The input tax credit mechanism under the GST framework allows companies to set off part of the tax paid against future tax liabilities. When companies pay GST, it is typically paid in two parts—tax and tax credit set-offs.
In cases where the tax department estimates a shortfall or mismatch between the GST a company is required to pay and the amount it has actually paid, penalties and interest are charged.
The companies say such penalties and interest should be applicable only on the actual GST to be paid and not the entire amount. They have filed a writ petition in this regard in the Gujarat high court.
“The moot point is whether the restriction of benefit with respect to interest is applicable when there is utilisation from the credit register in case the investigation has started under the GST provisions,” said Abhishek A Rastogi, a partner at Khaitan & Co., who is arguing the petitions.
A company with a tax liability of Rs 100 that has Rs 80 in its credit ledger should have to pay only Rs 20 as tax. However, upon the discovery of any discrepancies in the tax payment, the question is whether penalty and interest should be levied on Rs 100 or Rs 20.
The companies that have approached the court argue that penalty and interest should be charged only on the pending amount.
Even when a company wishes to revise its tax payments, it’s not possible due to the way the GST framework operates.
“The revision of returns is not possible for the financial year after September of the next year and this leads to problems in cases when differential tax has to be paid due to classification misunderstandings or interpretational clarity. The denial of benefit of reduced interest after utilising credit is arbitrary and has been challenged,” said Rastogi.