After retrospective amendment (via Finance Act 2019), interest is levied only on the net tax liability paid in cash, i.e., electronic cash ledger, not on ITC used.

Interest on Wrongly Claimed or Used ITC (Section 50(3))

• Applicable- When ITC wrongly claimed and utilized

• Rate of Interest- 18% per annum (earlier it was 24%) (amended via THE FINANCE ACT, 2022)

• Basic of Calculation: Initially, Interest was payable on the entire wrongly claimed ITC, whether it was utilized or not.

Now, after retrospective amendment (via Finance Act 2022) interest applies only on ITC that has been utilized for payment of tax, not on unused ITC.

Impact of Amendment-

The retrospective amendment to Section 50 of the CGST Act is a major relief for taxpayers. By restricting interest to the cash-paid portion (net liability) and lowering / refining interest on wrongly utilized ITC, the law now better aligns with the original policy intent to penalize actual delay in cash payment, not penalize taxpayers for utilizing credit that was legitimately available.

Manner of calculating interest on delayed payment of tax (Rule 88B)-

Provision	Scenario	Period for which interest is payable	Amount on which interest liability is computed
Rule 88B(1)	If tax has been belatedly paid through credit balance on account of delayed filing of return, before commencement of proceedings under Section 73 or 74 of the CGST Act [proviso to Section 50(1)]	Interest to be paid for the period of delay in filing the said return beyond the due date upto date of filing GSTR-3B	Tax paid by debiting the electronic cash ledger
Rule 88B(2)	In all other cases where interest is payable on delay in payment of tax covered by Section 50(1)	Period starting from the date on which such tax was due to be paid till the date such tax is paid	Amount of tax which remains unpaid
Rule 88B(3)	Where interest is payable on the amounts of ITC wrongly availed and utilised covered by Section 50(3)	Period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount	Amount of input tax credit wrongly availed and utilised

From a bare reading of the above Rule, it appears that the benefit of paying interest on the net cash component has been restricted to cases where there is a delay in filing the return in Form GSTR-3B. In all other cases, such as delay in payment of tax due to inadvertence or an interpretation issue, though returns are filed on the due date, the provision suggests that interest would have to be remitted on the gross tax liability.

Note- The benefit of levying interest on the net cash liability has been extended only to a limited situation of delay in filing returns leading to late payment of tax. This distinction, although not explicitly carved out in Section 50, has been specifically created through Rule 88B and the same has been brought in with retrospective effect as well.

Amendment- In 53rd GST council meeting, held on 22nd June, 2024, the GST Council recommended amendment in rule 88B of CGST Rules to provide that an amount, which is available in the Electronic Cash Ledger on the due date of filing of return in FORM GSTR-3B, and is debited while filing the said return, shall not be included while calculating interest under Section 50 of the CGST Act in respect of delayed filing of the said return.

To notify aforesaid amendment, in Rule 88B, after sub-rule (1), the following proviso has been inserted through Notification No. 12/2024 (central tax) w.e.f. 10.07.2024, namely: –

“Provided that where any amount has been credited in the electronic cash ledger as per provisions of sub- section (1) of section 49 on or before the due date of filing the said return, but is debited from the said ledger for payment of tax while filing the said return after the due date, the said amount shall not be taken into consideration while calculating such interest if the said amount is lying in the said ledger from the due date till the date of its debit at the time of filing return.”

In view of the above, If sufficient cash was available in the cash ledger to discharge the tax liability at the time the return was due, and was debited for payment of tax while filing the said return after the due date, interest under Section 50 should not be levied on the portion of tax that have been paid using the cash balance.

Judicial pronouncement

• In the case of Deepak Sales Corporation [2023] 64 TAXLOK.COM 139 (P&H) Punjab and Haryana High Court held that the petitioner did not utilize the excess ITC during the month of August 2017 and the balance of ITC available was never below the sum of Rs. 12,65,20,827/- when the petitioner reversed the excess ITC amount, it had never utilized the same. The demand of interest as well as penalty was not at all tenable. It was held that the petitioner was not liable to pay the amount of interest or penalty on the excess ITC wrongly entered by it in its electronic credit ledger for the relevant period.

• No recovery will be made for interest charged on delayed payment of tax which has been made by the taxpayer debiting the credit ledger. [2021] 32 TAXLOK.COM 035 (Patna)

• Madras High Court is of the view that there is no liability to interest, the impugned order to the extent to which it levies interest under Section 50(3) of the CGST, on ITC, Education Cess and Higher Education Cess, is not in conformity with law and is set aside. [2023] 58 TAXLOK.COM 116 (Madras)

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Interest under Section 50 — Retrospective Amendment and Impact

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