Introduction
The Goods and Services Tax (GST) regime in India introduced the Input Tax Credit (ITC) mechanism to avoid the cascading effect of taxation. Under this system, businesses can claim credit for taxes paid on purchases and adjust it against their tax liability. However, in certain cases, unutilized ITC lapses due to amendments in the law or non-compliance with eligibility criteria.
There was uncertainty regarding whether interest should be charged on such lapsed ITC. To address this, the Government issued Notification No. 20/2018 dated 26.07.2018, clarifying that no interest shall be payable on ITC that lapses due to statutory amendments or expiry of claim periods.
In this article, we discuss the ITC lapsing concept, its tax implications, legal precedents, and the impact of Notification No. 20/2018 on businesses.
What is ITC Lapsing?
Definition and Concept
ITC lapsing occurs when a business is unable to utilize the credit due to legal changes, expiration of claim periods, or adjustments mandated by GST laws. Such unutilized ITC is no longer available for future set-offs against tax liabilities and is removed from the taxpayer’s credit ledger.
Common Reasons for ITC Lapsing
- Transition Credit Denial: Businesses transitioning from previous tax regimes (VAT, Excise, Service Tax) faced denial of certain transitional credits under GST.
- Expiry of ITC Claim Period: As per GST rules, ITC must be claimed within a prescribed period, failing which it lapses.
- Ineligibility of ITC Due to Rule Changes: Some ITC components were made ineligible retrospectively, leading to automatic lapsing.
Before Notification No. 20/2018, tax authorities sometimes sought to impose interest on such lapsed ITC, arguing that businesses delayed utilization. This led to litigation and confusion among taxpayers.
Key Provisions of Notification No. 20/2018
Issued on 26th July 2018, Notification No. 20/2018 provided crucial clarity regarding ITC lapsing:
1. No Interest on Lapsed ITC
- The notification explicitly states that no interest shall be levied on ITC that lapses due to statutory amendments.
- This means taxpayers who had unused ITC balances that later became ineligible do not have to pay interest on such amounts.
2. Retrospective Application
- The notification applies retrospectively, covering cases where ITC lapsed before July 2018.
- This protects businesses from past claims of interest on ITC that was unclaimed but later lapsed.
3. Relief from Unnecessary Litigation
- The notification resolved disputes where tax authorities demanded interest on ITC reversals.
- Provided businesses with legal backing to contest undue interest claims.
Landmark Judicial Precedents and Case Laws
Several courts have ruled in favor of businesses on the issue of no interest on ITC lapsing. Below are key case references:
1. Maruthengal Moideen vs. State Tax Officer (Kerala High Court)
- Case Reference: W.P.(C) No. 20837 of 2024
- Judgment Date: January 13, 2025
- Key Ruling: The Kerala High Court ruled that misclassification of ITC under different tax heads does not warrant interest or penalty if the overall balance remains sufficient. The ruling reinforced that interest applies only when ITC is wrongly utilized, not on lapsing ITC.
2. M/s Anand Steel vs. Union of India (Madhya Pradesh High Court)
- Case Reference: W.P. No. 2164 of 2024
- Judgment Date: November 22, 2024
- Key Ruling: The court ruled that procedural lapses in ITC claims, when rectified with proper payments, do not justify disallowance of ITC or imposition of interest.
3. Sri Cheran Synthetics India Pvt. Ltd. vs. Union of India (Madras High Court)
- Case Reference: W.P. No. 11800 of 2019
- Judgment Date: April 24, 2025
- Key Ruling: The court held that taxpayers who reversed ITC under statutory compliance were not liable to pay interest, as they never utilized the ITC in question.
These cases strengthen the position that interest liability arises only when ITC is wrongly availed and utilized, not when it lapses due to statutory amendments.
Impact of Notification No. 20/2018 on Businesses
Financial Relief for Taxpayers
- Eliminated the risk of interest liability on ITC reversals.
- Helped businesses avoid undue financial burdens.
Greater Compliance Clarity
- Reduced uncertainty regarding ITC eligibility and interest liabilities.
- Encouraged businesses to properly track ITC utilization and reconciliation.
Reduced Litigation
- Provided a clear legal basis to contest unjust interest demands from tax authorities.
- Led to resolution of many pending disputes regarding ITC lapsing interest.
Encouragement for Better ITC Management
- Encouraged businesses to timely claim ITC and maintain proper documentation.
- Reduced the risk of ITC expiration and lapsing.
Best Practices for ITC Compliance
- Monitor ITC Expiry Periods: Regularly track ITC claim deadlines to avoid lapsing due to time-barred claims.
- Proper Record-Keeping: Maintain clear documentation of ITC claims, invoices, and reconciliation statements.
- Timely Reconciliation with GST Returns: Ensure that ITC claimed matches the supplier’s filings (GSTR-2A/GSTR-2B) to prevent disputes.
- Stay Updated on Legal Amendments: Keep track of GST notifications and amendments to avoid compliance errors.
- Consult Tax Experts if Needed: Seek professional advice if unsure about ITC eligibility, utilization, or lapsing rules.
Conclusion
The introduction of Notification No. 20/2018 dated 26.07.2018 provided much-needed relief to taxpayers by eliminating interest liability on ITC lapsing. This clarified that interest should only apply to ITC wrongly availed and utilized, not on ITC that expires due to law amendments.
By adopting best ITC management practices, businesses can minimize compliance risks and optimize tax benefits. As GST laws continue to evolve, staying proactive with ITC tracking and regulatory updates will be crucial for businesses to maximize their financial efficiency and avoid disputes.
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