Jurisprudence on levying interest under GST – Gross or Net

“The essence of law lies in the spirit, not its letter, for the letter is significant only as being the external manifestation of the intention that underlies it” – Salmond

Introduction

Interest in taxation matters is an automatic levy and compensatory in nature, for withholding the money of the Government by delay in payment of tax within due date. It is a mechanism to compensate the revenue for the loss caused to it due to the late payment[1]. The overall context of levy interest is to compensate the deprival of funds which are entitled by the revenue to be realised within the due time.

Interest under GST

Section 50 of CGST Act deals with levy of interest on failure to pay tax or any part thereof to the Government from the date of due, in such manner as may be prescribed which is yet to be provided. Further the section also deals with levy on interest on undue or excess claim of input tax credit under specific circumstances which is not relevant as on date since GSTR-2 is not yet implemented which is mandatory for such specified circumstances.

In 31^st GST Council meeting, recommendation was made by the council to amend section 50 of CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e., interest would be leviable only on the amount payable through the electronic cash ledger. Correspondingly vide Finance Act (No. 2) Act, 2019 dated 01/08/2019, a proviso was inserted to section 50(1) of CGST Act with a requirement of notification, which reads as follows,

“Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.”

[Emphasis Supplied]

Hon’ble Andhra High Court[2] ruled that in the light of scheme provided in the Act, until the return is filed as self-assessed no entitlement of credit and no actual entry of credit in the electronic credit ledger takes place. Hence, the interest has to be levied on Gross Liability declared in the delayed/belated return as the recommendation of GST Council made in its 31^st Council meeting are still on paper and not yet in force. Bench progressively granted stay on the application of the judgment (through a review petition) and granted interim relief to the Assesses by granting stay on initiation of any recovery proceedings in lieu of that.

However, the above decision can be countered stating the scheme of GST Law was drafted based on the expectation that the format of GSTR-1, 2 & 3 would be implemented and there would be a well versed technological assistance and advancement[3]. However, unfortunately such things are still on paper and not practically implemented. Hence, the essence & substance of the scheme prescribed under the Act with regard to availment of input tax credit and credit in electronic credit ledger is still on paper and presently the assesee is availing the input tax credit by filing GSTR-3B.

Later, Honb’le High Court of Madras[4] held that Proper application of Section 50 ibid to be one where interest levied on belated cash payment but not on ITC available with Department to credit of assessee. Further stated that, the proviso(supra) inserted to section 50(1) of CGST Act clearly seeks to correct an anomaly in the provision as it existed prior to such insertion. It should thus, be read as clarificatory and operative retrospectively.

Subsequent to the contradicting decisions from different High Courts, in 39^th GST Council meeting held on 14th March 2020 at New Delhi, recommendations has been made to amend the law retrospectively with regard to levy of interest for delay in payment of GST to be charged on the net cash tax liability w.e.f. 01.07.2017. Moreover, the same was communicated and confirmed by the Finance Minister in the post council meeting press conference.

Presently, the proviso to section 50(1) of CGST Act which provides for levy of interest on portion of the tax that is paid by debiting the electronic cash ledger, has been notified vide notification no.63/2020 CT dated 25^th August 2020 provides that the proviso to section 50(1) of CGST Act comes into force from 01^st September 2020.

Analysis & Conclusion

In the light of above discussion, it is clear that, interest in taxation matters has to be levied as a compensation for deprival of entitled funds to revenue within due date. Whereas with respect to input tax credit, such amounts are already being collected by the revenue from the supplier of the taxpayer and levying of interest from the hands of the recipient i.e. taxpayer would unjustly enrich the revenue which is against the principle of levy of interest. Article 265 of Constitution of India which states that “no tax shall be levied or collected except by the authority of law” would also include the levy of interest[5].

Moreover, there are a plethora of decisions by High Courts under GST regime to stay recovery of interest on gross liability.

By the above jurisprudence, even without the discussed proviso (supra) the levy of interest on gross liability cannot be justified within the scheme of the law subject to the current scenario. Such act contradicts to the principle of estoppel wherein a person by his words or conducts induces to another person to believe a fact and subsequently acts according to that belief or to alter his previous position, the accused is barred from later changing his position.

Further, any amendment made to clarify the intention of the law would have a retrospective effect in general. The proviso to section 50(1) of CGST clearly seeks to clarify the intention of the law and to rectify the ambiguity / anomaly existed.

Moreover, GST is a law being administered by GST Council[6] which comprises of involvement of both Central and State Government to ensure stability and equality over the rights of the State. Implementation of provisions of law contradicting to the recommendation of the council questions the validity of the very basic structure of the GST law i.e. Federalism.

To sum up, the levy tax by the Government should also accompany with the principles of equity and doctrine of fairness to uphold the belief of the taxpayers over the Constitution of India and the Government. “Salus Populi Est Suprema Lex” which means the welfare of the people is supreme for the law. It is inspired by principles of justice, equity and good conscience. Hence it is expected to clarify the retrospective nature of the notification 63/2020 (supra) from the Government at the earliest considering the principle of estoppel and also the very own objective of GST “Ease of doing Business”.

It has been the ardent hope of the honest tax payers that the law is fair for decades. Somehow even when logic, equity, and best practices are on charging of interest on net amount after ITC, the bureaucrats at CBIC would like to have uncertainty prevail by unwarranted restriction. This would only have the lawyers/ GST practitioners to laugh their way to the bank.

Gratitude to Madhukar sir for valuable inputs and value addition to the article. Feedback at arjun@hiregange.com, madhukar@hiregange.com.

[1] Pratibha Processors vs Union of India 1996 (88) ELT 12 (SC), Somson Exports 2016 (344) ELT 709 (GOI)

[2] Megha Engineering & Infrastructures Limited vs Commissioner of Central Taxes Hyderabad, 2019 (26) GSTL 183 (Telangana)

[3] Contemporanea expositio

[4] M/s Refex Industries Limited 2020 (34) GSTL 588 (Mad)

[5] Delta Paper Mills Ltd vs Collector of Central Excise 1995 (1) ALT 288, 1995 (77) ELT 544 AP

[6] Article 279A of the Constitution of India