| Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt. Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London
Published: 3 October 2026 | Last reviewed: 3 October 2026 |
| This article states the position under sections 50, 75(13), 125 and 126 of the Central Goods and Services Tax Act, 2017 (the CGST Act), including the amendments to section 50 made retrospectively from 1 July 2017 by the Finance Acts of 2021 and 2022, and rule 88B of the Central Goods and Services Tax Rules, 2017 (the CGST Rules), as at 3 October 2026. Penalty rates under sections 73, 74 and 74A are referred to only where they meet these provisions. |
| Short answer. Interest under section 50 is automatic, but it reaches less than many demands assume. For tax declared in a late return, it runs only on the part paid in cash. For credit wrongly availed, it runs only once the credit is utilised, measured by the fall in the electronic credit ledger. Penalty is different: section 75(13) allows one penalty per act, and section 126 bars discretionary penalty for minor breaches. |
Index of Topics
- Interest Is Compensatory, and It Follows the Tax
- Late Returns: Interest Only on the Cash Portion
- Wrongly Availed Credit: No Interest Until It Is Utilised
- One Act, One Penalty: Section 75(13)
- Minor Breaches and Reasons: Section 126
- Frequently Asked Questions
- How R & D Law Chambers Works on These Matters
1. Interest Is Compensatory, and It Follows the Tax
| Short answer. Section 50(1) requires a person who fails to pay tax within the prescribed period to pay interest on his own, at the notified rate within a ceiling of eighteen per cent, for the period the tax remains unpaid. Interest compensates for delay; it is not a penalty. It therefore stands or falls with the tax on which it is charged. |
Because interest under section 50(1) is charged on tax that remains unpaid, a challenge to the tax is also a challenge to the interest. If the tax demand fails, the interest built on it fails with it. Where the tax is accepted, the useful questions are narrower: on which amount, and for which period, the statute actually charges interest.
Two retrospective amendments answer those questions in the taxpayer’s favour more often than demand computations reflect. Both apply from 1 July 2017, so they govern every period of GST.
2. Late Returns: Interest Only on the Cash Portion
| Short answer. The proviso to section 50(1), substituted by the Finance Act, 2021 with effect from 1 July 2017, limits interest on tax declared in a return filed after the due date to the portion paid by debiting the electronic cash ledger. The exception is a return filed after proceedings under section 73 or 74 or 74A have commenced for that period. |
Take a monthly return declaring tax of ten lakh rupees, filed late, with seven lakhs discharged from the electronic credit ledger and three lakhs paid in cash. Interest under the proviso runs on the three lakh rupees paid in cash, not on ten lakhs.
The proviso has two conditions worth checking against any computation: the supplies must have been declared in the return for that tax period, and the return must not have been filed after proceedings under section 73 or 74 or 74A began for the period. A demand that computes interest on gross tax without addressing either condition is computed on the wrong base.
3. Wrongly Availed Credit: No Interest Until It Is Utilised
| Short answer. Section 50(3), substituted by the Finance Act, 2022 with effect from 1 July 2017, charges interest only on input tax credit wrongly availed and utilised, within a ceiling of twenty-four per cent. The Explanation to rule 88B(3) treats credit as utilised only when the electronic credit ledger balance falls below the amount wrongly availed, and only to that extent. |
Rule 88B(3) runs interest from the date of utilisation until the credit is reversed or the tax paid. If a business wrongly availed two lakh rupees of credit but its credit ledger never fell below two lakh rupees until reversal, there was no utilisation and no interest is payable under section 50(3), though the credit itself must still be reversed.
Circular No. 192/04/2023-GST dated 17 July 2023 clarifies that, for wrongly availed IGST credit, the test applies to the combined balance under the IGST, CGST and SGST heads, so a fall in the IGST head alone is not utilisation. It also excludes compensation cess credit from that balance. A demand computing interest from the date of availment, without the ledger history, should be met with the ledger history.
4. One Act, One Penalty: Section 75(13)
| Short answer. Section 75(13) provides that where a penalty is imposed under section 73, 74 or 74A, no penalty for the same act or omission may be imposed on the same person under any other provision of the CGST Act. A demand that adds a penalty under section 122 or 125 for the conduct already penalised in the demand order breaches it. |
Section 74A was added to section 75(13) by the Finance (No. 2) Act, 2024, so the bar covers periods from 2024-25 as well as earlier years. Explanation 1(ii) to section 74A adds a related protection: where a notice is issued to the main person liable to tax and to others, and the proceedings against the main person are concluded under that section, the proceedings against all persons liable to penalty under sections 122 and 125 are deemed to be concluded.
5. Minor Breaches and Reasons: Section 126
| Short answer. Section 126(1) bars any penalty for minor breaches of tax regulations or procedural requirements, and for easily rectifiable documentation mistakes made without fraudulent intent or gross negligence. A breach is minor if the tax involved is under five thousand rupees; a mistake is easily rectifiable if it is an error apparent on the face of the record. |
Section 126 also requires that a penalty be commensurate with the degree and severity of the breach (sub-section (2)), imposed only after an opportunity of being heard (sub-section (3)), and supported by an order specifying the nature of the breach and the provision under which the amount is fixed (sub-section (4)). Voluntary disclosure before discovery may be treated as mitigating (sub-section (5)).
Its reach has a limit. Under section 126(6) the section does not apply where the penalty is a fixed sum or a fixed percentage, which covers the percentage penalties in sections 73, 74 and 74A. It does govern discretionary penalties, such as the general penalty under section 125 for contraventions with no separate penalty, which may extend to twenty-five thousand rupees.
6. Frequently Asked Questions
Is GST interest payable on the full tax if I filed my return late?
No, in most cases. Under the proviso to section 50(1), substituted retrospectively from 1 July 2017, interest on tax declared in a late return runs only on the portion paid in cash. The exception is a return filed after proceedings under section 73 or 74 or 74A have commenced for that period.
Is interest payable on input tax credit wrongly availed but not used?
No. Section 50(3), substituted retrospectively from 1 July 2017, charges interest only on credit wrongly availed and utilised. Under the Explanation to rule 88B(3), credit is utilised only when the electronic credit ledger balance falls below the wrongly availed amount, and only to the extent of that fall.
Can two penalties be imposed for the same GST default?
No. Section 75(13) of the CGST Act provides that where a penalty is imposed under section 73, 74 or 74A, no penalty for the same act or omission may be imposed on the same person under any other provision of the Act.
Can a penalty be imposed for a small clerical mistake?
Section 126(1) bars penalty for minor breaches, where the tax involved is under five thousand rupees, and for easily rectifiable mistakes apparent on the face of the record, made without fraudulent intent or gross negligence. Under section 126(6) the bar does not apply to fixed-sum or fixed-percentage penalties.
Can interest be challenged separately from the tax demand?
Yes, on its computation. Interest follows the tax, so it falls if the tax falls; but even where the tax is accepted, the base and period of interest can be challenged under the proviso to section 50(1), section 50(3) and rule 88B. Errors of computation are raised in the reply and, after an order, in appeal.
7. How R & D Law Chambers Works on These Matters
R & D Law Chambers LLP is an Ahmedabad law firm. The practice advises businesses on interest and penalty in GST demands, on replies and appeals, and on petitions before the Gujarat High Court.
The practice advises on the base and period of interest under section 50 and rule 88B, on the bar on double penalty in section 75(13), and on section 126.
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| General information on Indian law as at 3 October 2026, not advice on any facts. Notified interest rates should be confirmed for the period in question. |