Interest Under GST
Government implemented GST by consolidating various State & Central taxes, these taxes has their different law as compare to each other. Every state’s law has various types of returns, due dates and interest (Interest Under GST) & penalty on account of defaults for late payment & late filing of returns. After implementation of GST, all states are bound with single law and have to follow uniform tax regulations.
Through GST, government tried to digitalize entire tax system to make it user friendly and easily accessible for everyone. As the system is automated, whenever there is any default it may be calculating interest, late fee and penalty automatically. In this article we will discuss and understand all aspects relating Interest under GST that has to be paid by taxpayer for non-compliance.
If any taxpayer “fails to pay taxes” to government or “pays taxes after due date”, then taxpayers has to pay the interest under GST as prescribed under different sections of GST Acts or rules wherever applicable. Similarly if taxpayer “claimed excess input tax credit” or “claimed input tax credit without their eligibility” or reversed lesser input tax credit as compare to required amount of reversal then also taxpayer will be liable for interest payment under GST. Hence we can say interest under GST is an additional burden on taxpayer to make him disciplined.
Let’s understand different scenario where interest liability under GST can arrive along with applicable rate of interest under GST:
There can be multiple reasons where liability for payment of interest can be arise, like defaults in payment of output tax, excess credit availed & reversal of credit etc. Under GST there are 2 rates of interest have been prescribed which are as under:
Interest u/s 50(1) of CGST Act: which deals with late payment of output tax and certain other cases where rate will be 18%
Interest u/s 50(3) CGST Act: which deals with excess or undue input tax credit where rate will be 24%
- a) Situations covered under section 50(1) of CGST Act:
Case 1) Output Tax determined correctly but paid after due date (Interest on late payment of GST)
If taxpayer determined their correct output tax liability but fails to pay on or before due date (i.e. after due date of GSTR 3B), then taxpayer will be liable to pay interest at the rate of 18%. Such interest will be reckoned from the next date of due date to the date of payment.
Example: Taxpayer reported tax liability in his GSTR 1 of INR 1,00,000 for the month of December 2019 and for the same month due date of GSTR 3B was 20th January 2019 but taxpayer made the payment of INR 1,00,000 on 1 February 2020 by filing GSTR 3B, here taxpayer will be liable for interest for 12 days from 21 January to 1 February @18% per annum.
Case 2) Output tax determined wrongly (Interest on GST output liability)
If the taxpayer has short reported their output tax liability in return (GSTR1 and 3B) then he will be liable for interest @ 18%. In this case whenever taxpayer or any officer finds that tax has been paid short by taxpayer then taxpayer is liable to pay such short paid tax along with interest of 18%.
Example: Reason for such under reporting of liability can be like that: taxpayer had forgot to incorporate one invoice of outward supply in their return (3B) having tax liability of 2,00,000 and paid the tax liability as per GSTR 3B, which was not correct liability, as he has to pay tax on the basis of actual liability which should includes tax liability of 2,00,000. In these cases, where taxpayer under reported their output tax liability then taxpayer has to pay interest @18% per annum. Basis for calculation number of days will remain same as mentioned in above example.
Case 3) Input Tax Credit (ITC) wrongly availed (Interest on ITC)
Whenever taxpayer wrongly availed input tax credit then he has to pay interest @ 18% per annum from the date of such excess claim to the date of payment or reversal of excess claimed. Reasons for such excess claim can be invoices received of inward supplies having input tax credit of 2000 (CGST+SGST) but taxpayer claimed 4000 (2000+2000) input tax credit.
Example: Taxpayer organized a corporate lunch on 25th January 2020 and paid INR 52500 to vendor here 50000 for services & 2500 for GST. Taxpayer claimed input tax credit of INR 2500 on food & beverage services and recorded such invoice in their books of accounts on 25th January 2020 however as per section 17(5) of CGST Act input tax credit on such services was not allowed. On 31st March taxpayer realise their error and rectified it by reversing such input tax credit. In that case taxpayer will be liable to pay interest @ 18%. Interest will be calculated from the date of input tax credit availed (25th January 2020) till the date of payment i.e. 20 April on which GST returns (3B) was filed for the month of March along with tax of payment.
Case 4) Reversal of Input tax credit on account of non-payment to supplier within 180 days (Interest on late payment to vendor)
As per section 16 of CGST act, recipient of inwards supplies has to make payment within 180 days from the date of invoice and failure of same will lead to interest obligation. Interest for such reversal will be charge at 18% from the date of invoice till the date of payment. Under this case taxpayer is liable to add such input tax credit and has to make payment in cash.
Example: Taxpayer received invoice for inward supplies of INR 10,000 plus 1,800 on 14th August 2019 and make the payment to vendor for inward supplies and GST on 15th March 2020. As the payment is made after 180 days of invoice, taxpayer is liable to pay INR 1800 to government and this is possible by 20th March while filing GSTR 3B for the month of February 2020. Here interest will be payable from the date of invoice i.e. 14th August to 20th March 2020.
- b) Situation covered under section 50(3) of CGST Act i.e. excess or undue Claim of Input (interest on ITC mismatch as per GSTR 2 and GSTR3)
Whenever taxpayer availed excess input tax credit on account of mismatch with actual inward supplies or Debit/Credit note issued by supplier then he has to pay interest @ 24% per annum from the date of such excess claimed to the date of payment.
Reasons for such excess claim can be that taxpayer didn’t receive the inward supplies but claimed input tax credit or supplies received in later months but claimed credit in current month or reversed input tax credit lesser than input tax credit shown in credit note issued by supplier.
Higher rate of interest is prescribed under that section is to avoid fake input tax credit/excess claim of ITC without receiving actual supplies and to make taxpayer disciplined to report their correct inwards supplies, which is match with vendor’s records. Hence whenever input tax credit doesn’t match with information submitted with vendor then higher rate of 24% will be applicable.
Interest rate of 24% is prescribed in section 50(3) which refers section 42 and 43 of CGST. Section 42 and 43 talks about matching of ITC as per GSTR 2 and GSTR 3 and such returns are not applicable as of now hence interest @24% will not be applicable unless government notifies GSTR 2 and GSTR 3.
Other scenario where interest liability can arise and corresponding interest rate
- Inputs or capital goods that are not returned to the principal within1 year or 3years respectively from the date of received by the Job worker, Rate of Interest will be 18%, the interest period will start from the date of delivery challan issued to the job worker by the principal till the date of reporting in output liability
- Any other defaults relating to short payment/nonpayment or erroneously refunded, Interest will be charge at 18% for default period.
- If taxpayer was required to pay IGST but wrongly paid CGST/SGST or vise versa then such case will not be treated as default, hence interest under GST will not be arise.
Conclusion: As of now interest under GST is applicable at 18% irrespective of type of default whether its late payment of tax, wrong payment of tax or excess claim of ITC however calculation of days of defaults varies as situations elaborated above.