Section 21 – Manner of Recovery of Credit Distributed in Excess
Section 21 of CGST Act, 2017 – Manner of Recovery of Credit Distributed in Excess
Updated on: February 2026 (as applicable till date)
Prepared by: Yours Tax Consultant
1. Bare Act Text – Section 21
Section 21:
Where the Input Service Distributor distributes the credit
in contravention of the provisions contained in section 20,
resulting in excess distribution of credit to one or more recipients,
the excess credit so distributed shall be recovered from such recipients
along with interest,
and the provisions of sections 73 or 74, as the case may be,
shall apply for determination of such excess credit.
2. Objective of Section 21
Section 21 ensures that:
- Input Service Distributor (ISD) follows Section 20 strictly
- No excess or wrongful ITC is retained by recipient units
- Revenue loss due to incorrect distribution is recovered
This section acts as a corrective and deterrent provision for ISD-related non-compliances.
3. When Does Section 21 Apply?
Section 21 is triggered when:
- ISD distributes credit in violation of Section 20
- Credit is distributed in excess of eligibility
- Credit is distributed to wrong unit
- Blocked or ineligible ITC is distributed
The liability arises on the recipient of excess credit, not on the ISD office.
4. Recovery from Recipient – Not from ISD
A key feature of Section 21 is that:
- Recovery is made from recipient unit
- Interest is payable on excess credit
- ISD is not treated as the defaulter
This is because ITC is finally availed and utilised by the recipient GST registration.
5. Interest Liability
Interest is payable from:
- Date of availment of excess ITC
- Till the date of reversal or payment
Interest rate is governed by:
- Section 50 of CGST Act
6. Applicable Recovery Provisions – Section 73 or 74
Section 21 explicitly refers to:
- Section 73 – where there is no fraud or suppression
- Section 74 – where fraud, wilful misstatement or suppression exists
Accordingly:
- Show Cause Notice is mandatory
- Opportunity of hearing must be provided
- Penalty provisions apply where applicable
7. Relevant CGST Rules
Non-compliance with these rules often leads to Section 21 proceedings.
8. Common Practical Situations
- HO distributes full ITC to only one branch
- Turnover ratio applied incorrectly
- Blocked credit under Section 17 distributed
- Credit distributed without filing GSTR-6
9. Interaction with Audit and Investigation
ISD-related discrepancies are usually detected during:
- GST Audit
- Departmental scrutiny
- DRC-01 based proceedings
Early voluntary reversal can help avoid penalty.
10. Related Provisions
- Section 20 – Manner of Distribution of Credit by ISD
- Section 73 – Demand without fraud
- Section 74 – Demand with fraud
11. Professional Tip
Always reconcile ISD credit with GSTR-6 and recipient GSTR-3B. Excess ISD credit almost always results in Section 21 recovery with interest during audit.
Disclaimer: This article is prepared based on the CGST Act, CGST Rules, notifications and prevailing legal position as applicable till date. Future amendments or judicial interpretations may require revision.
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