Interest on delay in filing of GSTR 3B is to be charged on Net Tax Liability or Gross Tax Liability?

Section 50 of CGST Act 2017 govern the Interest payment on delay payment of output tax liability.

Section 50 of Central Goods and Service Tax Act 2017 read with notification no 13/2017 dated 28-06-2017 states circumstances for payment of interest and the rate of interest which are as under:-

(a) Section 50(1) :- where a person is liable to pay tax ,fails to pay the tax or any part within the period prescribed, interest is payable at the rate of 18%.

(b) Section 50(3) :- When recipient has makes an excess or undue claim of ITC as per section 42(10) or undue or excess reduction in output tax liability under section 43 (10) of the CGST Act, rate of interest applicable will be 24% ( on Wrongly claimed ITC)

Recently GST department has started sending notices to all taxpayer who has filed their GSTR 3B late for asking Interest on GROSS TAX LIABILITY shown in GSTR 3B and taxpayer across the India is receiving the notices for payment of Interest.

Why GST Department is asking interest on Gross Tax

We need to understand the section based on which GST department is sending notices for interest on Gross Tax Liability.

As per section 50(1) of CGST Act before amendment made by Finance Act (FA) 2019 is as under:-

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.

Government has thereafter inserted one proviso in Section 50(1) by FY 2019 is as under:- “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”

Amendment as proposed by the Finance Act 2019 is not yet made effective by the government since two states have not yet amended their respective states law in line with the Amendment in made by FA 2019 (Telangana and West Bengal) once these two states also amend their respective states law government will notify the date from which the said proviso will be effective. GST department is of the views that said propose amendment will be made effective from prospective date and not from retrospective date. Hence, Interest notices is stated sending by the respective GST department.

GST Department has one favourable judgment form Telangana High Court in case of Megha Engineering& Infrastructures Ltd. v. Commissioner of Central Tax [2019] 104 taxmann.com 393 (TELANGANA) which stated as under:-

Court observed that until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. As a consequence, no payment can be made from out of such a credit entry. It is true that the tax paid on the inputs charged on any supply of goods and/services, is always But, it is available in the air or cloud. Just as information is available in the server and it gets displayed on the screens of our computers only after connectivity is established, the tax already paid on the inputs, is available in the cloud. Such tax becomes an in-put tax credit only when a claim is made in the returns filed as self-assessed. It is only after a claim is made in the return that the same gets credited in the electronic credit ledger. It is only after a credit is entered in the electronic credit ledger that payment could be made, even though the payment is only by way of paper entries.

Court has also stated that The Press release of the Ministry of Finance about GST Council 31st meeting which gave in principle approval to the following amendments in the GST Acts:

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.”

But, unfortunately, the recommendations of the GST Council are still on Therefore, we cannot interpret Section 50 in the light of the proposed amendment.

Therefore, Court has held that interest is to be charged on Gross Tax Liability and not on net tax liability.

Taking this as a weapon along with delay on notifying the amendment made by FA 2019 GST department has stated sending notices to pay interest on gross tax liability.

What Taxpayer supposed to/ what is correct view 

At the outset it may be noted that GST council has recommended the amendment in section 50 (1) of CGST Act 2017 by inserting “proviso”, proviso is inserted to clarifying the intention of the legislature. Proviso clearly says that “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”. 

It is also settled principle that if some amendment made which is clarifactory in nature need to be read as retrospective amendment even though not specifically stated. 

Further, when you see section 50 its says fails to pay the tax, what is tax payable has not been define under the Act, and as per Rajasthan High Court in Uma Polymers Ltd. V. State of Rajasthan and Others S.B.CIVIL WRIT PETITION NO.10230/2009 – 24.11.2011 it has been held that

In the absence of words “tax payable” defined under the VAT Act, 2003 or RIPS, 2003 itself, it would be wrong to contend that the word “output tax” and “gross tax liability” under the Rajasthan VAT Act, 2003 should be construed to mean “tax payable” under the VAT Act, 2003 for the purpose of RIPS, 2003. The very concept of VAT is to permit the assessee in the series of successive sales to pay only “net tax liability” after deducting therefrom input tax paid by him to the seller of the goods and raw materials to him, so that cascading effect and repetitive tax liability on such successive sales is reduced and only the “net tax payable” on the value addition made by the assessee is levied in his hands. The VAT regime therefore, does not require payment of output tax straightway by the assessee or manufacturer in question and it allows set-off of input tax to such assessee or manufacturer”.

Further, in recently Madras High Court in case of M/s. Refex Industries Limited Vs UOI Writ Petition Nos.23360 and 23361 of 2019 has held that

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.

The proviso, 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, in my view, be read as clarificatory and operative retrospectively. 

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.

High Court of Delhi in case of LandMark Lifestyle Vs UOI (WP) 6055/2019 which has given stay on recovery of interest on Gross Tax liability.

Supreme Court in Allied Motors Ltd Vs CIT (1997) CA Nos. 3175/91 and 2380/91), has held

“A proviso which is inserted to remedy unintended consequences and to made 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”

Conclusion

Interest is to be charged on net tax liability only since what taxpayer is supposed to pay had he file his return. Even Amendment made by Finance Act 2019 is giving some logical explanation to section 50 (1) of CGST Act 2017 hence even if government does not notify as prospective,  it should be read as retrospective as held by the courts.