Introduction:
The Indian Goods and Services Tax (‘GST’) system, established in 2017, has witnessed continuous refinement and clarification. One such clarification addresses the assessment of interest charges for the incorrect utilization of Integrated Goods and Services Tax (‘IGST’) credits. To provide clarity on this matter, the Central Board of Indirect Taxes and Customs (‘CBIC’) issued a circular. This circular explains how interest is calculated under s. 50(3) of the Central Goods and Services Tax (‘CGST’) Act, 2017, particularly focusing on whether wrongly availed IGST credits should be factored into the interest calculation when the available IGST credit balance is insufficient to cover the erroneously availed amount. Notably, r. 88B of the CGST Rules, 2017, is mentioned in the circular solely to outline the interest calculation methodology in such situations, with an emphasis on considering the total Input Tax Credit (‘ITC’) across all relevant categories to determine the interest liability.
Charging of Interest and Calculation Method:
Circular No. 192/04/2023-GST File No. CBIC-20001/5/2023-GST, dated 17th July 2023, issued by the CBIC provides explicit guidelines on the charging of interest in cases where IGST credit has been wrongly availed and subsequently reversed. According to s. 50(3) of the CGST Act, 24% interest is applicable on the amount of wrongfully availed or utilized credit by a registered person. The circular reaffirms that interest is applicable on the entire amount of wrongly availed credit, including IGST, Central GST (CGST), and State GST (SGST).
Role of Rule 88B:
To calculate interest correctly, the CBIC highlights the significance of r. 88B of the CGST Rules. R. 88B specifies the method for calculating interest on delayed payment of tax including cases of wrongly availed ITC. The circular clarifies that all heads (IGST, CGST, and SGST) will be taken into account while calculating interest. By including all heads, the CBIC aims to ensure that the interest charged covers the entirety of wrongly availed credit . It's worth noting that the circular also clarifies that interest liability arises only when the balance in the electronic credit ledger under applicable heads falls below the amount of wrongly availed IGST credit. This is considered 'utilization' of wrongly availed IGST credit. If the balance in the electronic credit ledger has never fallen below the wrongly availed IGST credit during the period from availing to reversal, there will be no interest liability as no 'utilization' has occurred.
Exclusion of Compensation Cess:
While interest is charged on the cumulative amount of IGST, CGST, and SGST, the circular makes it clear that the credit of compensation cess cannot be used in the interest calculation. The compensation cess is levied under the GST (Compensation to States) Act, 2017, and is specifically earmarked to compensate states for any revenue losses incurred due to the implementation of GST.
Explanation and Rationale:
The exclusion of compensation cess from the interest calculation can be attributed to its specific nature and purpose. Unlike IGST, CGST, and SGST, which are part of the GST regime, the compensation cess is designed to address the fiscal implications faced by states during the transition to the GST system. Thus, it is distinct from other types of taxes and does not factor into the interest calculation framework.
Impact and Compliance:
This clarification by the CBIC ensures uniformity and consistency in the charging of interest for the wrongful availment of IGST credit across all field formations. It simplifies the calculation process and eliminates any ambiguity regarding the inclusion or exclusion of different tax heads for the purposes of interest computation. By providing clarity on this matter, the CBIC aims to facilitate better compliance and minimize disputes related to the charging of interest for the wrong availment of IGST credit.
Conclusion:
The circular issued by the CBIC serves as a significant clarification on the charging of interest for the wrongful availment of IGST credit under s. 50(3) of the CGST Act. By referring to the role of r. 88B of the CGST Rules, the CBIC confirms that interest is calculated on the total amount of wrongly availed credit, encompassing IGST, CGST, and SGST. However, the credit of compensation cess is excluded from the interest calculation due to its distinct purpose and nature. This clarification streamlines the interest calculation process, promotes compliance, and aims to foster greater transparency in the GST system.
Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.