Interest for delayed GST payment – Proviso to Section 50(1)

Introduction:

Before implementation of GST, government was planning to collect good fund through it but it remains the dream and actual fund collection continuously remain short from the budgeted value. Now, government is planning to collect approx. 46000 crore through interest on delayed payment of tax. Notices has started to the assesse and it makes a dent on unexpected cash outflow for the companies in this struggling economy.

Legal provisions:

As per Sec 50(1) of CGST Act 2017, 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 recommendation of the Council.

Further, as per Sec 50(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 tax was due to be paid.

However, no such rules are prescribed till now for calculation of interest. Now, in absence of rules, calculation of interest in the notice sent by the department are illegal and void.

Issues and implications:

The main issue arises due to the calculation method adopted by the department. It is calculating interest on gross liability payable from the due date of return till the date of filing of return without considering input tax credit and cash payment made.

For Example:

Company ABC ltd gross liability for the month of Jan 2020 is Rs.1 crore, ITC available to him Rs.80 lakh and cash liability will come to Rs.20 lakh. Due date of filing return is 20^th Feb 2020. ABC ltd deposited cash and filed his return on 28^th Feb 2020.

Now, as per department interest will be calculated as : (1 crore * 18% * 8/365 = Rs.39452)

But, it should be calculated as below :  (20 lakh * 18% * 8/365 = Rs.7890)

It can be clearly seen from the above, extra burden of Rs.31562 has to be borne by the company.

Other Considerations:

The Act with respect to the filing of the returns as contained u/s 39 of the CGST Act, 2017 merely link the due date for payment of tax with the due date for the filing of the return but does not provide that the return can be filed only after paying the entire tax. Attention is also draw to the definition of “valid return” u/s 2(117) of the CGST Act, 2017 which considers a return on which entire tax has been paid as a valid return (which would have been considered for matching if the GSTR – 2/3 would not have been suspended). Therefore a return filed on the due date reflecting the tax paid by way of utilizing the input tax credit and showing the balance tax as payable, although not a valid return for matching, would still remain a return filed u/s 39.

However, the GSTN portal does not permit filing of the return showing the tax payable by cash as outstanding. The same is thus contrary to the legal provisions cited above. Said proposition has also been acknowledged by the GST Council at their 31st meeting. Relevant agenda note reads as under:

“A perusal of above provisions indicate that the law permits furnishing of a return without payment of full tax as self-assessed as per the said return but the said return would be regarded as an invalid return. The said return, however, would not be used for the purposes of matching of ITC and settlement of funds. Thus, although the law permits part payment of tax but no such facility has been yet made available on the common portal. This being the case, a registered person cannot even avail his eligible ITC as he cannot furnish his return unless he is in a position to deposit his entire tax liability as self-assessed by him. This inflexibility of the system increases the interest burden.”

Further, GST Council at their 31st meeting acknowledged the fact that GST is a tax on value addition. Relevant extract of the agenda is as under:

“It is also pertinent to mention that the liability of any registered person is related to the value addition made by him since GST is leviable only on value addition. Accordingly, input tax credit is allowed to the registered person in respect of the tax paid by him on his inward supplies. And, while making the outward supplies, the input tax credit so allowed is permitted to be utilized for discharging his output tax liability. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, by this mechanism the registered person effectively pays tax only on the value addition made by him. If this concept is applied for interest payable, then, it appears that the interest should also be charged on the tax payable on the value addition only, i.e. the amount of tax which is required to be paid through electronic cash ledger.”

Considering the demand from the trade that interest should be charged on net tax liability after adjusting the input tax credit and the recommendation of GST council as mentioned above, the Govt moved the amendment to Section 50 of the CGST Act vide Finance Bill 2019 by inserting proviso to Section 50(1) which will come into effect from the date of notification. 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”

Now Government has notified that interest will be applicable on net amount with effect from 1^st day of September, 2020 vide Notification No. 63/2020-Central Tax, dated. 25th August, 2020.

Now, government has again started battle by notifying it prospectively rather than retrospectively.

Arguments ‘for’ and ‘against’

The case for the government is Since ITC/Credit in balance in the ‘Electronic Credit Ledger’ cannot be treated as the Tax paid, unless it is debited in the said credit ledger while filing the return for off-setting the amount in the ‘Liability Ledger’, the interest liability under Sec. 50 is mandatorily attracted on the entire Tax remained unpaid beyond the due date prescribed. The ITC in balance as on the due date for filing the return has no relevance with regard to the interest liability u/Sec.50. It is immaterial whether the self-assessed tax is paid through the Credit/ITC or the Cash. Once the payment is beyond the prescribed date, interest liability is attracted on the entire Tax amount.

Also, CBIC, in its series of tweet, has justifies the same on the ground that, pending the notification, GST laws permits the calculation of interest in case of delayed payment on gross tax liability and also relied on the judgement of Telangana High Court decision in case of Megha Engineering & Infrastructure Limited where in it was held that interest u/s. 50(1) was chargeable on the gross tax liability. The said judgement was pronounced before proviso to Sec 50(1) was inserted by Finance (no. 2) Act, 2019.

The case for trade is different it emphasis that starting from the MODVAT of excise regime since 1989 and thereafter introduction of CENVAT in Cenvat Credit Rules, 2004 and in GST Law since 01st July 2017, consideration of ITC must be taken even before the same was shown in the Electronic Credit Ledger because only after which assesse can file the GSTR-3B and can reflect the figure of ITC in Electronic Credit Ledger.

Recently, Madras High Court in its judgement pronounced on 06.01.2020 in case of Reflex Industries Limited (TS-89-HC-2020(MAD)-NT), has held that interest u/s. 50(1) is chargeable on net tax liability i.e on tax payment in cash after the netting of the ITC available and not on Gross Tax liability.

Further, Stay Order of Delhi High Court and Gujarat High Court in the case of M/s Landmark Lifestyle Vs Union of India and Bharatbhai Manilal Patel vs. State of Gujarat respectively, wherein the Court has granted a stay from recovery of interest on gross liability.

Further, Hon’ble Supreme Court in the case of Eicher Motors Ltd. v. Union of India 1999 (106) E.L.T. 3 (S.C.) has held that that the credit is as good as the tax paid. Said principle was also reiterated in the case of Collector of Excise v. Dai Ichi Karkaria Ltd. 1999 (112) E.L.T. 353 (S.C.)

Conclusion:

As per above views, intent of the GST Council as well as the legislators in inserting the given proviso has itself proved that the Board has accepted the anomaly in the provisions of the Act and interest should be charged on net liability. Interest calculation on gross liability is injustice and harsh step by the government. Board should come out with clarification on it otherwise litigation will increase to high level. Trade is waiting for a positive response from the board.

We hope that Government would walk on one of the important themes of its Economic Survey 2019 – 20 that the nation must respect businessmen as they create wealth and also jobs, which is the need of the hour and essential for boosting economic growth in sustained manner.

(Views expressed above are of the author himself. We do not take any responsibility of any action taken based on above views. Author can be reached at 8958419004 or camittal.tax@gmail.com.)