Interest on delayed payment of tax.—

1. Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:

   [Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.] 78

2. The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

3. A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty four per cent., as may be notified by the Government on the recommendations of the Council.”

The interest under section 50(3) applies when there is undue or excess claim of ITC under section 42(10).

Section 42(10) reads as under:

“42. Matching, reversal and reclaim of input tax credit.—

(10) The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes place and such recipient shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.”

As per this section when there is reduction from output liability in contravention of provision of section 42(7), then interest as per section 50(3) shall apply.

Therefore, reference is required to be made to section 42(7). The said section reads under:

“42. Matching, reversal and reclaim of input tax credit.—

(7) The recipient shall be eligible to reduce, from his output tax liability, the amount added under sub-section (5), if the supplier declares the details of the invoice or debit note in his valid return within the time specified in sub-section (9) of section 39.”

As per this section the person can reduce his output tax liability by the amount added under section 42(5), if the supplier declares the details of invoices or credit note in his valid return filed within time limits given in section 39(9). Therefore, it is necessary to find out what is being added as per section 42(5).

Section 42(5) & (3) reads as under:-

“42. Matching, reversal and reclaim of input tax credit.—

(5) The amount in respect of which any discrepancy is communicated under sub-section (3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in such manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.”

Thus, as per this section if the mis-match conveyed to recipient is not cleared by supplier, it will be added in output liability of succeeding month. Mis- match is conveyed as per section 42(3), reproduced below:

“42. Matching, reversal and reclaim of input tax credit.—

(3) Where the input tax credit claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.”

This section provides for communication of mismatch to both parties i.e. supplier and recipient who claims ITC.

From above inter connected provisions, the sequence can be arranged as under:-

The discrepancy of mis-match will be found out by revenue and conveyed to supplier/ recipient (Section 42(3)).

If discrepancy communicated is not rectified by supplier in concerned month in which discrepancy communicated , then the recipient should add such amount in its output liability (sec.42(5)).

The recipient can once again take credit and reduce his output tax liability, if supplier rectifies his mistake by valid return filed within time limit of section 39(9).(sec.42(7)). As per section 39(9) the supplier can declare details of previous year till due date of filing return of September of succeeding year or actual date of filing annual return whichever is earlier. Due to section 42(7) supplier gets longer time to rectify his position.

If person has taken above reduction as per section 42(7) and it transpires to be incorrect then again it will be added back in output tax liability in return of concerned month of contravention (sec. 42(10)) and it is here that interest on same will apply @ 24% u/s.50(3).

Therefore, there are two situations.

1. Where the output tax liability is added due to communication of mismatch. This will be the first occasion in chain and hence interest will be 18% u/s.50(1). This is also clear from section 42(8).

2. Second occasion occurs when, after first addition in output liability, the recipient reclaims credit and reduces its output tax liability on ground that supplier has rectified discrepancy by valid return as per section 39(9).

However, if such assumption turns out to be wrong then the output liability will again be added by such amount of discrepancy. At such time the interest rate will be @ 24% u/s.50(3).

In summery, it can be said that in normal circumstances, where the recipient discharges discrepancy amount at first occasion the rate will be @ 18% u/s.50(1).

It is only when there is reclaim of such amount and if such reclaim turns out to be wrong, then the rate of interest will be @ 24% u/s.50(3).

The querist can see position accordingly.