There is always a stipulation in every taxation law (both direct or indirect) that amount due to the Government, on account of tax under the said law is to be paid on or before a specified date. Where such dues are not paid on or before the date so specified, such delayed payment of tax warrants leviability of interest, which has to be paid by the taxpayer in addition to the amount due on account of tax. Such tax laws, in addition to the due date to pay tax, also prescribe the rate of interest which would be applicable in instances of delayed payment and also the period for which such interest has to be paid by the tax payer.
Provisions relating to interest, in any taxation statute, have always been a bone of contention between the Assessee and Tax department. Tax department would always try to make the computation of interest on an inflated side so as to generate more revenue to the Government, as against which, the assessee would always try to compute the interest at the lowest possible level, so as to ensure that there is no undue loss to the business on account of such interest cost.
In GST laws also, provisions relating to interest, to the extent these provisions relate to delayed payment of tax dues under the law, have been a matter of serious debate since the very first day when the GST regime was made applicable in the country. In the erstwhile laws like VAT, service tax etc., interest was payable in respect of delayed payment of tax, dues to be paid by the taxpayers, after setting off of the available eligible input tax credit in terms of the provisions of said laws. However, under the GST law, the said practice got destroyed under the concepts of ‘Electronic Cash Ledger’, ‘Electronic Credit Ledger’, etc. and offsetting the liabilities with amounts in cash and credit ledgers through return in Form GSTR-3B.
In GST, it has always been contended by the Tax department that interest, in terms of provisions of Central Goods and Services Tax Act, 2017 (hereinafter referred to as CGST Act or the Act), is payable on gross tax liability before setting off of the available input tax credit. In respect of such interest, an overall demand of around INR 49,000 crores is said to be recoverable from the tax payers and tax department has started sending notices asking taxpayers to pay the amount of interest. This has created a lot of panic amongst taxpayers as this position would result in huge interest cost to their business, even if input tax credit which they intend to set off from their output tax liability has already been remitted to the Government by their counterpart vendor and still, they are being denied to the benefits of the same.
Through this article, an attempt has been made to discuss and understand the provisions of CGST Act read with Central Goods and Services Tax Rules, 2017 (hereinafter referred to as CGST Rules or the Rules) in so far as these provisions read with rules relate to the payment of taxes under the law and interest in case of delayed payment of tax.
ANALYSIS OF LEGAL PROVISIONS
Provisions relating to payment of tax under GST laws have been provided in Chapter X of the CGST Act under Section 49 read with Rule 85 to 87 of Chapter IX of CGST Rules. Further, provisions relating to the interest have been provided under section 50 of the CGST Act.
Provisions of Section 49 and Section 50 of the Act read with relevant rules have been discussed herein to the extent they are relevant for understanding their relevance with respect to delayed payment of tax and related consequences. Procedure like order of utilization of input tax credits, cross utilization of credits, order of discharge of tax and other dues under the Act etc. and provisions related thereto have not been discussed here.
Section 49 provides for the mode of payment of tax, interest, fee, penalty or any other amount due under the Act which is to be paid by the taxable person. This section envisages for maintenance of three kinds of ledgers/registers-
It provides that every deposit made, in specified modes, towards tax, interest, penalty, fee or any other amount due under the Act shall be credited to the Electronic Cash Ledger (‘Cash ledger’) of the taxpayer, maintained in Form GST PMT-05 in terms of Rule 87 of the CGST Rules. [Section 49(1)].
Self-assessed input tax credit (ITC) in the return shall be credited to Electronic Credit Ledger (‘Credit ledger’) maintained in Form GST PMT-02 in terms of Rule 86 of the CGST Rules. [Section 49(2)].
All liabilities of the registered person shall be recorded and maintained in an Electronic Liability Register (‘Liability register’) maintained in Form GST PMT-01 in accordance with Rule 85 of the CGST Rules. [Section 49(7)]. Amount payable under the Act shall be debited to the liability ledger in Form GST PMT-01.
The amount available in the Cash ledger may be used for the payment of tax, interest, penalty, fee or any other amount payable under the Act and amount available in Credit ledger may be used for making payment of output tax under CGST Act or IGST subject to the conditions and restrictions prescribed [Section 49(3) and Section 49(4)]. It is important to note here that Credit ledger can be used to make payment towards output tax only and interest, late fee or penalty cannot be paid through it. Accordingly, they have to be paid in cash necessarily.
In terms of Rule 85 of the Rules, liability register of the taxpayer shall be debited by the amount payable on account of tax, interest, fee, penalty or any other amount payable under the Act, as per the return filed by the taxpayer. Such register shall further be debited by the amount of tax, interest, penalty or any other amount payable as determined by the proper officer in pursuance of proceedings under the Act or as ascertained by the said person, the amount of tax and interest payable in respect of mismatch under Section 42 or 43 or 50 or any amount of interest that may accrue from time to time.
Our discussion here shall be limited to the first instance where such liability register is debited with tax, interest etc., as per the return filed by the taxpayer.
Subject to the provisions of Section 49, 49A and 49B which deal with payment of tax, utilization of input tax credit subject to certain restrictions and order of utilization of input tax respectively, payment of every liability by a register person shall be made by debiting the Credit ledger, maintained in Form GST PMT-02 as per Rule 86, to the extent such liability is paid by utilization of input tax credit available to such person. Payment of liability shall be made by debiting the Cash ledger, maintained in Form GST PMT-05 as per Rule 87, to the extent such liability is paid by utilizing cash balance available in such ledger. The aggregate of the amount of debited to the Credit ledger and Cash ledger respectively shall be credited separately to the Liability register, maintained in Form GST PMT-01, in terms of Rule 85. Such amount credited to the Liability register shall be the amount of liability discharged and shall be treated as amount paid to the Government towards tax liability for the tax period concerned.
From the above mechanism, it can be understood that unless there is an amount debited to Credit ledger/Cash ledger, as the case may be and an equivalent credit to the Liability register, there cannot be a payment of amount towards tax, interest etc. under the Act. Hence, where a return in terms of Section 39 (GSTR 3B for the time being) is not filed or filed after the due date, payment of liability, by the amount of input tax credit intended to be used by the taxpayer by making a debit to the Credit ledger, cannot be made and hence, there cannot be a discharge to tax liability to the extent of said amount even though it is lying the credit ledger and is available for utilization. Hence, such non-filing of return or delayed filing of return is treated as non-payment or delayed payment, as the case may be, of the total tax liability.
Accordingly, it can be viewed that where debit entries are not made in Credit ledger or Cash ledger as the case made and corresponding credit entries are not made in the Liability register, the tax dues under the laws cannot be treated as discharged or paid. As, such debit or credit entries are made by way filing returns, unless such returns are filed within the due timeframe, one cannot say that tax dues have been paid to the Government for the tax period concerned within the prescribed timelines.
However, merely on account of tax payment mechanism being provided the way it is in terms of section 49 read with rules, it should not be said that unless that mechanism is followed, there cannot be payment of tax dues under the law. Tax credit which is genuinely eligible for a taxpayer, and has already been paid by the vendor concerned to the Government out of tax collection being done from the taxpayer, should not be denied merely on account of non-filing of return or delayed filing of return.
There have been varied views in respect of the same. First school of thoughts is that in terms of the mechanism, procedure and law provisions existing as on the date, interest should be levied on the gross tax liability in the absence of relevant returns being filed and entries in appropriate ledgers being made on account of such filings. Even, section 50 also provides that where the person is liable to pay tax and he fails to do so, he shall be liable to pay interest at the applicable rates. One can argue that, in terms of provisions of section 49, making a debit entry in the credit ledger, by way of filing of return is also a mode of paying tax under the law, as the payment of tax does not necessarily mean payment in cash only and such tax can also be paid through utilization of credit, if any lying in the Credit ledger. Hence, where there is no utilization of credit, there cannot be said that taxes have been paid to the extent of credit not utilized.
The second school of thoughts is that interest should be applicable only on the net tax liability i.e. after setting off of available eligible input tax credit. It can be viewed that tax credit represents that portion of tax liability, which has already been paid by the vendor on behalf of the recipient (registered person) through their sales. Hence, in way, such registered person has already discharged its tax liability to the extent of taxes deposited by its vendors to the Government while making sales to the registered person. Also, levying interest on ITC portion is against the principles of natural justice and Government cannot levy interest on an amount which has already been deposited with its exchequer.
In terms of 31st GST Council meeting, held on December 22, 2018, it was also decided by the Council that interest should be levied on net cash liability, not on the gross tax liability, after setting off of available ITC. However, despite of the decision being made by the Council in its meeting, Hyderabad GST Commissionerate (‘Commissionerate’) issued order 01/2019 dated February 04, 2019 ordering that interest liability is to be paid not only on the cash component, but also on the credit component. The Commissionerate, vide its order, said that interest in terms of Section 50 is liable to be paid, on the tax or any part thereof, which remained unpaid to the Government within the period prescribed. It further said that, since ITC/Credit balance in the 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 register, the interest liability under Section 50 is mandatorily attracted on the entire tax remained unpaid beyond the due date prescribed. The ITC balance in Credit ledger as on the due date for filing the return has no relevance with regard to the interest liability under Section 50. Further, it is immaterial whether the self-assessed tax is paid through the ITC or the cash. Once the payment is beyond the prescribed date, interest liability is attracted on the entire tax amount. Accordingly, instructions were issued for strict compliance, basis the said legal position, by conducting due verifications of all cases involving delayed filing of returns and ensure that interest liability is discharged not on the net cash liability but on gross tax liability. It was also ordered that where interest in terms of Section 50 is not discharged, recovery proceedings, in terms of Section 79, in respect of unpaid interest be initiated against the taxpayers.
Further, through Section 100 of the Finance (No.2) Act, 2019, Section 50 of the CGST Act has been amended by way of insertion of a proviso to the said section. Proviso provides that interest shall be levied only on that portion of tax which has been paid by debiting the Cash ledger except in the situations where the returns are furnished after the commencement of the proceedings under Section 73 of Section 74 in respect of the tax period concerned. Hence, now the law has also been amended to provide that interest shall be leviable on net cash liability only and not on gross tax liability. However, the amendment made in Section 50 has been kept in abeyance and has not been notified as effective by the Government till date. It means the position as it was prior to the amendment made in the law is still in place.
The issue pertaining to interest leviability on gross tax liability has gone to Hon’ble Madras High Court as well. While hearing the case of Refex Industries Limited, the Hon’ble Court opined that;
Hon’ble Madras High Court deviated from the earlier adverse decision of the Hon’ble Telangana High Court in the case of Megha Engineering and Infrastructures Ltd., on the basis that the proviso inserted under Section 50(1) was only at the stage of a press release when the order was passed. It may also be noted that the Telangana High Court has also admitted the review petition against the said adverse ruling.
However, reasons, of the amendment already being brought in to the CGST Act by the Government, but not yet being made effective till date could not be understood. Further, there is no mention of the date from which the said amendment will take effect. What will be the fate of the cases where the interest has been paid only on net cash liability, where such amendment is made effective prospectively. What will be the position of the cases where the amendment is made retrospectively, and interest has actually been paid on gross tax liability. Will the amount of interest paid in excess be allowed as refund, is not clear, as taking a refund takes huge amount of time and efforts on the part of the claimant.
The decisions of Hon’ble Madras High Court in case of Refex Industries Limited is a welcome decision as the Court has dealt with the two important aspects – nature of levy and proviso inserted in the CGST Act on the levy of interest. Also, the Court has laid down the correct law by upholding the levy of interest only on the net portion of the tax paid by cash.
The Central Government may consider issuing suitable instruction/clarification to provide that in line with the amendment proposed under Section 50, no such recovery proceedings should be initiated by any State Government where the taxpayer had sufficient credit balance to discharge GST liability. The Government may also consider amending the Section 50 retrospectively from July 1, 2017. Further, in case where the interest has been paid on gross tax liability by the taxpayers, the same may be instructed to be refunded to such taxpayers at the earliest possibility.
Disclaimer: Views expressed in this article are personal views of the author and are for guidance purposes only. It is advised that the same should not be treated as legal advice and should not be acted upon in business scenarios. It is further advised that appropriate legal/professional advice is taken prior to acting upon the above while undertaking business transactions.