Denying ITC for Late Returns: Is It Double Penalty?

Denying ITC for Late Returns Penalizes Taxpayers Twice

The recent court decision addressing denying ITC for late returns highlights how procedural delays shouldn’t lead to double penalties for taxpayers. The case, involving multiple writ petitions, challenged the disallowance of Input Tax Credit (ITC) due to delayed GST return filings for FY 2018-19. Let’s break down the case and understand the implications for taxpayers.

📌 The Background

The petitioner, a proprietorship firm registered under the Central Goods and Services Tax Act (CGST Act), filed their GST returns but incurred late fees. Despite paying taxes, the ITC was denied under Section 16(4), which imposes a time limit for availing ITC.

🚴🏻 The Argument: Is Denying ITC Fair?

The petitioner argued that:

• Denying ITC due to late returns is arbitrary.
• It violates constitutional rights.
• It results in double penalty since late fees were already paid.

The core issue was whether taxpayers should lose rightful ITC due to procedural delays when taxes have been paid.

📊 Legislative Intent and Double Penalty

The court emphasized that the intent behind GST was to avoid cascading taxes and allow ITC claims where taxes are paid. Denying ITC for late returns results in:

1. Late fees as a penalty for procedural delay.
2. ITC denial, effectively imposing a second penalty.

This approach unfairly burdens taxpayers who comply but face minor delays.

🔄 Recent Clarification: Finance Act 2024

The Finance Act 2024 introduced amendments addressing this issue. The amendments offer more flexibility in claiming ITC and recognize the need for procedural fairness.

📅 Key Takeaways from the Court’s Decision

1. Writ petitions allowed: The court nullified show-cause notices and assessment orders under Section 16(4).
2. Compliance with amendments: Tax authorities must consider the recent Finance Act amendments.
3. Balanced approach: The court stressed balancing procedural compliance with taxpayer rights.

🔍 Analysis: Why This Matters

• Avoiding unfair penalties: The decision ensures taxpayers aren’t penalized twice for late filings.
• Policy clarity: Encourages fair tax administration aligning with GST’s core principles.
• Future implications: Sets a precedent for handling similar disputes.