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GST, Interest & Penalty paid during Search

Bhavesh Patel

A XYZ Pvt Ltd face a GST search in its premises on 22/07/2024. The GST department raised a demand for the previous year(FY 2020-21, 2021-22 & 2022-23). Is it allowable as an expense under the Income Tax Act in FY 2024-25, or is the principal payment of GST disallowed as Deferred revenue expenditure?

GST paid after a tax search: when principal is non-deductible, interest may be deductible, penalties generally disallowed A company subject to a GST search that pays past GST liabilities cannot generally treat the principal GST as an income-tax deductible business expense because GST is a tax/indirect-duty recoverable through input tax credit mechanisms rather than a deductible revenue outlay; treatment depends on whether the amount represents unrecoverable input tax or a true business expense. Interest on the GST demand is more likely deductible if it is wholly and exclusively for the business, whereas penalties and fines are ordinarily disallowed as deductions under income tax principles. Specific treatment depends on facts and timing, so confirm with detailed records and tax counsel. (AI Summary)
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