DRAFT REPLY TO NOTICE FOR PAYMENT OF INTEREST U/S. 50(1) OF CGST ACT
FOR ACADEMIC DISCUSSION
Reference:- Your Notice No. ……………. Dated …………
Subject:- Interest on account of delayed payment of tax.
We have received the aforesaid notice/advisory in which we have been directed to deposit the interest for late payment of Taxes (GST). In this regard we would like to submit as follows:-
That the aforesaid notice does not indicate the section or provision under which the same has been issued. It appears that the aforesaid notice has not been issued as per the provisions of law.
That in absence of clear provisions and prescribed mechanism under the GST laws, interest for delayed payment is not payable:
1. Text of Section 50:-
Provision relating to levy of interest under CGST law is covered by section 50. For the sake of ready reference, the text of the said section is reproduced here-in-below:-
“Section 50. Interest on delayed payment of.
(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.
(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.
(3) A taxable person ………………..”
A notification No. 13/2017 – Central Tax dated 28/06/2017 was issued wherein it has been notified that for the purpose of section 50(1), rate of interest will be 18% per annum.
2. No due date of Tax payment was notified:-
Section 50(2) says that interest under section 50(1) will be calculated from the day succeeding the day on which such tax was due to be paid. Section 39(7) fixes the due date of payment and contains (prior to the recent amendment) – “Every registered person, who is required to furnish a return under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return.”
In the instant case the undersigned was liable to submit returns under section 39 of CGST Act. As per rule 61 the return under section 39(1) was to be filed in form GSTR 3. Due date for furnishing Form GSTR 3 has been deferred and has not yet been notified. In absence of such due date, the provisions of section 50(1) and 50(2) were not applicable on the undersigned and thus, there was no liability to pay interest while filing GSTR 3B. As per the existing provisions there was no interest liability for late submission of the GSTR 3B.
It may kindly be noted that Gujarat High Court in case of AAP and Company Vs UOI [TS-490-HC-2019(GUJ)-NT] has held that GSTR-3B is not a return for the purposes of Section 39 of CGST Act, 2017. The Hon’ble High Court was of the view that Form GSTR-3B was an interim arrangement, which did not tantamount to a monthly return under section 39 of the Act, being Form GSTR-3.
It may be please appreciated that as the GSTR 3B was not a return under section 39 and as there was no due date for payment of taxes, the taxpayer has made no delay in depositing the tax and therefore interest in this case is unlawful.
Retrospective amendment of rule 61(5):
In the 37th meeting of the GST Council, the Co-convenor of the law committee had stated that the aforesaid judgment of the Gujrat High Court led to further challenges such as legality of interest payable as FORM GSTR 3B was not considered as valid return etc. Consequently the council recommended amendment of Rule 61 of the CGST Rules, 2017 to say explicitly that FORM GSTR-3B is a return under sub-section (1) of Section 39 of the CGST Act.
Rule 61(5) has been amended so as to deem GSTR-3B as return with effect from 01.07.2017 vide Notification No. 49/2019-Central Tax dated 09.10.2019. Thus, a retrospective liability to pay interest has been imposed on the registered persons vide the aforesaid procedural amendment. Creation of additional liability on the taxpayers by retrospective amendment of rule is not permissible in law. Furthermore, as per section 164 of CGST Act, under which the said amendment is done, restricts the power of amendment for carrying out the provisions of the Act, whereas this amendment is not made for the said purpose.
Taxpayers cannot be punished due to any retrospective amendment of rule. Demanding interest for the earlier period on the basis of a retrospective amendment is against the spirit of the law and also against the spirit of the Constitutional safeguards provided to Indian Citizens. This retrospective legislation appears to be contrary to the general principle that ‘legislation introduced for the first time need not change the character of past transactions carried out upon the faith of the then existing law’.
Hon’ble Apex Court in the case ‘Star India (P) Ltd. vs CCE, 2006 280 ITR 321’ has held that the liability to pay interest would only arise on default and is really in the nature of a quasi-punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect.
It may kindly be appreciated that interest cannot be demanded for non-filing of returns as per the prescribed procedure, especially when there is no specific provision under the GST Law for levying interest in such situation. Irrespective of grounds for non-sustenance of levy of interest going forward, it would be grossly inequitable and unjust to demand interest for the past period for supposed ‘delays’ when there was no due date for payment of taxes in the past.
3. Period as envisages under section 50(1) has not been prescribed:-
Section 50(1) casts a liability of interest on the registered persons in the cases where he fails to pay the tax within the period prescribed. It may kindly be appreciated that the word “prescribed” has been defined in clause 87 of section 2 of the CGST Act, 2007 to mean prescribed by Rules made under this Act on the recommendations of the Council. Thus, the default for which interest is payable is non-payment of tax within the period prescribed under CGST rules. No such period has been prescribed in the rules and therefore there was no default at the part of the undersigned which may cause any interest liability. Thus, the section 50(1) is non effective due to the aforesaid reason because as on now it is not known to the taxpayer that under which circumstances, he will be liable to pay interest.
It is very important to note that the phrase “period prescribed” as used in section 50(1) does not necessarily mean “due date of tax payment”. Section 50(1) and 50(2), alongwith notification no. 13/2017 – Central Tax dated 28/06/2017, if reads together, says that interest will be payable if the tax is not paid within the period prescribed under CGST rules, interest @ 18%, which will be calculated from the date on which tax was due to be paid u/s. 39(7).
It may kindly be appreciated the phrase “prescribed period” has been used in section 50(1) and the Government is empowered to prescribe the period, non-payment of tax within which will attract interest. As such power has not yet been exercised by the Government, there is no legal scope of levying interest.
4. Section does not specify the sum on which interest is payable:-
Section 50(1) does not specify the amount on which the interest is to be paid and on this ground also the section has become inefficacious. The section is incomplete as it stipulates the condition under which interest will be payable but does not state the amount on which the said interest will be calculated and levied.
It has been held by the Apex Court in the case of India Carbon Ltd Vs State of Assam, 1997 (6) SCC 479) that interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf.
5. Manner of calculation of interest not prescribed:-
Interest as per section 50(1) is not payable because of the absence of prescribed manner or machinery provisions. As per section 50(2), interest under sub-section (1) is to be calculated in the manner as may be prescribed. Whereas till now no such manner has been prescribed by any rule under GST Acts. Therefore the provisions of sub-section (1) of Section 50 of the Act, providing for levy of interest, cannot be given effect to.
In this connection, the decision of the Gauhati High Court in Santosh Kumar Harlalka Vs State of Assam & Ors, (1995) 2 GLR 95 may be referred to. In the said case, Section 27 of the Assam General Sales Tax Act, 1993 provided for deduction of tax at such rates and in such manner as may be prescribed. The rate and manner of deduction of tax was not prescribed by framing the Rules. In that connection the Court held as under:
“Therefore, I am of the opinion that as per the “Rules”, no rate and manner have been prescribed to deduct tax at source. In the absence of any prescribed rate and manner, the 3rd respondent has no jurisdiction to issue notice dated 5.8.93 directing the 4th respondent to deduct taxes at source and the respondent no.5 has also no authority and jurisdiction to deduct the tax at source in the manner as it is proposed. Therefore, the letter dated 5.8.93 issued by the 3rd respondent is liable to be set aside as ultra vires.”
Subsequently, the Government of Assam amended the law prescribing the rate but no manner was prescribed. The matter again came up before the Gauhati High Court in Gauhati Municipal Corporation Contractor’s Association Vs Gauhati Municipal Corporation, (1996) 2 GLR 172 and the High Court held as under :
“It is a well settled law that where a power is given to do certain thing in a certain way the thing must be done in that way or not at all. In section 27(b) of the Assam General Sales Tax Act the legislature has fairly indicated that tax can be deducted at source not only on the basis of the prescribed rate but also in the manner. While making the said provision, definitely, the legislature had in its mind certain manners. It is also an established principle of law that legislature do not use any expression which is unnecessary and redundant. Taking the plain meaning from Section 27(b) of the Act, it is abundantly clear that some manner, regarding deduction of tax has to be prescribed. As this has not been done, in my opinion, no tax can be deducted at source in the present facts and circumstances of the case. Accordingly, I set aside and quash the action of respondents deducting the sales tax at source from the bills payable to the members of the petitioner-association.”
It has been hitherto uncontroverted legal position that where a statute requires to do a certain thing in a certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and necessarily forbidden. [Reference may be made different judicial rulings including – Nazir Ahmad v. King Emperor, AIR .1936 PC 253 ; Deep Chand v. State of Rajasthan, AIR 1961 SC 1527 ; Patna Improvement Trust v. Shrimati Lakshmi Devi and Ors., AIR 1963 SC 1077 ; State of Uttar Pradesh v. Singhara Singh and Ors., AIR 1964 SC 358 ; Nika Ram v. Stale of Himachal Pradesh, AIR 1972 SC 2077 ; Ramchandra Keshav Adke (Dead) by LRs. v. Govind Joti Chavare and Ors., AIR 1975 SC 915 ; Chettiam Veettil Ammad and Anr. v. Taluk Land Board and Ors., AIR 1979 SC 1573 ; State of Bihar and Anr. v. J.A.C, Saldanha and Ors., AIR 1980 SC 326; A.K. Roy and Anr. v. State of Punjab and Ors., (1986) 4 SCC 326 ; State of Mizoram v. Biakchhawna, (1995) 1 SCC 156 ; J.N. Ganatra v. Morvi Municipality Morvi, AIR 1996 SC 2520 ; and Babu Verghese and Ors. v. Bar Council of Kerala and Ors., AIR 1999 SC 1281]. Source- “Ram Asrey Lal Rajendra Kumar vs State of U.P, 2005(3) ESC 1610.
Hon’ble Supreme Court in the case of Govind Saran Ganga Saran vs. CST 1985 AIR 1041, 1985 SCR (3) 985 held “The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”
Similar observations have been made by the Apex Court in the case of CIT vs. B.C Srinivasa Setty, 1981 AIR 972, 1981 SCR (2) 938 and Commissioner, Central Excise & Customs & Ors. Vs. Larsen and Tourbro Limited 2016 (1) SCC 170.
6. That as the GST law neither speaks about the amount on which the interest is to be calculated and nor lay down any manner of calculation of interest even the prescribed period as envisages under section 50(1) has not been prescribed, the question of charging and levy of interest under the CGST Act, 2017 does not arise at all.
That without prejudice to the above, as per the system introduced in the portal, payment of taxes has been linked with the filing of returns or GSTR 3B and there was no way to pay the taxes without filing of GSTR 3B of the relevant period. It is also a fact that during the first few months of the GST era, GSTR 3B could not be filed due to technical glitches and due to newly introduced complex system.
It will be unlawful and unjustified to levy interest for the delay in making the payment of taxes in the cases where the delay is attributable to the technical glitches in the portal and due to complexity in newly introduced return.
That without prejudice to the above, it has been found that interest as reflected in your notice is calculated on the total amount of output tax without deducting the eligible input tax credit therefrom. As per the provisions of law, interest is payable on the total amount of cash payable (output –input credit) and it is improper to levy interest on the gross amount of output tax without deducting the amount of eligible input tax credit. In this context the following points may kindly be considered:-
1. Interest on tax has always been levied on net tax payable:-
According to the working concept of GST and VAT, the taxpayer’s liability is restricted to the value addition made by him. Consequently, the input tax credit is allowed to the taxpayer for the tax paid by him on his purchases to be adjusted against the tax payable on the sales.
The resulting difference is the tax liability on the value addition to be discharged through electronic cash ledger and interest, if leviable, can only be levied on such tax liability only. During VAT regime also interest was charged on the net amount of tax payable, changing the terminology or the procedure of adjustment of input tax credit cannot be a reason of enhanced interest liability.
2. Interpretation of section 50(1) regarding the subject matter of interest is incorrect:-
As discussed above, sub-section (1) of section 50 does not specify the amount on which the interest is payable by a registered person. Thus, as per the principles of literal interpretation it is not fair to interpret that section 50(1) demands interest on the gross amount of output.
3. Being compensatory in nature, interest can only be levied on the net amount payable:-
Interest under fiscal laws are compensatory in nature and should be levied on the basis of actual loss incurred by the Government and the actual amount withheld by the assessee:-
In fiscal Statutes, the import of the words — “tax”, “interest”, “penalty”, etc. are well known. They 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. 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 of any tax as and when it is due and payable. The levy of interest is geared to 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 penalty– which is penal in character. [Prathibha Processors Vs. UOI (1996) 11 SCC 101 (SC)]
“..Tax, interest and penalty are three different concepts. Tax becomes payable by an Assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not penal.” [Associated Cement Co. Ltd. Vs. Commercial Tax Officer, Kota and Others (1981) 048 STC 0466 (SC)]
“The said interest is compensatory in nature in the sense that when the assessee pays tax after it becomes due, the presumption is that the Department has lost the revenue during the interregnum period (the date when the tax became due and the date on which the tax is paid). The assessee enjoys that amount during the said period. It is in this sense that the interest is compensatory in nature and in order to recover the lost revenue, the levy of interest is contemplated by section 120 of the Finance Act, 2000”. [Indodan Industries Ltd. V. State of U.P. and others  27 VST 1(SC), in reference to the Central Sales Tax Act, 1956]
The principles of the above Apex Judgment has been well reflected in the Notification No. 23/2017 dated 17th August 2017 as amended by Notification No. 24/2017 dated 21st August 2017 issued by the Commissioner, on the recommendations of the Council, and gazetted vide GSR No. 997(E ) dated 8th August 2017. The said notification inter-alia contains:-
2(iii) : where the amount of tax payable under the said Act for the month of July, 2017, as detailed in the return furnished in FORM GSTR-3B, exceeds the amount of tax deposited in cash as per item (i), the registered person shall pay such excess amount in cash in accordance with the provisions of rule 87 of the said Rules on or before 28th August, 2017 along with the applicable interest calculated from the [26th day of August, 2017] till the date of such deposit.
Explanation (for the purpose of the notification)-
(ii) “tax payable under the said Act” means the difference between the tax payable for the month of July, 2017 as detailed in the return furnished in FORM GSTR-3B and the amount of input tax credit entitled to for the month of July, 2017 under Chapter V and section 140 of the said Act read with the rules made thereunder.
4. Being the GST Council has realised that charging interest on gross amount of GST (output tax) is improper and therefore has recommended in its 31st meeting on 22/12/2018 to amend the provisions of section 50(1). Accordingly in the Finance (No. 2) Act, 2019 dated 01/08/2019 the following proviso has been inserted to the section 50(1):
“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.”
The aforesaid amendment has not yet been notified.
Recently the issue regarding interpretation of section 50(1) knocked the door of Hon’ble Madras High Court in the case Refex Industries Ltd. Vs Assistant Commissioner of CGST & Central Excise (Writ Petition Nos. 23360 and 23361 of 2019 & WMP Nos.23106 and 23108 of 2019) observed “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. In my considered view, the proper application of Section 50 is one where interest is levied on a belated cash payment 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, in my view, neither belated nor delayed”. It was held that the newly inserted 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.
The contention that the new proviso to section 50(1) will be with retrospective effect also get support from the judgment of the full bench of the Apex Court in the case ‘CIT New Delhi Vs. Vatika Township P. td.  49 taxmann.com 249’ wherein it was observed- We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India & Ors. v. Indian Tobacco Association, the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra & Ors. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are confronted with any such situation here.
Honourable Delhi High Court in its judgement in the case of M/s. Landmark Lifestyle v/s. Union Bank of India  105 taxmann.com 354 (Delhi) and others has granted stay on recovery of interest amount on gross GST Liability where there was delay in filing of GST return.
In the premises of the aforesaid submission, the undersigned most humbly request your good self to kindly drop the proposed proceedings. For any further clarification and explanation opportunity may kindly be provided.
In case if your good self is not satisfied with our above submissions, we may kindly be given a further opportunity to present our case with reference to few more judgments of the Hon’ble Courts. No coercive action may kindly be taken for recovery of the amount of tax, without giving us the reasonable and effective opportunity of being heard.
This draft is for the purpose of academic discussion among the tax professionals. We are not taking any responsibility whatsoever in case any damage is occurred or if the different views are taken by authorities.
Compiled by- CA. O. P. Agarwalla, Guwahati