Imposition of Interest under GST has come up as a contentious issue, especially in recent times when bulk notices are being issued by the Department mainly because of mismatch in returns furnished by the taxable persons. Studying this feature is further made important by the fact that in the majority of cases, the interest component exceeds the tax component demanded in the notice. While everybody understands that the levy of interest is automatic and mandatory, quantification of such interest demands an arithmetic exercise, and the real issue is the determination of the principal amount of default on which the rate of interest is to be applied for the period of default.
Sections 73 and 74 of the CGST Act, 2017 deal with the determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly utilized in non-fraud and fraud cases respectively. However, it is most important to understand that even the contours of Sections 73 and 74, while empowering levy of interest, specifically draw reference from Section 50. Similarly, other legal provisions enumerated in different sections of the CGST Act like Sections 16, 21, 37, 38, 39, 51, 52, 60, and 67 draw a reference from Section 50 itself.
Right from the beginning, the basic issue has been to levy interest under Section 50 only on the belated ‘cash’ component of tax and not on the ‘ITC’ component and the judicial authorities have been reiterating this principle in a number of judicial pronouncements. Hon’ble Madras High Court in its judgment in Tol. Kumaran Filaments (P) Ltd. V. Commissioner of Central GST and Central Excise [W.P.(MD)No.11113 of 2020 dated 14/09/2021] quotes the following observations made by the Division Bench of the High Court in Commissioner of Central Excise, Puducherry-I Vs. CESTAT, Chennai 2017 (346 E.L.T. 80);
“The Bench notes that there was sufficient credit available with the Department as on 30.06.2006 and the principal demand raised arose only from the adjustment of such credit. This adjustment could well have been automatic and the Bench thus says that no interest would lie on such adjustment which could have been made at any time, since the amount was available with the Department. In this context, the Bench quips that ‘when credit was available to the account of the assessee, the Department cannot act like Shylock demanding a pound of flesh.”
In the 31st GST Council meeting dated 22/12/2018 it was approved to amend Section 50 of the 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.’ In the follow-up, based on the recommendations of the 35th GST Council meeting dated 21/06/2019, the provisions of Section 50 were amended vide the Finance (No. 2) Act, 2019 to provide for the imposition of interest on the ‘net tax liability.’ Furthermore, in the 39th GST Council meeting dated 14/03/2020, it was recommended to impose interest liability ‘retrospectively’ on net tax liability.
Press release dated 26/08/2020 and instructions dated 18/09/2020 were further issued to clarify the recovery of interest on net tax liability w.e.f. 01/07/2017. This issue of retrospectivity was finally settled vide clause 112 of the Finance Act, 2021 dated 28/03/2021 notified vide Notification no. 16/2021-Central Tax dated 01/06/2021.
Nevertheless, it is being observed that the tax authorities, in most of the recently issued notices, are demanding interest on the ITC component as well in complete violation of the specific retrospective amendment of the legal provisions governing the charge of interest vide Clause 112 of the Finance Act, 2021 dated 28/03/2021 notified vide Notification no. 16/2021-Central Tax dated 01/06/2021, which implemented the recommendations of the GST Council meetings and the Clarifications issued by CBIC from time-to-time. In most of the notices/orders, the provisions of Section 50 read with Rule 88B are wrongly interpreted resulting in arbitrary demand of interest without any force of law. This is causing genuine hardship to the taxable persons because of an illegal claim on their scarce business working capital and is pushing them to unnecessary tax litigation.
The taxable persons are therefore advised to strongly contest any illegal demand of interest vide the show cause notices recently issued mechanically.
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