Interest liability in terms Section 50 of CGST Act/SGST Act after proposed amendment to Section 50(1) vide Finance Bill 2019

There are divergent views on rationality of charging interest on gross liability of tax even though the Tax Payer (TP) has got certain amount in his credit ledger to discharge part of his tax liability but could not done so and consequently could not file the return as he was not having sufficient finances to pay the balance amount of tax through his cash ledger.

2. Arguments AGAINST charging of interest on gross tax liability without adjusting input tax credit:

i. Under excise, service tax and VAT regime a Tax Payer was also liable to pay interest on delayed payment of tax, but the interest was calculated on the net tax liability after set off of input tax credit of duties/taxes paid on inputs and the consequential reduction of cascading effect of taxes. Even under GST, the concept of input tax credit remains the same. However, in GST Tax payer will have to pay interest on the gross amount of output tax liability without any adjustment of input tax if he makes any delay payment of GST and in filing of return u/s 39. Thus, the very purpose of adjustment of input tax credit to some extent defeated.

ii. The input tax credit is available to the buying TP only if the seller has paid the tax. Thus, the recipient is claiming a credit of tax which has already been received by the government. It is well-settled principle of taxation law that interest is compensatory in nature. If the government is trying to levy interest on any amount which it has already received then this payment will not be compensatory in nature but will be in the nature of penalty. Anyhow for delayed filing of return u/s 39 a dealer is already liable to pay late fee u/s. 47 and penalty u/s. 125. Again penalising him for the same offence way of interest is not correct.

iii. There is no dispute with the provision of Section 16(2) (d)which says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s 39. But that Section nowhere explicitly says that the date of submission of return will be deemed as the date of availability of input tax credit to the buying dealer.

3. Arguments IN SUPPORT of charging of interest on output tax without adjustment of input tax credit under the law:

(i) The following provisions suggests that ITC would not be available to the Tax payer

(a) Section 16(2)(d) says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s. 39.

(b) Section 49(2) says that the input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger.

(c) Section 49(3) says that the amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fee, etc.

(d) Section 49(4) says that the amount available in the electronic credit ledger may be used for making any payment towards output tax only.

(e) Rule 61(3) says that tax liability shall be discharged by debiting the cash ledger or credit ledger.

(ii) It is argued that one cannot utilize the input tax credit for payment of output tax without furnishing return u/s. 39. The date of furnishing of return u/s. 39 shall be deemed to be the date of payment of tax. Output tax liability is discharged by debiting the cash ledger and/or credit ledger and reverse charge tax liability is discharged by debiting cash ledger only. Accordingly, if one makes delay in furnishing of return u/s. 39, then his entire tax liability (i.e., gross value of output tax and reverse charge tax liability) remain unpaid till the date of furnishing of return u/s. 39. Therefore, interest should be charged on the entire output tax liability without making any adjustment of the input tax credit.

4. Considering the demand from the trade that interest should be charged on net tax liability after adjusting the input tax credit, the Govt moved the amendment to Section 50 of the CGST Act vide Finance Bill 2019 by inserting proviso to Section 50(1) ibid. The proviso reads as below:

“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”

5. As seen from the above, all these liabilities and actions are linked to filing of return in terms of Section 39.

6. Recently, Hon’ble High Court of Gujarat in the case of AAP AND COMPANY (reported 2019-TIOL-1422-HC-AHM-GST) in the issue of time limit to take ITC on the documents issued in the year 2017-18, held as follows:

“27. Section 16(4) of the CGST Act/GGST Act provides that the last date for taking the input tax credit in respect of any invoice or debit note pertaining to a financial year is the due date of furnishing of the return under Section 39 for the month of September following the end of the financial year or furnishing of the relevant annual return, whichever is earlier.

28. Therefore, the moot question is, whether the return in Form GSTR-3B is a return required to be filed under Section 39 of the CGST Act/GGST Act. The aforesaid press release is valid and in consonance with Section 16(4) of the CGST Act/GGST Act only if Form GSTR-3B is a return required to be filed under Section 39 of the CGST Act/GGST Act.

29. Section 39(1) of the CGST/GGST Act provides that every taxpayer, except a few special categories of persons, shall furnish a monthly return in such form and manner as may be prescribed. Rule 61 of the CGST Rules/GGST Rules prescribes the form and manner of submission of monthly return. Sub-rule 1 of Rule 61 of the CGST Rules/GGST Rules provides that the return required to be filed in terms of Section 39(1) of the CGST/GGST Act is to be furnished in Form GSTR-3.

30. It would be apposite to state that initially it was decided to have three returns in a month, i.e. return for outward supplies i.e. GSTR-1 in terms of Section 37, return for inward supplies in terms of Section 38, i.e. GSTR-2 and a combined return in Form GSTR-3. However, considering technical glitches in the GSTN portal as well as difficulty faced by the tax payers it was decided to keep filing of GSTR-2 and GSTR-3 in abeyance. Therefore, in order to ease the burden of the taxpayer for some time, it was decided in the 18th GST Council meeting to allow filing of a shorter return in Form GSTR-3B for initial period. It was not introduced as a return in lieu of return required to be filed in Form GSTR-3. The return in Form GSTR-3B is only a temporary stop gap arrangement till due date of filing the return in Form GSTR-3 is notified. Notifications are being issued from time to time extending the due date of filing of the return in Form GST- 3, i.e. return required to be filed under Section 39 of the CGST Act/GGST Act. It was notified vide Notification No.44/2018 Central Tax dated 10th September 2018 that the due date of filing the return under Section 39 of the Act, for the months of July 2017 to March 2019 shall be subsequently notified in the Official Gazette.

31. It would also be apposite to point out that the Notification No.10/2017-Central Tax dated 28th June 2017 which introduced mandatory filing of the return in Form GSTR-3B stated that it is a return in lieu of Form GSTR-3. However, the Government, on realising its mistake that the return in Form GSTR-3B is not intended to be in lieu of Form GSTR-3, rectified its mistake retrospectively vide Notification No.17/2017-Central Tax dated 27th July 2017 and omitted the reference to return in Form GSTR-3B being return in lieu of Form GSTR-3.”

7. Vide above judgement, Hon’ble High Court held that GSTR-3B can’t be treated as a return to be filed under Section 39 ibid. In view of the non-declaration/non-notifying of due date for filing GSTR-3 return which is only considered to be the return in terms of Section 39, as per new proviso introduced the interest is not payable as due date for filing return in terms of Section 39 is not yet over rather not even notified. Further, most of the enforcement/assessment actions can’t be initiated till the last date to file GSTR-3 or till filing of GSTR-3 as the case may be. It appears that correctness or otherwise of the returns filed by the Tax payer can only be checked after filing GSTR-3 on reconciliation done between GSTR-1 and 2 with GSTR-3B in terms of Rule 61(6).

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