Is ITC reversal interest 18% or 24 %?

ITC Reversal Interest: 18% or 24%?

Reversing eligible input tax credit (ITC) under the Indian Goods and Services Tax (GST) regime typically incurs an interest charge of 18%. However, there are certain exceptions where a different interest rate applies.

18% Interest Rate

For most cases of ineligible ITC reversal, an interest charge of 18% is levied per annum. This includes situations where the ITC was:

• Claimed on inputs or input services that were not used for business purposes
• Claimed on inputs or input services that were exempt from GST
• Claimed in excess of the eligible amount

24% Interest Rate

However, Section 42(10) and 43(10) of the CGST Act specify a different interest rate for improperly claimed credits. These sections deal with situations where:

• Credit was availed on goods or services not received (Section 42(10))
• Input tax credit was availed on goods or services used for non-business purposes (Section 43(10))

In such cases, the interest charge is levied at 24% per annum. This higher interest rate serves as a deterrent against fraudulent or intentional misuse of ITC.

Calculation of Interest

The interest on ITC reversal is calculated from the date the credit was claimed until the date of its reversal. The interest amount is:

Interest = Principal Amount x Interest Rate x Number of Days / 365

For example, if an ineligible ITC of Rs. 10,000 was claimed on January 1, 2023, and reversed on July 1, 2023, the interest charge at 18% would be:

Interest = Rs. 10,000 x 18% x 180 / 365 = Rs. 920

Conclusion

The interest rate for ITC reversal is generally 18%, but it increases to 24% for improperly claimed credits under Sections 42(10) and 43(10) of the CGST Act. Businesses should be aware of these different interest rates to avoid any unintended liabilities or penalties.