Goods and Services Tax (GST) has revolutionized India’s indirect tax system making it simpler to comply and transparent in taxation. However, for the benefit of meticulous strict compliance with tax procedures, the GST regime imposes heavy interest and fines on companies failing to comply with the rules as prescribed.
Taxpayers can be charged interest on delayed payment of taxes, penalties for improper filing, and even prosecution in extreme cases of tax evasion. Non-adherence to GST can result in financial losses, legal issues, and interruption in business activities.
This blog provides a complete overview of the character of GST interest and penalties, how they are calculated, and how companies can avoid unnecessary fines by paying on time.
Introduction
Since its roll-out in 2017, GST has brought India’s indirect tax regime together under one head by consolidating several indirect taxes into a unified tax system. Although it has made tax filings easier for industries, strict compliance is necessary so that businesses avoid interest and penal charges levied by the GST authorities.
Under GST laws, businesses are required to-
- Timely file the returns (GSTR-1, GSTR-3B, GSTR-9, etc.).
- Pay GST due within the set deadline.
- Correctly report Input Tax Credit (ITC) and taxable turnover.
- Proper invoicing and documentation.
Non-compliance with these regulations may result in substantial interest charges, penalties, and even legal action. Most businesses unwittingly pay substantial fines for delayed payments, improper filings, or ITC claim mismatches.
Knowledge of how interest and penalties under GST are levied can assist businesses in remaining compliant and avoiding unnecessary costs.
Types of Interest Under GST
Interest under GST is primarily charged for delayed tax payments and wrongful ITC claims.
1. Interest on Late Payment of GST
If a taxpayer fails to pay GST within the due date, the interest is charged on the outstanding tax liability from the day after the due date until the payment is made.
- Interest Rate- 18% per annum (as per Section 50 of the CGST Act).
- Calculation Formula-
Interest = Outstanding Tax Liability × 18% × Number of Days Delayed​ / 365
2. Interest on Wrongful ITC Claims
If a taxpayer wrongfully claims ITC (for ineligible expenses or fraudulent claims), they must reverse the excess credit along with interest.
- Interest Rate- 24% per annum (as per Section 50 of the CGST Act).
- Applicable when-
-
- ITC is availed but not eligible.
- ITC is claimed without proper documentation or invoice matching.
- ITC is used but the supplier has not paid GST to the government.
Interest = Business wrongly claims × 24% × Number of Days Delayed​ / 365
Types of Penalties Under GST
Penalties under GST are imposed based on the nature and severity of the non-compliance. The GST law categorizes penalties under general offenses, fraudulent activities, and tax evasion.
1. Penalty for Late Filing of GST Returns
If a taxpayer fails in filing GST returns on time, a late fee is imposed for each day of delay.
- Late Fee for GSTR-3B and GSTR-1
-
- Rs 50 per day (Rs 25 CGST + Rs 25 SGST) for regular taxpayers.
- Rs 20 per day (Rs 10 CGST + Rs 10 SGST) for NIL returns.
- Maximum Late Fee- Capped at Rs 5,000 per return.
2. Penalty for Not Registering Under GST
If a business exceeds the GST turnover threshold but fails to register-
- A penalty of 10% of the tax due or Rs 10,000 (whichever is higher) is imposed.
4. Penalty for Incorrect or Fraudulent Invoices
If a business issues incorrect invoices, fake invoices, or does not issue GST-compliant invoices, penalties are imposed based on intent.
- Genuine Mistake – Penalty of Rs 25,000.
- Fraudulent Intent (fake invoices to claim ITC) – Penalty of 100% of the tax evaded or Rs 10,000 (whichever is higher).
5. Penalty for Not Displaying GST Registration Number (GSTIN)
Every GST-registered business must display its GSTIN on invoices, signboards, and premises. Failure to do so may result in a penalty of Rs 25,000.
6. Penalty for Tax Evasion
If a business intentionally avoids GST payments, suppresses turnover, or claims fraudulent refunds, severe penalties are imposed.
- For tax evasion up to Rs 50 lakhs -100% of tax due or Rs 10,000 (whichever is higher).
- For tax evasion above Rs 5 crores – Penalty plus possible imprisonment (up to 5 years).
How to Avoid Interest and Penalty under GST?
Paying tax on time, accurate filings, and strict adherence are necessary to avoid interest and penalties under GST. The following are the methods through which business can steer clear of errors-
- File GST Returns within Time: Filing GSTR-1, GSTR-3B, or GSTR-9 late incurs late fees and penalties. Take reminders, use filing software for GST, and submit within time to avoid extra fines.
- Pay GST Prior to the Due Date: Belated tax payment entails 18% interest p.a. Calculate GST liability beforehand and keep required amounts in your funds before the due date.
- Claim Correctly ITC: Incorrect claim of ITC accrues interest of 24%. Reconcile ITC to GSTR-2B, check the supply filings by supplier, and eschew eligibility of the ineligible credits in order to avert reversals as well as levies.
- Prepare proper GST-conforming Invoices: Incorrect bills can result in Rs 25,000+ fines. Utilize GST-approved billing tools, mention GSTIN, HSN codes, and tax information, and bill on time.
- Reconcile GST Data Regularly: Discrepancy between sales, purchases, and ITC claims can result in GST notices. Cross-verify GSTR-1 with GSTR-3B from time to time and authenticate purchase data with GSTR-2B.
- Register for GST If Required: If your turnover exceeds the limit, failure to register attracts a 10% penalty. Avail GST registration if required in order to avoid legal problems.
- Keep Yourself Updated with GST Regulations: GST regulations keep changing. You should keep track of CBIC notifications, participate in webinars, and seek advice from tax professionals to remain compliant and prevent any such penalties.
By following these habits, companies can steer clear of unnecessary penalties, stay compliant, and avoid financial losses under GST.
Conclusion
GST compliance is most important for businesses to avoid heavy interest charges and penalties. A single delay in payment or filing of taxes can translate into financial trouble and legal issues. Awareness of the computation of interest on late payment and incorrect claims of ITC allows businesses to plan their tax payments accordingly.
By maintaining timely GST return filing, accurate tax payment, and proper records, companies can ward off unnecessary penalties and enjoy hassle-free business running. Timely GST compliance not only reduces fiscal risks but also enhances the credibility of a company and the integrity of laws.
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