Penalty on Wrong availment of ITC under GST

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Published on:

February 28, 2025

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Penalty on Wrong availment of ITC under GST

What is the Penalty for Wrong Availment of ITC Under GST?

The penalty for wrongly availing of the Input Tax Credit (ITC) under GST is designed to ensure taxpayers follow compliance regulations. If ITC is claimed incorrectly, the following consequences may apply:

1. Reversal of ITC – If a taxpayer mistakenly avails ITC but has not utilized it, they must reverse the credit along with applicable interest within the given timeframe. Failure to do so may lead to penalty proceedings.

2. Penalty Amount - If the ITC is incorrect and used, but still used, the penalty will be ₹ 10,000 depending on the value of up to 100% of the amount available or ₹10,000, depending on the higher one.

3. Interest Costs - According to a change from 50 of the CGST Act of 2017, interest applies only if it is misused by the ITC.

4. The interest rate can go up to 24%.

5. Legal Provisions – Under Section 122 of the GST Act, penalties can be imposed for availing and utilizing ITC incorrectly. Even if ITC is claimed but remains unused, penalties may still apply.

6. Intentional Tax Evasion – If authorities find that the wrongful claim was intentional, stricter penalties may be imposed, increasing the overall liability.

You Can Also Read: Input Tax Credit Under GST: Eligibility and Claim Process

Key Judgments on Wrongful availing of ITC

Over the years, courts have delivered significant rulings regarding the incorrect availment of Input Tax Credit (ITC). Below you will find some surprising judgments that provide insight into the interpretation of the law in such cases.

M/s Ati Hotel Assistant Commissioner (ST), 2021

In this case, the Madras High Court has confirmed whether penalties and interest will be imposed if the ITC has been misused but not used. The court said it must decide in the favor of taxpayers and pay interest and penalties in such circumstances. However, the decision emphasized that Section 122 of the GST Act, which provides for punishment for illegal ITC claims, should be carefully checked in such cases. This decision reveals that if the ITC is not used, punishment may not always apply, and compliance with GST regulations is extremely important.

Pratibha Processor vs. Union of India, 1996 The

The Supreme Court distinguished in this case between tax, interest, and penalty. The court finds that interest should compensate the government for late tax payments, and the penalty is intended to be a deliberate violation of the tax law. About the ITC, this judgment determined an important principle:

If an incorrect claim emerges from the supervisor, only interest can be applied. However, if punishment is also intentionally imposed.

Reflex Industries Ltd vs. Assistant Commissioner, 2020

This Madras High Court ruling addressed the ITC denial of input services from the pre-GST era. The petitioner argued that such denial was causing unnecessary hardship. The court ruled in favor of the taxpayer, asserting that transitional provisions under GST should be interpreted in a manner that aligns with the law’s objectives. It emphasized that ITC restrictions from the previous tax regime should be assessed with a broader perspective, ensuring fair treatment for taxpayers.

What are the legal requirements for ITC claims?

1. Possession of a valid invoice - You must have a tax invoice or another related document issued by the registered supplier.

2. Receipt of Goods and Service - You can only claim ITC if you receive the Product or Service.

3. Supplier Payment - Suppliers must pay taxes to the government as reflected in GST returns.

4. GST Return Submitting- You must submit your GST Returns (GSTR-3B and GSTR-2B) at a time appropriate to request ITC.

5. ITC should not be blocked - ITC cannot be requested in the articles listed in Section 17(5) of the CGST Act.

6. Claim within the time limit- ITCs must file on the date of the September repayment date for the next fiscal year or before filing an annual return (depending on previous times).

How does the GST department recognize fake invoices?

The GST department uses a variety of methods to identify fake invoices and prevent tax fraud. How to identify suspicious activity:

1. Checking Multiple GST Registrations Under One PAN – If a single PAN has multiple GST registrations, it may indicate shell companies used for fake invoices. The department cross-checks data to find such cases.

2. Comparing Sales and Purchase Reports – The system automatically matches sales reported in GSTR-1 with purchases in GSTR-2A/2B. Big mismatches can signal fraud, so regular reconciliation is important.

3. Monitoring High Transactions in New Businesses – If a newly registered business reports unusually high transactions, it raises suspicion. The department keeps a close watch to prevent fake invoicing.

4. Tracking E-Way Bills with Transaction Data – The department checks whether the number of e-way bills generated matches the reported transactions in GSTR-1. If the numbers don’t add up, it could indicate fake invoices.

5. Watching ITC Claim Patterns – A sudden increase or unusual ITC claims that don’t match the business’s size or nature can raise red flags. The department investigates such patterns to catch fraud.

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Conclusion

Input Tax Credit (ITC) as part of GST can lead to high penalties, interest, and legal issues. The GST division is actively pursuing trading with the help of expansion tools. This means that non-compliance is easily recognized. To stay safe, businesses must maintain accurate records, submit them quickly, and follow legal guidelines. Learning from past judicial cases can also help you deal with ITC-related conflicts. Ultimately, it's not just about maintaining conformity and transparency, avoiding punishment, and ensuring smooth business and economic security.

FAQs

1. What happens if I wrongly claim ITC under GST?

If ITC is wrongly claimed, you may need to reverse it with interest. If utilized, a penalty of up to 100% of the amount or ₹10,000 (whichever is higher) may apply.

2. Can I avoid a penalty if I reverse ITC before using it?

Yes, if you reverse the wrongly claimed ITC before utilizing it, only interest may be applicable, and a penalty might not be imposed.

3. What is the interest rate on wrongly availed ITC?

If ITC is wrongly claimed and used, interest can be charged up to 24% as per Section 50 of the CGST Act.

4. How does the GST department detect fake ITC claims?

The department matches GSTR-1 (sales) with GSTR-2A/2B (purchases), monitors e-way bills, and checks suspicious ITC claims based on transaction history.

5. Can I claim ITC without a proper invoice?

No, you must have a valid tax invoice or debit note from a registered supplier to claim ITC.

6. What if my supplier doesn’t pay GST to the government?

If your supplier fails to pay GST, your ITC claim may be denied, and you might have to pay the tax along with interest.

7. Is ITC allowed on all purchases?

No, ITC cannot be claimed on blocked credits under Section 17(5), like motor vehicles (except in certain cases) or personal expenses.

8. Can I claim ITC for the previous year?

ITC must be claimed before the due date of the September return of the following financial year or before filing the annual return, whichever is earlier.