Interest is compensatory in character and is imposed on a registered person who has withheld payment of any tax as and when it is due and payable. It is a settled principle1 that interest is a mere accessory to the principal which has no independent existence of its own. Accordingly, interest is payable on actual loss to the revenue. To avoid cascading effect of taxes the concept of CENVAT was being introduced. Under the said concept, the amount of tax deposited by the supplier would be available as credit to the recipient which can be utilised for future payments of such tax liabilities. Accordingly, to the extent of such credit, the actual tax money is available to the government for disposal. After series of litigation and amendments under the erstwhile law it was settled that liability for payment on interest shall arise on net liability. GST Law also prescribes levy2 of interest on delayed payment of GST which is analysed as under.
2. Relevant provisions under GST:
a. Every person liable to pay tax, fails to pay within the prescribed period, then for such unpaid portion, interest3 is payable. The provision is silent as to the manner of calculation of interest thereby keeping the playground open.
3. Confusion with respect to manner of calculation of interest.
a. On 22nd December 2018, the GST council proposed for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability.
b. On 04th February 2019, the Principal Commissioner (Hyderabad) had issued a Standing Order 01/2019 to clarify that interest is payable on gross liability, including on the portion of the liability that was adjusted using the accumulated ITC. Accordingly, department started issuing Demand/recovery notices to various dealers for non-payment of interest on gross liability.
c. On 18th April, 2019, the Hon’ble High Court of Telangana4 held that interest is payable on gross liability wherein the High Court observed that since the ownership of such money is with the registered person till the time of actual payment, the Government is entitled for earning interest on gross amount.
d. Finance (No.2) Act, 2019 dated 1st August, 2019 introduced proviso to section 50(1) of the CGST Act, 2017 which substantiated that interest shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger which means interest is payable on net liability. However, the effective date of the instant provision was not clarified.
6. On 6th January, 2020, Madras High Court5 held that levy of interest on delayed payment of GST is purely compensatory. Accordingly, interest is liable to be charged on the net cash payment and not on the gross liability. The High Court while pronouncing the judgment observed that the use of the word ‘delayed’ connotes a situation of deprival, where the state has been deprived of the funds whereas the availability of ITC runs counter to this, as it connotes the situation of ‘enrichment’ to the State. The provision for interest specifically intends to apply to a situation of deprival & cannot apply in a situation where the State is possessed of sufficient funds to the credit of the taxpayer.
7. On 1st February, 2020 the Finance Minister in her budget speech of 2020 has pointed out that the harassment of tax payer will not be tolerated, and assured that tax payer won’t be harassed to pay interest on gross liability.
8. On 14th March, 2020 in the 39th GST Council Meeting it was decided that, interest for delay in payment of GST would be charged on the net cash tax liabilitye.f. 01st July, 2017. However, the proposed amendment is still not effective.
4. KSAA Analysis:
a. In the series of notifications released, no notification has been issued yet to give effect to the above provision introduced vide Finance (No.2) Act, 2019. Accordingly, due to tremendous pressure if a registered persons pays the interest then can a refund claim be filed on such excess payment of interest once the provision is effective is a question which is unanswered and can only be understood with the passage of time.
b. In our opinion, interest is payable on net liability and the said views are supported by observations of the High Court & Supreme Court referred supra.
1. Pratibha Processors vs Union of India 1996 (88) ELT 12 [SC]
2. Section 50(1) of the CGST Act, 2017
4. M/S Megha Engineering & Infra Ltd. v/s The Commissioner of Central Tax [2019 (26) G.S.T.L. 183]
5. Refex Industries Ltd. Vs Ass. CCGST [2020-TIOL-382-HC-MAD-GST]
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