QUESTION

One registered Co have filed GSTR-3B returns for the month of July, 2020, have shown Rs.3.31 cr. against `Outward taxable supplies (zero rated)` and have availed ITC to the tune of Rs.2.53 cr. On analysis of GSTR-2A of the said co. for the month of July, 2020, it is evident that this registered co. have availed ITC on the basis of invoices issued by a fake/non existent co. As per the statement of the proprietor of this registered co, they have availed fake credit issued by that non existent co. wilfully but did not utilise it. Whether this registered co is liable for penalty under Section 74 of CGST Act for availment of wrong credit.

ANSWER

FACTS OF THE CASE:

 Liability to pay penalty under section 74 of CGST Act for availment of wrong credit wilfully.

LAW APPLICABLE:

SECTION 74 OF CGST ACT(Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.)

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.
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(8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.

INTERPRETATION:

If any person has wrongly availed excess credit by reason of fraud or any wilful misstatement or suppression of facts then section 74 of CGST Act will be applicable. Please check carefully whether Section 74 applies to you or not because it is applicable when the credit is availed with intention of fraud and with willful superation of facts.

There may be two possibilities:
1. Notice is issued by Proper Officer: As per sub section (8) of section 74, If notice is already issued by PO, then registered Company is liable to penalty equivalent to twenty-five per cent. along with tax and interest only if Company pays the dues within 30 days of issue of notice. Otherwise Company is liable to penalty equivalent to tax amount.

2. Notice is not issued by Proper Officer: As per sub section (5) of section 74, if Company pays the dues before service of Notice, then Company is liable to penalty equivalent to fifteen per cent along with tax and interest.

CONCLUSION:

If credit is wrongly availed willfully then Penalty equivalent to 25%/15% or equivalent to amount of tax is levied depending upon the situations as discussed above.

NOTE: If ITC is claimed in excess then the interest is applicable under section 50(3) CGST. Currently the bare act states that this interest would be applicable if the ITC is wrongly claimed, even if it is not utilised towards payment of tax. However, after multiple representations from the trade and industries, Finance Act 2022 brings about a retrospective amendment to this section to incorporate the condition of utilisation of ITC for levying interest under section 50(3).

It is important to note here that this amendment is not yet notified therefore it is not a part of the CGST Act right now. However the amendment is retrospective and will apply from 1st July 2017 whenever the same is notified.

After amendment of section 50(3), interest would be applicable only if the excess ITC is utilised towards payment of ta (Reply dt. 03/05/2022)