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’.
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