Interest on delayed payment of tax under section 50 of GST act – An analysis

Introduction

Section 50 of the GST Act 2017 provide for charging of interest on delayed payment of tax. In this article provisions of levy of interest are discussed.

Contents of the page

Relevant provisions under GST act.

Scope of charging of interest under section 50 of the act.

Rate of interest.

Interest on unpaid tax as per return.

Interest on differential tax due as per order.

Interest on ITC wrongly availed and utilised.

No interest on interest.

Interest on payments made before issue of notice.

Liability to pay interest on deferred payment of tax by reason of stay or instalment order.

No interest on tax paid under wrong head.

Levy of interest automatic and mandatory.

Requirement of notice and opportunity of hearing.

Time limit to levy interest.

Liability to pay interest on wrong payment of tax.

Conclusion

Relevant provisions under GST act.

Section 50 of the act deals with levy of interest on delayed payment of tax. Rule 88B, which is inserted vide notification number 14/2022 Central Tax, prescribe manner of calculation of interest on delayed payment of such tax.

Section 50- Interest on delayed payment of tax.-

(1) 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 recommendations of the Council.

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 thedue 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 payable on that portion of the tax which is paid by debiting the electronic cash ledger. (inserted wef 1-07-2017 Notification no 16/2021 Central Tax )

(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 such tax was due to be paid.

(3) Where the input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed. (substituted wef 1-07-2017 vide Notification no 9/2022 central Tax )

88B. Manner of calculating interest on delayed payment of tax.-

(1) In case, where the supplies made during a tax period are declared by the registered person in the return for the said period and the said return is furnished after the due date in accordance with 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, the interest on tax payable in respect of such supplies shall be calculated on the portion of tax which is paid by debiting the electronic cash ledger, for the period of delay in filing the said return beyond the due date, at such rate as may be notified under sub-section (1) of section 50.

(2) In all other cases, where interest is payable in accordance with sub section (1) of section 50, the interest shall be calculated on the amount of tax which remains unpaid, for the period starting from the date on which such tax was due to be paid till the date such tax is paid, at such rate as may be notified under sub-section (1) of section 50.

(3) In case, where interest is payable on the amount of input tax credit wrongly availed and utilised in accordance with sub-section (3) of section 50, the interest shall be calculated on the amount of input tax credit wrongly availed and utilised, for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount, at such rate as may be notified under said sub-section (3) of section 50.

Explanation. —For the purposes of this sub-rule, —

(1) input tax credit wrongly availed shall be construed to have been utilised, when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, and the extent of such utilisation of input tax credit shall be the amount by which the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed.

(2) the date of utilisation of such input tax credit shall be taken to be, —

(a) the date, on which the return is due to be furnished under section 39 or the actual date of filing of the said return, whichever is earlier, if the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, on account of payment of tax through the said return; or

(b) the date of debit in the electronic credit ledger when the balance in the electronic credit ledger falls below the amount of input tax credit wrongly availed, in all other cases.‖; (Notification no 14/2022 Central Tax)

Scope of charging of interest under section 50 of the act.

Section 50 provides for determination of liability to pay interest on delayed payment of tax and wrongly availed and utilised ITC. Plain reading of said section 50 (1) of the act makes clear that every person who is liable to pay tax as per provisions of act or rule, has failed to pay tax within prescribed period, should pay interest @18 per annum for the period of delay of such unpaid tax. Where there is delay in payment of tax and filing of return for any tax period, as per proviso which is inserted wef 1-7-2017, interest is payable on amount of net tax liability, which is discharged by debiting electronic cash ledger, from the due date of return till the date of debit to cash ledger. Section 50 (2) provides for manner and method of calculation of interest under section 50 and accordingly rule 88B has been inserted vide Notification no 14/2022 Central Tax. As per section 50(3) every registered person, who has wrongly availed and utilised amount of ITC should pay interest and same interest shall be calculated on the amount of input tax credit wrongly availed and utilised, for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount. Interest is consequential liability and has to be discharged by person on his own whenever there is default in payment of tax beyond due date.

In view of the above it appears that liability of interest is automatic and mandatory and requires to pay on his own by concerned person. Where person liable to pay interest has not paid the interest, the proper officer has powers to demand and recover such interest by issuing order under section 50 of the act.

Rate of interest.

Government has notified rate of interest under section 50 of the act and section 20 of the IGST act vide notification No. 13/2017 – Central Tax and Notification No. 6/2017 – Integrated Tax Dated 28-06-2017 and amended from time to time. Accordingly 18 % per annum rate of interest has been notified for the section u/s 50(1) and 24 % for section 50(3) of the act.

Interest on unpaid tax as per return.

Section 50 (1) of the act provides to levy interest on the delayed payment of unpaid taxes under the act. This tax means tax by way of any order issued under the provisions of the act or rule or self assessed tax admitted in the returns. If person has failed to pay due tax and furnish return for any tax period within due date of such return, interest will attract and he should pay the interest on his own @ 18% p.a.. The registered person, who furnish return for tax period within prescribed period, may discharge his tax liability due as per return, either by debiting electronic credit ledger or electronic cash ledger. However, where the registered person files return and pays tax for any tax period belatedly, proviso to section 50(1) will be applicable. Accordingly, 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, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger. As per said proviso interest shall be payable on net tax liability which is paid by debiting cash ledger. However, benefit of proviso (levy of interest on net tax liability) is applicable only to the extent of supplies which are made during a tax period and declared in the return for the said period furnished after the due date. In other word, where supplies related to earlier tax period are declared in the return of current tax period benefit of the said proviso can not be granted. Similarly, benefit of the said proviso can not be extended to cases where proceeding u/s 73 or 74 has been already initiated. Therefore, care should be taken by the registered person to declare all supplies made in the return correctly while filing return for the said tax period. The registered person who has declared supplies of earlier tax period in the next tax period, interest will be payable on gross tax payable of such supplies of earlier period , in view of said proviso

Interest on differential tax due as per order.

Under the provision of act proper officer issues adjudication and assessment orders and create demand of tax, which commonly known as differential tax dues. As a result of such orders taxable persons are liable to pay such additional tax and consequential interest. Such tax is liable to pay as per provisions of the act and hence comes within ambit of section 50 of the act. Such interest should be calculated at the notified rate ( 18 %) from the day succeeding the day on which such tax was due to be paid till the date of order.

In the case of Gammon India Ltd. (2013) 298 ELT 171 the Bombay High Court has held that liability to pay interest on short payment of duty is absolute and reasons for such short payment were not germane.

Interest on ITC wrongly availed and utilised.

As per substituted subsection 50 (3) of the act, interest is applicable only where ITC is wrongly availed and utilized. In order to attract interest u/s 50(3) of the act both components of wrong availment and utilization must be present. Where ITC is claimed wrongly in the return but lying in the electronic credit ledger as it as without utilisation, interest will be not payable. Interest should be calculated as per manner prescribed in rule 88B. Accordingly, an interest shall be calculated on the amount of input tax credit wrongly availed and utilised, for the period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount, at such rate as may be notified under said sub-section (3) of section 50. Rule 88B (3) read with explanation 1 & 2 , prescribes the criteria for deciding issue of wrong utilisation of ITC and determination of quantum of such utilised ITC and date of utilisation. The proper officer and taxable person is required to decide first whether there is wrong utilisation of ITC and if there is wrong utilisation , then required to determine quantum and date of such utilisation of ITC by applying the criteria prescribed in the said rule. The registered person is required to pay interest accordingly. It was proposed to reduce rate of interest applicable u/s 50 (3) of the act to 18 % from 24 % in the Finance Act 2022, however notification yet to issue. Where, registered person has failed to pay such interest u/s 50 (3), the proper officer is required to issue order under said section to recover such interest , after giving opportunity to the registered person to prove non applicability of said interest and present his case.

While calculating interest u/s 50 actual days of delays are required to be consider.

In the case of BPL Mobile Cellular Ltd (2005) 183 ELT 324 (Cestat Chennai) the Tribunal has held that actual days of delays are to be considered for interest payment, if delay comes to only some days of month, whole of that month could not constitute delayed period.

In the case of Pepsi Co India Holding Ltd (2011-TIOL-36-SC-CT) Supreme Court has held that once it has been confirmed that the tax is payable under the act, the same becomes payable from the date when it was due and not from the date when judicial verdict was pronounced (unless and until, in a case, court specifies a particular date from which it shall be payable).

In the case of India Yamaha Motors Pvt Ltd (2022-TIOL-1186-HC-MAD-GST) the Madras High Court has held that” date of debit to cash ledger would be date of payment credit can not prior to avaiment be taken construe to construe payment. Unless an assessee actually files a return and debit the respective ledger the authority cannot expect to assume that available credit will be set off against tax liability. It is only when remittance that is effected by way of debit an assessee would be protected from levy of interest.

No interest on interest.

Section 50 of the act clearly state that interest is payable only on delayed payments tax. It does not provide to levy interest on delayed payment of interest. Hence, no interest can be levied on late payment of interest irrespective of period of delay.

In the case of VBC Industries Ltd (2011) 270 ELT 314 the Madras High Court has held that issue of payment of interest on belated payment of interest does not arise in case of indirect taxation as there is no provision of payment of interest on delayed payment of interest.

Interest on payments made before issue of notice.

Every person is liable to pay tax under the act and rule is liable to pay interest u/s 50 (1) on delayed payment of unpaid tax. Delayed payment means payment made after prescribed period ie due date of such payment. Such due date may be before issue of any notice / order or after issue of notice/order. Non payment of tax beyond due date attract interest. Therefore, interest is payable on delayed payment of tax even it is paid before issue of notice or order under the provisions of the act and rules.

In the case of Alsthom Instrument Transformers (2015) taxmann.com 380 assessee has paid duty before issuance of notice, the Karnataka High Court has held that payment of interest is automatic irrespective of reason for delay in payment of duty.

Liability to pay interest on deferred payment of tax by reason of stay or instalment order.

As per section 107 of the act any person aggrieved by the order of adjudicating authority may file appeal to the first appellate authority subject to limitation period and payment of prescribed amount of pre deposit. Thereafter, balance amount shall be deemed as stayed. Similarly, as per section 112 of the act, any person aggrieved by the order of the appellate authority or review authority, may file second appeal to the appellate Tribunal on payment of prescribed amount of pre deposit within prescribed time limit. After admission of second appeal balance amount shall be deemed as stayed. An appellant should pay amount due to the Government before filing of appeal to High Court. Section 50 of the act provides to charge interest on all delayed payment of tax irrespective of fact that said amount is stayed or not. There is no exemption to interest on the amount stayed by authorities under the act. Hence, every person is liable to pay interest on delayed payment of stayed tax.

In the case of R K Swamy BBDO Advertising P Ltd (2005) 12 CCHST 0249 (Cestat Mumbai) the Tribunal held that, in absence of specific order of High court that period covered by stay order was to be excluded for the purpose of computing period of delay, appellant were liable for interest for entire period of delay in payment of service tax,

Section 80 of the act provides facility to the taxable person to pay tax and other dues in instalment. Commissioner has power to grant monthly instalment up to 24 months. However, such instalments are subject to payment of interest u/s 50 of the act. Therefore, payment of tax which was delayed due to instalment order are also subject to interest.

In the case of Premier Ltd (2014) 309 ELT 3 the Bombay High Court has held that assessee is liable to pay interest on the amount of tax paid in instalments as per order of Supreme court.

No interest on tax paid under wrong head.

Section 77 of the act deals with procedure for tax wrongfully collected and paid to central government or state government. Sometimes a registered person pays tax under wrong head by considering intrastate supply as interstate supply or vice versa , which result in delay in making payment under proper head. In such situation, as per section 77(2) of the act, said person is not liable to pay interest on such delayed payment of tax.

In the case of Shree Nanak Ferro Alloys Pvt Ltd (2020) 37 GSTJ 454 the Jharkhand High Court has held that no interest liable on the amount paid under wrong head.

Levy of interest automatic and mandatory.

As per section 50(1) of the act every person who is liable to pay tax should pay interest on his own on the delayed unpaid tax as per notified rate. It is seen that interest contemplated under section 50 is automatic and mandatory. In other word it is not necessary to issue order to demand and recovery of interest on delayed payment of tax. However, where person liable to pay interest does not pay the prescribed amount of interest, the proper office is required to issue such order for recovery of interest. Thus, sub clause (1) of Section 50 clearly mandates that assessee should pay the interest on his own for the period for which the tax or any part thereof remains unpaid. The liability to pay interest is evidently fastened on the assessee and the same has to be discharged on his own. Thus, there cannot be any two views on the liability. In each and every case, it is not mandatory to issue order to demand and recover interest. Section 75(8) of the act states that where the Appellate Authority or Appellate Tribunal or court modifies the amount of tax determined by the proper officer, the amount of interest and penalty shall stand modified accordingly, taking into account the amount of tax so modified. Similarly, section 75(9) of the act provides that the interest on the tax short paid or not paid shall be payable whether or not specified in the order determining the tax liability. These express provision makes clear that levy of interest is automatic.

In the case of Daejung Moparts (P) Ltd (2021) 116 taxmann.com 372, question was raised “ whether interest on delayed payment of tax as contemplated u/s 50 of the GST act is automatic or same is to be determined after considering the explanation offered by assessee ? “ Madras High court has held that though the liability of interest under section 50 is automatic, quantification of such liability shall have to be made by doing the arithmetic exercise, after considering the objections of the assessee. Important observation made in para 27 & 29 are reproduced .

Para 27 –A careful perusal of the section 50(1) of the GST act would show that every person who is liable to pay tax, but fails to pay the same or any part thereof within the period prescribed shall, on his own, pay interest at such rate not exceeding 18% for the period for which the tax or any part thereof remains unpaid. Thus, sub clause (1) of Section 50 clearly mandates the assessee to pay the interest on his own for the period for which the tax or any part thereof remains unpaid. The liability to pay interest is evidently fastened on the assessee and the same has to be discharged on his own. Thus, there cannot be any two views on the liability to pay interest under Section 50(1) of the said Act. In other words, such liability is undoubtedly an automatic liability fastened on the assessee to pay on his own for the period for which tax or any part thereof remains unpaid.

Para 29. A careful perusal of sub Sections (2) and (3) of Section 50 thus would show that though the liability to pay interest under Section 50 is an automatic liability, still the quantification of such liability, certainly, cannot be by way of an unilateral action, more particularly, when the assessee disputes with regard to the period for which the tax alleged to have not been paid or quantum of tax allegedly remains unpaid. Likewise, whether an undue or excess claim of input tax credit or reduction in output tax liability was made, is also a question of fact which needs to be considered and decided after hearing the objections of the assessee, if any. Therefore, in my considered view, though the liability fastened on the assessee to pay interest is an automatic liability, quantification of such liability certainly needs an arithmetic exercise after considering the objections if any, raised by the assessee. It is to be noted that the term “automatic” does not mean or to be construed as excluding “the arithmetic exercise”. In other words, though liability to pay interest arises under section 50 of the said Act, it does not mean that fixing the quantum of such liability can be unilateral, especially, when the assessee disputes the quantum as well as the period of liability. Therefore, in my considered view, though the liability of interest under section 50 is automatic, quantification of such liability shall have to be made by doing the arithmetic exercise, after considering the objections of the assessee. Thus, I answer the first issue accordingly.

In the case of Pratibha Processor AIR1997 SC138 Supreme Court has held that interest is compensatory in nature and is imposed on assessee who withheld payment of any tax as and when it is due and payable.

In the case of Alsthom Instrument Transformers (2015) taxmann.com 380 assessee has paid duty before issuance of notice, the Karnataka High Court has held that payment of interest is automatic irrespective of reason for delay in payment of duty.

In the case of Rajasthan Spinning and Weaving Mill (2009) 238 ELT 3 (SC) the Supreme Court held that levy of interest is automatic and compensatory and when duty is paid belatedly, interest is automatically payable.

Requirement of notice and opportunity of hearing.

It is clear from the section 50 that levy of interest is automatic and mandatory. And no express provision has been made in the said section to issue notice and afford opportunity of hearing before charging of interest and issue of order. Similarly, no form has been prescribed in the rules for such notice. While quantifying an amount of interest applicable disputes may arise depending upon facts of the case regarding quantum of unpaid tax, period of delay, period of tax period under default, applicability of interest, utilisation of wrong ITC, date of such utilisation thereof. In such cases in order to decide liability and determine correct amount of interest it is necessary to give opportunity of hearing by issuing notice on the points of disputes for compliance of principle of natural justice. Interest must be calculated and intimated to assessee by way of such notice, so as afford him opportunity to present his case. In number of cases High courts have held that interest levied u/s 50 without issue notice and affording opportunity of hearing are not sustainable in the eyes of law.

In the case of Mahadeo Construction Co (2021) 41 GSTJ 307 Jharkhand High Court has held that notice is required to be issued even for recovery of interest u/s 50 of the GST act on short payment of or non payment of tax.

In the case of Godavari Commodities Ltd (2019) 3 GSTJ Online 638 the High Court of Jharkhand held that show cause notice should be issued for recovery of interest even though the tax amount has already been paid voluntarily.

In the case of Gaya Marketing 116 taxmann.com 140 the High court of Patna has quashed and set aside order levying interest u/s 50 (1) on the ground of non grant of opportunity of hearing before passing of said order.

In the case of Rajkamal Builder InfrastructurePvt Ltd (2022-TIOL-745-HC-AHM-GST) the Ahamdabad High Court has held that notice (DRC-1)contemplated under rule 142(1) could not be issued for the purpose of recovery of amount toward interest on delay in payment of tax as there is no reference made to any notice u/s 50.

Time limit to levy interest.

No specific time limit has been stipulated under section to levy and issue order. Thus it can be said that interest applicable on delayed payment of unpaid tax may be demanded and recovered at any time if not already paid. However, levy of interest is consequential levy on the amount of tax payable under the act. Unless and until there is delay in payment of tax or delay in reversal or payment of wrongly availed and utilised ITC, interest under section can not attract. Thus amount of interest has always nexus with short payment or non payment of principle amount of tax or amount of ITC, which can be demanded and recovered by invoking proceeding such as u/s 62 or 63 or 73 o 74 etc of the act. In view of the following judgment it can be said that period of time limit , which is applicable to a claim for the principle amount should also apply to the claim for interest thereon.

In the case of TVS Whirlpool Ltd (2000) 119 ELT A177(SC) and Kwality Cream Company (2012) 27 STR 8 (Delhi) it was held that period of limitation, unless otherwise, stipulated by the statute which applies to a claim for the principle amount should also apply to the claim for interest thereon.

Liability to pay interest on wrong payment of tax.

If a person is liable to pay tax and failed to pay such tax within prescribed period then only he is liable to pay interest. However, where person wrongly paid amount of tax belatedly under belief that tax liable to pay and thereafter it is established that no tax is payable, no interest is payable on delayed payment of such amount non payable tax. Interest is payable only on delayed payment of legal tax.

In the case of Sundaram Textiles Ltd (2015) 55 taxmann.com 242 the Madras High court assessee has paid service tax which was not leviable and demand of interest was made. The Madras High Court has held that assessee can not be asked to pay interest merely because he has paid belatedly non- payable service tax. It is pertinent to note that interest is payable only on delayed payment of legal and valid tax.

Conclusion

Section 50 is independent section to levy interest. Proper officer is empowered to levy interest on delayed payment of tax if taxable person does not pay interest payable on his own. Order under said section is appealable. Errors in the said order can be rectified u/s 161 of the act by the proper on his own motion or on an application of the assessee, where such errors are apparent on the face of record. It is also subject to review under section 108 of the act by reviewing authority if order is found erroneous and prejudicial to the interest of revenue.

******

Motiram Kanadje, Retired Joint Commissioner of State Tax, Pune

Author can be reached via email momakanadje@gmail.com

Disclaimer: Nothing contained in this document is to be construed as legal opinion or view of author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any action taken in reliance thereon.