Demand for interest payable on delayed payment of GST dues being raised on the Gross amount of tax payable before the availment of Input Tax Credit (ITC)

One of the present acute problems being faced by many taxpayers is the flurry of demands being initiated by the GST departments of several states where demand for interest payable on delayed payment of GST dues is being raised by the Department on the Gross amount of tax payable before the availment of Input Tax Credit (ITC)

The Notice being sent by the Department looks like the one reproduced below after modifying figures for secrecy

Quote

 In terms of Section 50(1) of the CGST Act 2017, which has been reproduced below verbatim;

Section 50(1)  – Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, 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.

It is seen that you have paid the tax to Government after prescribed due dates during FY 2018-2019 and thus interest on delayed payment has to be paid as per Section 50(1) of the CGST Act 2017. Detailed delay along with GST Paid and interest is as below.

GSTR 3B of the Month Total GST Paid Delay in filing the Return (in days) Total Interest Due @18%
April 2018 16XXXXX 0 0.00
May 2018 0 0 0.00
June 2018 0 0 0.00
July 2018 1870XXX 0 0.00
August 2018 20735XX 10 1022XX
September 2018 0 0 0.00
October 2018 191377XX 1 94XX
November 2018 0 0 0.00
December 2018 204242XX 1 100XXX
January 2019 23843XXX 0 0.00
February 2019 18556XX 1 91XX
March 2019 1983XXXX 29 283XXX
Total 15812XXXX   4,14,5XX.00

You are advised to deposit the total interest as calculated above under appropriate heads (CGST/SGST/IGST) for the respective periods immediately under intimation to this office. In case the opportunity for voluntary compliance as suggested is not availed, appropriate action for recovery of interest shall be initiated as per law.

If you have already remitted the interest, the payment particulars may be intimated to this office through Email cgst.xxxxxxx@gov.in.

You are also advised to verify the above provided details of delayed filing/total liability/Interest calculated @18% etc. with your records and if any error/discrepancies are noticed, the same may also be brought to notice of this office, urgently.

It is informed that the present CGST Act mandates to levy Interest on total GST liability i.e. Cash & Input Tax Credit for delayed payment and the same has been reiterated by the Telangana High Court in the case of M/s Megha Engineering & Infrastructures Ltd. Vs. Commissioner of Central tax for Writ Petition No. 44517 of 2018.

It is also informed that amendment to Section 50(1) of The CGST Act 2017 was brought through Section 100 of The Finance (No.2) Act 2019 and as per Section 1(2)(b) of The Finance (No.2) Act Sections 92 to 112 and section 114 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. The said amendment is yet to be notified and the same shall have prospective effect as clarified by CBIC.

Unquote

While the department is conveniently quoting the Telangana High Court Verdict which was delivered before the amendment in the Finance Act, 2019 was proposed the Madras High Court has quashed any attempts to levy interest on the gross amount before availing of ITC stating that the Finance Act,2019 has inserted a proviso to Section 50(1) which is nothing but curative and clarificatory in nature and would be applicable retrospectively meaning that Interest would be chargeable on the Net amount after availment of ITC and not the gross amount vide M/S. REFEX INDUSTRIES LIMITED, M/S. SHERISHA TECHNOLOGIES PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF CGST & CENTRAL EXCISE, THE SUPERINTENDENT OF CENTRAL TAX, BANK MANAGAR, BANK MANAGAR, ICICI BANK in Writ Petition Nos.23360 and 23361 of 2019 And WMP Nos.23106 and 23108 of 2019 Dated: – 06 January 2020

The gist of the above judgement of the Honorable Madras High Court is as given below:

Levy of Interest on belated payments – Section 50 of CGST Act – whether in a case, where credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’?

  • HELD THAT: – The use of the word ‘delayed’ connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax. The availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee.
  • The proper application of Section 50 is one where interest is levied on belated cash payments but not on ITC available all the while with the Department to the credit of the assessee. The latter being available with the Department is, thus, neither belated nor delayed.
  • The proviso to Section 50(1), as per which interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 01.08.2019, but 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.
  • Petition allowed – Decided in favour of petitioner.

There are several judgements which state the same logic which has been put forth by the Honorable Madras High Court stating that as the proviso seeks to correct an anomaly in the provision the same should be read as clarificatory and operative retrospectively

One such Supreme Court decision which clearly propounds this logic is as stated below:

Allied Motors (P) Ltd vs CIT (1997) 91 Taxmann 205 SC, the Hon’ble Supreme Court, has held as under:-

“A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole”

What is not being understood in this context that if it was the intention of the Legislature to collect interest on the Gross Tax amount there was no need for the Finance Act, 2019 to bring in a proviso to Section 50(1) which cures an existing defect.

Under the circumstances, it seems that the notices being issued by the Department for collection of interest on the gross tax amount is totally illogical and being done with sole intention of harassment of the taxpayer. It may also be an attempt to boost collections to the extent possible by making such illogical demands

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