APPLICABILITY OF NORMAL RATE OF INTEREST

Section 50(1) and 50(2) of the CGST Act 2017 read as under – ‘’(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council:

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 payable on that portion of the tax which is paid by debiting the electronic cash ledger. (Substituted by Finance Act’ 2021, made applicable with retrospective effect from 01.07.2017. Appointed date is 01.06.2021, vide Notification No.16/2021 CT dated 01.06.2021)

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.’’

Central Govt, vide notification no. 13/2017 CT dated 28.06.2017 has notified such rate as 18%.

On reading of the foregoing provisions, it emerges that section 50(1) has applicability in situation i) where tax is liable to be paid and ii) such person has failed to pay either full or part thereof. It further emerges that Interest shall be paid for the default period i.e for the period for which the tax or any part thereof remains unpaid.

Therefore, in order to attract section 50(1), there must be a situation where there a liability to pay tax. In other words, if there is no liability to pay tax, no interest u/s 50(1) should be payable.

Lets analyze by way of an example. Output Tax liability is Rs.5 Lakhs. ITC is Rs. 7 Lakhs. Subsequently it was found that from out of Rs. 7 Lakhs, Rs.3 Lakhs was ineligible u/s 17(5). Interest in this case shall be payable on Rs.1 Lakh for the period of default. Not on Rs.3 lakhs.

Impact of section 50(2): The word “prescribed” has been defined in section 2(87) of the CGST Act, 2017 to mean – prescribed by rules made under the Act on the recommendation of the Council. Till date no such rules have been formulated to prescribe the manner for calculating interest u/s 50(1).

In a taxing statute, broadly there are two provisions. One is levy & collection or charging provision and other is machinery provision. It is a settled position of law that in the absence of machinery provision, charging provision fails and such provision cannot be applied on isolation.  Reliance is placed on the decision of Hon’ble Supreme Court in the case of Govind Saran Ganga Saran Vs. CST AIR 1985 SC 1041.

To sum up, section 50(1) cannot be implemented in the absence of machinery provision u/s 50(2).

APPLICABILITY OF HIGHER RATE OF INTEREST

Section 50(3) reads as – A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.

Central Govt, vide notification no. 13/2017 CT dated 28.06.2017 has notified such rate as 24%.

It emanates from the foregoing provision that section 50(3) is applicable only in following two situations namely:

(a) undue or excess claim of ITC u/s 42 (10), or

(b) undue or excess reduction in output tax liability u/s 43 (10)

Meaning thereby, occurrence of at least one situation mentioned herein above is sine qua none for applicability of section 50(3). If none of the situations occur, there can be no applicability of section 50(3). It further emerges that section 42(10) and 43(10) are the enabling sections in order to apply interest u/s 50(3). In the absence of either of these two sections in a given case, section 50(3) has no applicability.

Let’s now analysis Section 42 which talks about matching, reversal and reclaim of ITC as appearing in GSTR 2.

Section 42(10) – The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes place and such recipient shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.

Section 42(7) – The recipient shall be eligible to reduce, from his output tax liability, the amount added under sub-section (5), if the supplier declares the details of the invoice or debit note in his valid return within the time specified in sub-section (9) of section 39.

In a simple term, section 42(10) is applicable in a case where higher or excess ITC is reclaimed over the eligible amount and such excess amount is added back to outward tax liability of the recipient.

Notification No.58/2017-Central Tax Dated 15th November 2017 has deferred implementation of matching of ITC sine die. Till now matching of ITC u/s 42 has not been in place.

Therefore since the mechanism as required for the applicability of interest under the enabling provision section 42 has not been implemented till date, there cannot be applicability of interest section 50(3) read with section 42.

It is a trite law that for taxability of any transaction there are two provisions, one is charging provisions which provides the conditions for taxability of any event and other is machinery provision which takes care of computation of tax. It is now a settled legal position that in the absence of machinery provision, charging provisions cannot be applied on isolation. Reliance is place on the decision of Hon’ble Supreme Court in the case of Govind Saran Ganga Saran Vs. CST AIR reported at 1985 SC 1041.

 INTEREST ON REVERSAL OF WRONGLY AVAILED ITC

In a situation where ITC is legally eligible by virtue of section 16(2), but availed (though not utilized) in the return u/s 39 after the specified date u/s 16(4), whether interest is payable on subsequent reversal of such ITC in the subsequent return u/s 39.

Section 50(1) uses the expression ‘’every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder’’. Meaning thereby, section 50(1) is applicable only when there is a tax liability and not otherwise.

Incorrect availment of ITC without the same being utilized cannot be equated with ‘tax or any part thereof remaining unpaid’.

CCE, Bangalore v Bill Forge Pvt. Ltd., 2011-TIOL-799-HC-KAR-CX: 2012 (26) STR 204 (Kar.): 2012 (279) ELT 209 (Kar.) after considering the catena of decisions of the Supreme Court including the Supreme Court decision in the case of Ind-Swift (supra) held that “20-.. Before utilization of such credit, the entry has been reversed, it amounts to not taking credit. Reversal of CENVAT credit amounts to non-taking of credit on the input”.

Honble Patna HC in the case of Commercial Steel Engineering Corporation 2125 of 2019 has held that mere entry in the credit ledger does not call for recovery or penal proceeding. It is only when such credit amount is set off against tax liability as per returns, proceedings can commence.

INTEREST ON GROSS OR NET TAX LIABILITY

There was a huge controversy surrounding the interpretation of the then provisions of section 50(1) of the CGST Act as to whether interest, in case of delay in filing of return u/s 39, shall be payable on gross tax liability before taking ITC or on net tax liability after taking ITC.

Honble Telengana & AP HC in the case of Megha Engineering and Infrastructure Ltd V CCT (2019) 4 TMI 1319 has held that interest shall be payable on gross tax liability without adjusting ITC.

Honble Madras HC in the case of Refex Industries Lrd V AC CGST & CE (2020) 2 TMI 794 had a contrary view and held that interest shall be payable on net tax liability after adjusting ITC.

GST Council in its 39th meeting held on 14.03.2020 had decided that interest shall be payable on net tax liability after adjusting ITC and the provisions to be made retrospective effect from 01.07.2017.

However, to the contrary, Finance Act’ 2019 inserted a proviso to section 50(1) to the effect that interest shall be payable on net tax liability after adjusting ITC and the provisions were made effective from 01.09.2020.

Proviso to section 50(1) was substituted by Finance Act, 2021 vide Notification No.16/2021 CT dated 01.06.2021 and is made applicable with retrospective effect from 01.07.2017. As per the said notification, the appointed date is 01.06.2021.

This amendment finally settles the controversy.

LIABILITY TO PAY INTEREST –  WHETHER AUTOMATIC?

The moot question is whether interest on belated filing of return arises automatically?

Honble Telengana & AP HC in the case of Megha Engineering and Infrastructure Ltd V CCT (2019) 4 TMI 1319 has held that interest u/s 50(1) arises automatically. This case has been put to challenge before the hon’ble Supreme Court.

Honble Madras HC in the case of AC CGT Vrs Daejung Moparts P Ltd WA 2127 of 2019 in Para 29 of the order has held as below:

i) Liability fastened on the assessee to pay Interest is an automatic liability.

ii) The term Automatic does not mean or to be construed as excluding ‘the arithmetic exercise’

iii) In other words though liability is automatic, quantification of such liability shall have to be made by doing arithmetical exercise

CAN INTEREST BE DEMANDED WITHOUT ADJUDICATION?

Section 75(12) of CGST Act reads as under – Notwithstanding anything contained in section 73 or section 74, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.

From the plain reading of the aforesaid provisions, it is apparent that department can directly proceed to recover interest on admitted self -assessed tax without going through the process of adjudication.

Now, when an assessee questions the quantification or determination or calculation of interest by the department, in such an eventuality, can the department by invoking section 79 directly proceed to recover such interest from the assessee or have to mandatorily to go through the process of adjudication?

Honble Jharkhand HC in the case of Mahadeo Construction Co. WP 3571 of 2019, after considering the judgment of Honble Madras HC in the case of AC CGT Vrs Daejung Moparts P Ltd and its own judgement in the case of Godavari Commodities Ltd WP 1786 of 2019, has held in Para 22 that the department has to mandatorily go through the process of adjudication u/s 73 or 74 in the event assessee disputes the computation of very livability of interest. Without completing such adjudication process interest amount cannot be termed as ‘amount payable under the Act’.

*****

Disclaimer: The contents of this document are solely for informational and knowledge purpose. Neither have I accepted any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any action taken in reliance thereon.

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2 Comments

  1. ASHOK KUMAR KANUNGA says:

    still GST Department issuing notice to recover the interest U/s 50(1) for Incorrect availment of ITC without the same being utilized —FOR THIS MY REPLY AS UNDER :–

    With reference to above we are submitting following information as under-
    Facts of Case- Taxpayer had availed Rs 130404039/ as IGST Credit in month of October -2017 and Rs 133435107/- as IGST Credit in month of November -2017 by mistake , but utilsed only Rs 20083/- for payment of outward liability after that taxpayer reversed entirely wrongly claimed credit Rs 263819063 in May 2018 also paid Rs 20083 vide DRC-03. Now department issued Form DRC-01A ( Intimation of liability u/s 74(5) of CGST Act 2017)- interest on voluntary reversal of ineligible input tax credit availed during the audit period amounting to Rs 23792000.00 as per provisions of Section 50(1) of CGST ACT 2017. The assessee has voluntary reversed entirely wrongly availed ITC in May,2018 even before intimation of audit and in the month not later than September 2018 following the end of financial year or furnishing of relevant annual return , whichever is earlier.
    Our Submission regarding above-
    As per section 50(1) of CGST Act, 2017:
    “(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council.”
    In instant case availed ITC is not used for payment of tax (Only Rs 20083.00 was used to in April,2018)Interest on tax unpaid, But you have levied Interest on ITC availed but not utilized.
    Meaning of Interest-
    There is no specific meaning given in GST law but in the Case of Pratibha Processors Vs Union of India (1996) 88 (ELT) 12 (SC), the apex court at para 13 observed as-
    “In fiscal Statutes, the import of the words — “tax”, “interest”, are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. The penalty is ordinarily levied on an Assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an Assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to the actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from a penalty — which is penal in character”
    • First as per Section 50 (1) of CGST ACT 2017- payment of interest is only triggered when there is reduction in output tax liability – it means when output tax liability remains unpaid –Hence in instances where there is no reduction in output tax liability but only erroneous availment of excess input credit, which has not been utilized by the assessee, interest liability is not triggered.
    • Secondly- There is no financial benefit of availment of excess ITC to Assessee which is subsequently reversed and therefore no revenue loss to the exchequer.Hence it is against rule of law.Rule of law means decisions should be made by application of know principles and rules and such decisions remove hardship of the citizens.
    • Thirdly , Section 50 of CGST Act was amended in Finance Act 2021 as under- retrospectively w.e.f. 01/07/2017
    “Amendment of section 50(1) 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”.

    Hence in our view, in the cases where the excess input credit was erroneously availed but not utilized and same was reversed entirely through unutilized credit balance available in the electronic credit ledger in the GST Portal , there was no amount payable through the electronic cash ledger. Therefore there is no question of interest at all.

    *CITATIONS*

    1. Ind-Swift laboratories Ltd. Vs Union of India ,2009-240-ELT-328(P&H),
    2. CCE Vs. Maruthi Udyog Ltd., 2007 (214)ELT173(P&H)
    3. Refex Industries Ltd. v. Assistant Commissioner of CGST & C/E(Mad) (2020)
    4. Maansarovar Motors Pvt. Ltd. v. The Assistant Commissioner and Others(W.P.No.28437 (Mad) (2020)
    5. Commercial Steel Enginerring Vs Sate of Bihar (W.P No.2125 / 2019
    6. Prasanna Kumar Bisoi Vs Union Of India, W.P .(C) No 13190 /2020 , Orrisa
    7. KLT Automotive and Tubular Products Ltd. Vs Vikram Nankani (Bombay High Court) Writ Petition (L) No. 983 of 2020.

    PART-2

    REF:-GST DRC -01A / DT. 28-05-2021

    REGARDING DRC-01A ISSUED U/S 74(5) of CGST TO PAY INTEREST IN ACCORDANCE WITH PROVISIONS OF SECTION 50(1) –

    Above submission makes it clear that Interest on wrongly availed ITC not covered u/s 50(1) as Interest levied only on tax remains unpaid In our case I.T.C. wrongly availed and not utilsed for setting off output liability.Output liability correctly paid and not using wrongly availed ITC. Even if ITC used Rs 20083-00 reversed by us so liable to interest on that portion only.
    Also our case not covered u/s 74 of CGST ACT 2017 as Section 74 deals with certain situations for demand and recovery of taxes in cases of fraud, or any kind of wilful mis-statement or suppression of facts with intent to evade payment of tax.
    In our case there was no intention to decit others it was just clerical mistake in entering ITC as total purchase amount entered instead of ITC in GSTR-3B .So it was just human error not fraud, wilful mis-statement or suppression of facts. The assessee is pained by the new system of LAW which penalizes the correct and honest tax payer, inspite of being true and fair tax payer. The mistake occurred in wee- months since the GST was enacted, It would be totally unfair, harsh and vitiated to make assessee vicariously liable U/S/ 74(5) for Rs.23792000.00

    Assesse has not closed his business , not absconding , given all documents and information in audit proceeding and personally appeared before audit team, then how can department say FRAUD OR WILFUL-MISSTATEMENTS or SUPRESSION OF FACTS with intent to evade payment of tax.

    Issuing such types of notices causes un-due harassment to taxpayers when they have already rectified their mistakes by reversing wrongly availed ITC.

    Above submission is also supported by following judgements

    Judgement pronounced on 18.07.2019 by The Hon’ble High Court of Patna in the case of M/s Commercial Steel Engineering Vs The State of Bihar; wherein it was held that wrongly availed input tax credit, reflecting in electronic credit ledger under GST shall not draw penal proceedings until the same, fully is utilized against out put tax liability, so as to make it recoverable by the authorities.

    Summary of the judgement pronounced by The Hon’ble High Court of Patna:
    • The issue was identified by the Hon’ble High Court as to whether at all the credit was availed by the petitioner, for which the proceeding under Sec. 73 was initiated by the GST Authorities.
    • It was noted that the petitioner had not utilised the transitional credit reflecting in the electronic credit ledger for discharging the tax liability in the tax returns filed.
    • Thereby, there was no change in the position of transitional credit in the electronic credit ledger except for the minor changes.

    A plain reading of Sec. 73 would confirm that the penal proceedings under this Section is applicable only when availment / utilization of wrong credit towards reducing the out put tax liability, thereby permitting such tax liability recoverable from the dealer. Jury clarified that the availment of credit is a positive act and unless it has been carried out for reducing the tax liability in the tax return filed for any financial year, it cannot be treated as either availment or utilization for that matter.

    Further, if the petitioner was not entitled for the transitional credit, “the claim could have been rejected but such rejection of the claim for transitional credit does not bestow any statutory jurisdiction upon the assessing authority to correspondingly create a tax liability especially neither when neither any such outstanding liability exists, nor such credit has been put to use”

    OTHER JUDGEMENTS-

    1. The Punjab & Haryana High Court had addressed the issue in its decision in Ind- Swift Laboratories Ltd. Vs Union of India [2009-240-ELT-328 (P&H)], wherein it was held that no interest/penalty was payable if the CENVAT Credit is merely availed and not utilised for payment of tax.

    2. The Punjab and Haryana High Court, again in CCE vs. Maruti Udyog Ltd. [2007 (214) ELT 173 (P&H)], held that an assessee was not liable to pay interest/penalty where credits had only been availed erroneously but were not subsequently utilised.

    4. In the case of M/s Naresh Kumar Vs Union Of India dated 25-04-2014 observed that wilful suppression can not be assumed and or presumed merely on failure to declare certain facts unless it is preceded by deliberate non – discloser to evade payment of tax.

    5. In the case of M/S Anand Nishikawa co Ltd (2005) 7 SCC749 Supreme court has observed that

    “ Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE we find that “suppression of facts” can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find wilful suppression. Therefore, in view of our findings made herein above that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in the proviso to Section 11-A of the Act. We are, therefore, of the firm opinion that where facts were known to both the parties, as in the instant case, it was not open to CEGAT to come to a conclusion that the appellant was guilty of “suppression of facts”.

    6. In the case of Cosmic Dye Chemical v. Collector of Central Excise, Bombay, (1995) 6 SCC 117, the Apex court held that

    “Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word “wilful” preceding the words “mis-statement or suppression of facts” which means with intent to evade duty. The next set of words “contravention of any of the provisions of this Act or rules” is again qualified by the immediately following words “with intent to evade payment of duty”. It is, therefore, not correct to say that there can be suppression or mis-statement of fact, which is not wilful and yet constitute a permissible ground for the purpose of the proviso to Section 11-A. Mis- statement or suppression of fact must be willful.”

    7. As per FILE No. CT/1444/2021-C9 of Office of the Commissioner of Kerala State Goods and Services Tax Department Tax Towers, Karamana, Thiruvananthapuram , Dated: 22/02/2021

    “There may arise some instances where the tax under GST was either not paid or not paid correctly. The determination of tax by a proper officer may thus become necessary under the KSGST/CGST Act, 2017. Chapter 15 of the said Acts deals with “Demands and Recovery” and it is covered in section from 73 to 84of CGST . The incidence of short payment of tax or erroneous refund or wrong availing of Input Tax Credit may be because of an inadvertent bonafide mistake or it may be a deliberate attempt (Fraud Cases) to evade the tax. The determination of tax in all cases where there is an element of mens rea has to be done under Section 74 and in all other cases the determination has to be done under Section 73 of the Act. In order to distinguish whether mens rea is present, an intent to evade tax by way of fraud or through willful misstatement or through suppression of facts, has to be established.”

    Explanation 2 of Sec 74 of CGST Act.–For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made there under, or failure to furnish any information on being asked for, in writing, by the proper officer.
    In case of hand all such things are TOTALY absent, department not all proved any mistake in audit proceedings, even though if you need explanations or documents we are happy to do so NOW.
    Conclusion-
     Section 50(1) states that Interest applicable on delayed payment of GST.There is no specific mention of Interest on Input credit wrongly availed.
     As per above discussion – Interest and penalty will be applicable on wrongly availed ITC & utilise to reduced the Output tax liability. but if ITC has not utilised for reducing of Output Tax Liability, only shown in Credit ledger and reversal of unutilized credit Interest /penalty will not be applicable.

     To conclude- To invoke interest / penalty even when it is abundantly clear that no interest is payable incase ITC is merely availed and not utilised for payment of tax would certainly be arbitrary and restricting the freedom to carry on trade without any justification.
    Therefore you are requested to drop the recovery of interest and penalty u/s 50(1) & 74 of CGST ACT on voluntary reversal of ineligible input tax credit. If you are not satisfied from the above explanation kindly gives the opportunity to personal hearing

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