Avoiding Pitfalls: The Risks of Wrongful Availment of GST Credit

The Goods and Services Tax (GST) is a unified indirect tax in India, replacing multiple state and central taxes. Based on the "one nation, one tax" principle, it removes tax barriers across states. GST enables businesses to claim Input Tax Credit (ITC), reducing tax liability, while promoting transparency, reducing tax evasion, and improving the ease of doing business.

Input Tax Credit (ITC) allows businesses to reduce tax liability by claiming credit for taxes paid on purchases used in operations, ensuring tax is only applied to the value added at each stage. To claim ITC, businesses must ensure suppliers have paid the required taxes and that purchases are for business use.

IMPLICATIONS OF IMPROPER UTILIZATION OF GST CREDIT	LEGITIMATE STRATEGIES TO MINIMIZE GST OUTPUT LIABILITY
Wrongful Availment: If ITC is wrongly availed but not utilized, the taxpayer must reverse it with applicable interest. Non-compliance may lead to penalty proceedings.	Maintain Detailed Records: Ensure all transactions, including invoices and receipts, are well-documented and organized. This helps validate ITC claims and prevents potential disputes with tax authorities.
Intention: - If there is an intent to evade tax, harsher penalties may be imposed based on the department's findings.	Implement Strategic Tax Planning: Collaborate with tax experts to develop tailored strategies that leverage legal provisions, helping to minimize tax liability while aligning with your business goals.
Penalty Amount: If wrongly availed ITC is utilized, the penalty may be up to 100% of the ITC amount or INR 10,000, whichever is higher.	Timely GST Returns Filing: Ensure regular and on-time filing of GST returns to avoid late fees and interest, while also facilitating prompt claims for any eligible refunds.
Interest Liability: As per Section 50 of the CGST Act, an interest rate of 24% is charged on any over-claimed ITC.	Stay Informed on Tax Law Changes: Keep up to date with updates in GST laws and regulations to ensure compliance and capitalize on new provisions that could improve your tax position.
Risk of Audits and Scrutiny: Incorrect GST credit claims may lead to audits or investigations by tax authorities, resulting in enhanced scrutiny and potential legal consequences.	Pursue Refund Claims: Assess eligibility for GST refunds on exports or excess input tax credits to recover cash and enhance liquidity.

By implementing these strategies, businesses can effectively manage their GST obligations while reducing their overall tax liability.

EXAMPLE:-

Scenario:

•    Eligible ITC: ₹1,50,000

•    Wrongly availed ITC: ₹2,00,000

•    Excess ITC availed: ₹50,000

•    Output Tax Liability: ₹3,00,000

Wrong Calculation (with excess ITC of ₹50,000):

Wrong ITC availed: ₹2,00,000

Output Tax Liability after wrong ITC adjustment: 3,00,000−2,00,000=1,00,000

The business only pays ₹1,00,000 due to the wrong availment of ITC. Thus, the business underpays ₹50,000 of its tax liability

Correct Calculation:

Correct ITC to be availed: ₹1,50,000

Output Tax Liability after ITC adjustment: 3,00,000−1,50,000=1,50,000

The business should pay ₹1,50,000 as its output tax liability.

Penalty to be paid on wrongful availment: Department will levy an interest of 24% on ₹50,000 that will amount to Interest=₹50,000×24%=₹12,000

How we assist you?

DUGAIN ADVISORS LLP provides expert consultancy to help businesses avoid the wrongful availment of GST credit, which can lead to incorrect reduction in output tax liability, as well as financial penalties and interest costs. We recommend ensuring proper documentation and adherence to GST regulations to prevent such errors. Regular reconciliation of purchase and sales data, along with verifying ITC eligibility, can significantly reduce risks and ensure compliance with GST rules.