Gross Interest vs Net Interest under GST

1. Introduction/Background:

GST is a tax on value addition. Accordingly, a tax payer is allowed to set off input tax credit in respect of the tax paid by him on his inward supplies against the tax payable by him on outward supplies. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, what is paid by a tax payer is effectively only on the value addition made by him.

Many of the registered persons are receiving notices to pay interest on GROSS liability for delay in filing of GSTR 3B returns in case of failure to pay so the department may initiate recovery proceedings under sec 79, because of which there is as huge confusion among the registered tax payers regarding calculation of interest.

2. Let us understand what does GROSS & NET liability mean:

Suppose, a registered person has sold goods on which tax is amounting to Rs.1000/- & his Input Tax credit is Rs.900/-

Then, Gross Liability in this example is Rs.1000/- total outward tax liability Net liability in this is Rs.100/-(1000-900) the amount required to be paid in cash.

As per Sec 50(1) of the Act 

“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.”

– This section mandate that the interest has to be paid if there is as delay in paying of tax.

3. Synopsis of GST Council Meeting and various Judgements?

39^nd GST Council Meeting

As per GST Council Meeting held on 14^th March 2020 it was held that Interest for delay in payment of GST to be charged on the net cash tax liability w.e.f. 01.07.2017 (Law to be amended retrospectively). But notification for same is pending as of now.

31^st GST Council

• On 22/12/2018 the Press Release of 31^st GST Council meet recommended that “Amendment of 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.
• The above recommendations of the Council will be made effective only after the necessary amendments in the GST Acts are carried out.”
  • This shows that the GST Council is of the view that interest has to be collected on NET liability as but till date the law is not clear as no circular/notification has been issued.
• On 04.02.2019 a Standing Order No. 01/2019 issued by the Office of the Principal Commissioner of Central Tax (Hyderabad GST Commissionerate) stating that the interest has to paid on account of delay in filing of GSTR 3B Returns on the cash & the ITC Component of the tax paid after due date i.e that the interest has to be paid on Gross Liability.

M/s.Refex Industries Limited (Petitioner in W.P.No.23360 of 2019) AND M/s.Sherisha Technologies Pvt. Ltd. (Petitioner in W.P.No.23361 of 2019) Vs The Assistant Commissioner of CGST & Central Excise, The Superintendent of Central Tax, Bank Managar,Indian Overseas Bank,

In Judgement of Refex Industries Limited petitioner has  question crystallised for consideration is as to whether interest on belated payment of tax as contemplated under Section 50 of the CGST Act is automatic or whether the same would have to be determined after considering the explanation offered by the assessee. The Hon’ble Judge holds that the liability to pay interest under Section 50 is automatic. The specific question for resolution is as to whether in a case such as the present, where credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’. 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.

Learned counsel for the petitioners also draw attention to the decision of the Telengana High Court in the case of Megha Engineering and Infrastructures Ltd. V. The Commissioner of Central Tax and others (2019-TIOL- Writ Petition Nos.23360 & 23361 of 2019 893), where the Division Bench interprets Section 50 as canvassed by the Revenue. The amendment brought to Section 50(1), was only at the stage of press release by the Ministry of Finance at the time when the Division Bench passed its order and the Division Bench thus states that ‘unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment’.

M/s. Megha Engineering & Infra Ltd. V/s. The Commissioner of Central Tax

On 18/04/2019 the position was upheld in the order of Honourable High Court of Telangana in the Case of M/s. Megha Engineering & Infra Ltd. V/s. The Commissioner of Central Tax. Learned counsel for the petitioners also draw my attention to the decision of the Telengana High Court in the case of Megha Engineering and Infrastructures Ltd. V. The Commissioner of Central Tax and others (2019-TIOL-893), where the Division Bench interprets Section 50 as canvassed by the Revenue. The amendment brought to Section 50(1), was only at the stage of press release by the Ministry of Finance at the time when the Division Bench passed its order and the Division Bench thus states that ‘unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment’. Today, however, the amendment stands incorporated into the Statute and comes to the aid of the assessee.In the light of the above discussion, these Writ Petitions are allowed and the impugned notices are set aside. No costs. Connected Miscellaneous Petitions are closed.

LC Infra Projects Pvt. Ltd. v. Union of India 2019 VIL 365 (Kar.).

• Reference here is also invited to the decision of Hon’ble Karnataka High Court in the case of LC Infra Projects Pvt. Ltd. v. Union of India2019 VIL 365 (Kar.). In the said case the above referred principle of natural justice has been upheld by holding that the law requires the officer to issue the show cause notice even for the recovery of interest u/s 50 which has not been self-assessed by the tax payer. Relevant paragraph of the said judgement is reproduced below for ready reference:
• “Thus, the issuance of Show Cause notice is sine qua non to proceed with the recovery of interest payable thereon under Section 50 of the Act and penalty leviable under the provisions of the Act or the Rules. Undisputedly, the interest payable under Section 50 of the Act has been determined by the third respondent – Authority without issuing Show Cause Notice, which is in breach of principles of natural justice. It is trite law that any order passed by the quasi-judicial authorities in contravention of the principles of natural justice, cannot be sustained. Similarly, after determination of the interest liable to be paid by the petitioner, no notice has been issued before attaching the bank account of the petitioner. There is a lapse on the part of the third respondent – Authority. The notion of the third respondent – Authority that Section 75(12) of the Act empowers the authorities to proceed with recovery without issuing Show Cause Notice is only misconceived. The said Section is applicable only to the self-assessment made by the assessee and not to quantification or determination made by the Authority.”

5. Why the interest has to be charged on Gross Amount?

In Sec 100 of The Finance Act (No.2) 2019 in Act there was a proviso added to sec 50(1) of CGST Act,2017.

“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.”.

This has been further clarified by the Tweet of CBIC India the official Twitter handle of CBIC on 12.41 am dt.15/02/2020 stating

“The GST laws, as of now, permit interest calculation on delayed GST payment on the basis of gross tax liability. This position has been upheld in the Telangana High Court’s decision dated 18.04.2019 In spite of this position of law and Telangana High Court’s order, the Central Government and several State Governments, on the recommendations of GST Council, amended their respective CGST/SGST Acts to charge interest on delayed GST payment on the basis of net tax liability Such amendment will be made prospectively. The States of Telangana and West Bengal are in the process of amending their State GST Acts. After the process of amendment is complete, the changed provisions can be put in operation for the entire country.”

That means the interest has to be collected on Gross Basis.

Conclusion Remarks

Hence in my opinion the Interest has to be charged on the Net Liability because:

• The latest interim order of Telangana High Court in the case of Raghava Constructionson 17/08/2019 was in Favour the Registered person i.e interest on Net Liability.
• Even the Delhi, Karnataka & Gujarat High Courts is of the same view & have granted interim order stating that the interest is to be paid on net liability.
• Sec 50 states that the interest has to be paid on the tax remaining unpaid, even if you are thinking about the judgement in the case of M/s. Megha Engineering & Infra Ltd. V/s. The Commissioner of Central Tax,the reading the court understood that the court is of a view that as the return is not filing hence the input tax credit is in Air , but we can take help of the opening credit as is not in air but in our electronic credit ledger can be used and hence pay on Net.
• The Finance Minister, she has pointed out in her budget speech of 2020 that the Harassment of Tax Payer will not be tolerated; asking a taxpayer to pay on gross is not less than harassing him which can never be the intention of the law maker.
• No Circular / Standing order / any tweet is binding on the registered person.
• From the above I am of the view that the interest has to be paid on NET even while replying to the notice kindly check the due dates as in many cases I have seen that the department has ignored the extension notification and has calculated interest on Gross Liability from 20^th of the month.