Unlocking Economic Growth: Interest on Unutilized Input Tax Credit (ITC) under CGST Act

Introduction: The Central Goods and Services Tax (CGST) Act stands as a cornerstone of India’s tax framework. To uphold the principles of inclusive growth and trust, it’s imperative to consider introducing interest on unutilized Input Tax Credit (ITC) under the CGST Act. This mechanism aims to support businesses and foster economic prosperity by addressing the challenges posed by accumulated unutilized ITC. In this article, we delve into the necessity for such a provision and suggest modifications to existing regulations.

Challenges of Unutilized ITC: Businesses encounter various hurdles in utilizing ITC efficiently:

1. Delayed Sales: Industries with seasonal demand or long production cycles may face delays in converting raw materials into finished goods.
2. Market Fluctuations: Unpredictable market conditions may lead businesses to hold onto goods in anticipation of better pricing or optimal market conditions.
3. Working Capital Constraints: Accumulated unutilized ITC restricts funds that could otherwise be utilized for operational needs, hindering growth and investment.

Proposed Mechanism: To address these challenges and incentivize trade and industry, the following mechanism for providing interest on unutilized ITC is proposed:

1. Eligibility Criteria: Businesses eligible for interest on unutilized ITC should be determined based on the duration of non-utilization, typically beyond a reasonable threshold like three months from the credit availability date.
2. Interest Rate: The interest rate should be competitive and reflective of market rates to compensate for the loss of liquidity, benchmarked against government short-term borrowing rates.
3. Calculation of Interest: Interest should be computed on a monthly basis for the period of non-utilization, starting from the end of the threshold period until the ITC is utilized.
4. Modification of CGST Provisions: Amendments to the CGST Act should include provisions for interest on unutilized ITC, specifying eligibility criteria, interest rates, and calculation methods.
5. Refund Process: Taxpayers should be able to apply for interest on unutilized ITC through the GST portal, providing necessary details or through an automated process without external intervention.
6. Review and Approval: Tax authorities should review and approve eligible claims after verifying the non-utilization period.
7. Disbursement: Once approved, the interest amount should be disbursed along with the ITC refund to the taxpayer’s registered bank account.

Benefits and Considerations: The introduction of interest on unutilized ITC offers several advantages:

1. Enhanced Liquidity: Improved access to working capital facilitates growth, investment, and job creation.
2. Mitigation of Financial Constraints: Reduced financial strain enables businesses to meet operational obligations and navigate market uncertainties effectively.
3. Compliance Incentive: It encourages taxpayers to adhere to GST regulations diligently.
4. Promotion of Inclusive Growth: This initiative aligns with the principles of inclusive development and trust-building within the tax ecosystem.

Conclusion: Interest on unutilized ITC under the CGST Act represents a significant stride towards inclusive growth and trust-building. By addressing the challenges faced by businesses in managing unutilized credits, it unlocks their potential for economic expansion. Implementing a transparent and efficient mechanism is crucial to encouraging trade and industry while upholding the integrity of the tax system. Let’s embrace this progressive step towards fostering Sabka Sath, Sabka Vikas, and Sabka Vishwas.

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