In this article Author has compiled detailed reply to be submitted to GST department against Notice demanding interest on Gross GST Liability without giving Input Tax Credit for Late Submission of Form GSTR 3B under Section 50(1) of CGST Act, 2017. Text of the Submission is as follows:- 

Dear Sir,

R: M/s. _____________  GSTN :
Your Letter No.———- dated——- in respect of Interest
Due U/s 50(1) received through mail.
DIN:

1. This has reference to your Letter received in the mail with respect to the Interest Payable by the above referred assessee for the Period _____ to ____ in respect of the Delayed payment of the Tax amount on Late filing of the GSTR 3B Return. The quantification of the Interest payable by the assessee, in the said letter is as under:

Financial Year Interest Payable on Cash Set Off Interest Payable on ITC Set Off Total Interest Payable

2. With regards to your advisory of the Interest Chargeable U/s 50(1) we would like to submit as under:

Sec. 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:

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

Though it appears that the effective date for the operation of this Proviso has not yet been notified, nonetheless the proviso has been inserted by the Finance (No. 2) Act 2019, which has been validly Legislated.

Though the Date has not been notified, the effective date has not

been made ‘Prospective also’ as of this date and upon its notification whenever, the same shall have to stand the legal test of the reading of this proviso to be of Retrospective nature, the amendment being in the nature of ‘Curative of an Anomaly artificially created by GSTN System’ which is not as per GST Law as this anomaly has been duly acknowledged by the GST Council in its 31st Meeting and as also duly acknowledged by the Judiciary in the direct case.

More details of this are being produced in the relevant paragraphs below.

3. With regards to the Tax Due, Return Filing, Part Payment and Claim of the Input Tax Credit and provisional acceptance there of we would first like to reproduce the relevant tax provisions and explain the relevance with the matter on hand.

 a. Return Filing – Due Date – Sec 39

(7) Every registered person who is required to furnish a return under sub-section (1), other than the person referred to in the proviso thereto, or sub-section (3) or sub-section (5), shall pay to the Government the tax due as per such return not later than the last date on which he is required to furnish such return:

Provided that every registered person furnishing return under the proviso to sub-section (1) shall pay to the Government, the tax due taking into account inward and outward supplies of goods or services or both, input tax credit availed, tax payable and such other particulars during a month, in such form and manner, and within such time, as may be prescribed:

Provided further that every registered person furnishing return under sub-section (2) shall pay to the Government the tax due taking into account turnover in the State or Union territory, inward supplies of goods or services or both, tax payable, and such other particulars during a quarter, in such form and manner, and within such time, as may be prescribed.

The discharge of the tax expected from the assessee under the above provisions of Return filing, has been clearly spelt out as being of ‘tax due’, taking into account the ITC on the Inward Supplies of goods or services for the month or for the quarter as per GSTR3B Return, periodicity applicable to the assessee.

b. Part Payment of Taxes

49(2): The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with [section 41 or section 43A], to be maintained in such manner as may be prescribed.

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.

The amount of Taxes Paid by the Vendors/Suppliers of the assessee and in accordance with Sec. 41 as specified above, have been credited to the Ledger of the assessee as per the GSTN system designed.

Taxes Paid by the suppliers of the assessee, credited to the Electronic Credit Ledger (ECL) are deemed to have been paid ‘in discharge of the Output Liability of the assessee, in advance’.

The Hon. Apex Court in the case of Eicher Motors Ltd. Vs. UIO – (1999) (106) ELT 3(SC), has held that the taxes paid by the suppliers and available to the assessee as Modvat Credit, in the value add based system of tax, is right accrued to the assessee and the right accrues on the date when the tax is paid on the raw material or inputs. This is the tax paid to the Revenue, on behalf of the assessee.

“6. We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto, then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed.”

The same is true since the usage of the ITC have been ‘managed/ programmed” by the Common Portal to be used only for the discharge of the Output tax liability of the assessee and no other purpose, not even enabling this to be moved to a different head of tax or a different GST Number even of the distinct person thereby making it permanently available with the Revenue and hence ought to be considered as Paid.

The Depiction of the offset of the same through the GSTR 3B is only the mechanism being provided to the assessee to disclose or put the same in the GSTN computer system. The assessee does not have the option or the method available or the Form made available where the amount of the ITC that can be shown as offset against the output liability in any other manner.

c. Claim of Input Tax Credit and Provisional Acceptance

41. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self-assessed output tax as per the return referred to in the said sub-section.

The assessee is eligible to the ITC based on provisions of Sec. 16(2) of the GST Act and the credit is taken in the Books of Account first,  for the determination of the Self-Assessed Balance of Tax Due and payable to the Government and then through the Return mechanism GSTR 3B, to be reflected on the common portal. The data on the ITC is anyway accumulated and even otherwise available in GSTR2A. 

The actual consideration of the ITC and its communication was originally designed with the filing of GSTR2, which never materialized and GSTR3B was not even a Return, until 9th October 2019 when the retrospective amendment was made to make the same. Nonetheless on delayed filing of the return the mandated Late filling fees is paid and with the payment of the prescribed late filing fees, the Return is Deemed to have been filed on its due date. 

This would mean that the offset shown in the common portal shall date back to the due date for filing of the return.

4. We would also like to bring your notice that Sec. 50(2) provides for the manner of the computation of the Interest and is as under: 

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 such tax was due to be paid.

We understand the manner of calculating the Interest has not yet been Prescribed. In the event it has been so done and notified, do let us know. Since your above referred letter neither has the details of the manner of the calculation of this Interest nor the working of the Interest amount, it is difficult for us to verify the correctness of the same.

5. In this context, the decision of the Gauhati High Court in Santosh Kumar Harlalka Vs State of Assam & Ors, (1995) 2 GLR 95 becomes may more relevant here. In the above case, Section 27 of the Assam General Sales Tax Act, 1993 provided for deduction of tax at such rates and in such manner as may be prescribed. The rate and manner of deduction of tax were however not prescribed by framing the Rules. In view of the above legal anomaly the Court held as under: 

“Therefore, I am of the opinion that as per the “Rules”, no rate and manner have been prescribed to deduct tax at source. In the absence of any prescribed rate and manner, the 3rd respondent has no jurisdiction to issue notice dated 5.8.93 directing the 4th respondent to deduct taxes at source and the respondent no.5 has also no authority and jurisdiction to deduct the tax at source in the manner as it is proposed. Therefore, the letter dated 5.8.93 issued by the 3rd respondent is liable to be set aside as ultra vires.”

Subsequently, in order to overcome the above Judgement, the Government of Assam amended the law prescribing the rate, but nonetheless the manner was still not prescribed. The matter again came up once again before the Gauhati High Court in Gauhati Municipal Corporation Contractor’s Association Vs Gauhati Municipal Corporation, (1996) 2 GLR 172 and the High Court held as under:

“It is a well settled law that where a power is given to do certain thing in a certain way the thing must be done in that way or not at all. In section 27(b) of the Assam General Sales Tax Act the legislature has fairly indicated that tax can be deducted at source not only on the basis of the prescribed rate but also in the manner. While making the said provision, definitely, the legislature had in its mind certain manners. It is also an established principle of law that legislature do not use any expression which is unnecessary and redundant. Taking the plain meaning from Section 27(b) of the Act, it is abundantly clear that some manner, regarding deduction of tax has to be prescribed. As this has not been done, in my opinion, no tax can be deducted at source in the present facts and circumstances of the case. Accordingly, I set aside and quash the action of respondents deducting the sales tax at source from the bills payable to the members of the petitioner-association”

6. It is trite law that when a power is given to do a certain thing in a certain way the thing must be done in that way or not at all. Other methods of performance are necessarily forbidden. The aforesaid law was laid down in Nazir Ahmad vs King Emperor, AIR 1936 PC 253(2) In State of Uttar Pradesh Vs Singhara Singh & Ors, AIR 1964 SC 358.

The above decision was approved by the Constitution Bench of the Apex Court as well approving such proposition of law.

7. Constitution Bench of the Apex Court again in Commissioner of Income Tax Vs Anjum M.H. Ghaswala, (2002) 1 SCC 633 held as under:

“Then it is to be seen that the Act requires the Board to exercise the power under Section 119 in a particular manner i.e. by way of issuance of orders, instructions and directions. These orders, instructions and directions are meant to be issued to other income tax authorities for proper administration of the Act. The Commission while exercising its quasi-judicial power of arriving at a settlement under Section 245-D cannot have the administrative power of issuing directions to other income tax authorities. It is a normal rule of construction that when a statute vests certain power in an authority to be exercised in a particular manner then the said authority has to exercise it only in the manner provided in the stated itself. ….”

8. In Captain Sube Singh & Ors Vs. Lt. Governor of Delhi, (2004) 6 SCC 440, referring to the decision of the Apex Court CIT vs Anjum (supra), the Apex Court held as under:

“29. In Anjum M.H. Ghaswala {CIT v. Anjum M.H. Ghaswala, (2002) 1 SCC 633} a Constitution Bench of this Court reaffirmed the general rule that when a statute vests certain power in an authority to be exercised in a particular manner then the said authority has to exercise it only in the manner provided in the statute itself. The statute in question requires the authority to act in accordance with the rules for variation of the conditions attached to the permit.”

 9. General provisions relating to determination of tax – Sec. 75 

Sec. 75(12) referred to in your said Letter, is as under: 

Notwithstanding anything contained in section 73 or section 74, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.

The above provision deals with the Recovery of the self-assessed tax in accordance with the Return that remains unpaid, either wholly or partly. The Self- Assessed, as per the provisions of Sec. 39 are the tax due after taking into consideration the input supplies of goods and services.  However, this deals only with the ‘tax so due’. 

The Tax, Interest, Fees and Penalty are all different. Had this not been so, there would not have been a provision to ‘pay the Interest, Fees, penalty etc.’ separately in cash and the ITC would not have been restricted to be used only for the tax to be paid. 

However based on the recommendation and the Principle of the calculation available, we would like to submit that there has been a delay in the filing of certain Returns covered by the above financial year and the Interest Payable on the Delayed Payment of the Tax has been computed and paid/being paid as under: 

Return Period Gross Tax Payable Entitled ITC Chapter V and Sec 140 Tax-Payable Due date for Payment of Tax Payable Date of Tax payment Interest Payable U/s 50(1)
             
             

 The above amount has been paid as under:

Particulars Amount Rs.
Paid with the Filing of the Return GSTR 3B
Being Paid Now
Total  

10. Interest due and payable is of compensatory nature. We would like to bring to your notice that the Supreme Court in Pratidha Processors vs. Union of India- (1996) 11 SCC 101, has held that Interest is compensatory in character and is imposed on the assessee who has withheld payment of any tax as and when it is due and payable; that the levy of interest is levied on the delay in payment of tax due and payable on the due date. 

That the Interest is only of the Compensatory Nature and to be computed only on the amount of the tax that has been withheld and paid later than the due date, has also been decided in various following few decisions.

2. Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has will fully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory In character and not penal.

  • Indodan Industries Ltd. Vs. State of UP and Others – (2010) 27 VST 1 (SC)

One more aspect needs to be highlighted. In the present case, we are concerned with the levy of interest for delayed payment. Under sub-Section (2B) to Section 9, such interest for delayed payment is given the status of “tax due“. The said interest is compensatory in nature in the sense that when the assessee pays tax after it becomes due, the presumption is that the Department has lost the revenue during the interregnum period (the date when the tax became due and the date on which the tax is paid). The assessee enjoys that amount during the said period. It is in this sense that the interest is compensatory in nature and in order to recover the lost revenue,

The mechanism of maintenance of the ECL, Orthodox way of utilization designed in GSTN, at no point of time makes this credit available to the assessee to be used for any other purpose and hence cannot be treated in any manner as ‘tax withheld’ by the assessee from payment to the Government.

In BSNL v. CCE (2006) 6 STJ 128 (Bang.), it was held that if tax had been paid in time and there was only delay in transferring from one account head to another account head, such delay cannot be made a ground for levy of interest as the same was not attributable to appellants and, thus, the impugned order demanding interest was set aside. The Tribunal relied upon the following judgments: BSNL v. CCE (2006) 5 STJ 831, Chennai Telephones (BSNL) v. CCE, Chennai (2005) 1 STJ 83.

The apparent delay in the transfer of the tax from ECL (maintained and fully within the control of Government), to the Offsetting and Output liability is Purely on account of the Inflexible GSTN system, which has also been acknowledged by the GST Council in its 31st Meeting and part of the Minutes of the Meeting, cannot be attributed to the assessee and hence there is no cause for charge of any Interest on the ITC part. The funds were always available with the Government.

11. The principles of the above provisions read holistically along with Apex Judgment that has been stated and fortunately brought on the GST statute by the Notification No. 23/2017 dated 17th August 2017 as amended by Notification No. 24/2017 dated 21st August 2017 issued by the Commissioner, on the recommendations of the Council, and gazetted vide GSR No. 997(E ) dated 8th August 2017.

2(iii) :  where the amount of tax payable under the said Act for the month of July, 2017, as detailed in the return furnished in FORM GSTR-3B, exceeds the amount of tax deposited in cash as per item (i), the registered person shall pay such excess amount in cash in accordance with the provisions of rule 87 of the said Rules on or before 28th August, 2017 along with the applicable interest calculated from the [26th day of August, 2017] till the date of such deposit. 

Explanation 

(ii)  tax payable under the said Act” means the difference between the tax payable for the month of July, 2017 as detailed in the return furnished in FORM GSTR-3B and the amount of input tax credit entitled to for the month of July, 2017 under Chapter V and section 140 of the said Act read with the rules made thereunder.

Chapter V deals with the Eligible ITC U/s 16 and Sec. 140 relates to the Transitional Credits under various circumstances. 

Since the Interest payable based on the above parameters stands fully discharged there is no further Interest liability, particularly on the ITC component as has been stated in your said letter and there shall be no need for initiation of any recovery

12. We provide below the Observations of the GST Council also in this regard

GST Council in their 31st meeting held on 22nd December 2018, has put into the minutes and which has also been enacted and made as a Part of the GST Act itself.

“Though the GST Law provides for the filing of the Return without making the payment of the taxes, the facility has ‘not yet been made available on the common portal and this inflexibility of the system increases the Interest burden which otherwise has to be only on GST Value Addition.”

Proposal for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability

Accordingly, in princip1e approval for amendment in law (as the proposed changes require amendment to CGST as well as SGST Acts) is sought so as to provide that:

– Interest should be charged only on the net liability of the taxpayer, after taking into account the admissible credit, i.e. the amount payable through electronic cash ledger.

– Interest would be charged on tax calculated on taxable value where invoices or debit notes are uploaded late

The above had been considered and enacted and put as an amendment to GST Act as Proviso to Sec. 50(1).

13. All the above principles and also the enactment brought about by the Finance (No 2) Act 2019 as Proviso to Sec. 50(1), which has been constructively held as being of retrospective nature and already in place, has been considered in the decision of the Hon. Madras High Court in the case of

The decision has elaborately discussed on all the issues and has also considered and factored the against decision of the Hon. Telangana High Court rendered in the case of Mega Engineering. The decision has been given based on the law point and not on only the particular case of the assessee.  The Hon. Madras High Court has also held that

Proviso ence and use we are reproducing below the relevant paras of this decision.

9. However, the objection raised by the petitioners before me is not one of fact but one of law. According to the petitioners, Section 50 that provides for levy of interest on belated payments would apply only to payments of tax by cash, belatedly, and would not stand triggered in the case of available ITC, since such ITC represents credit due to an assessee by the Department held as such

12. The specific question for resolution before me is as to whether in a case such as the present, where credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’. The use of the word ‘delayed’ connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax. The availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent.

Thus, Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. 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.

13. The argument that ITC is liable to be reversed if it is found to have been erroneously claimed, and that it may be invalidated in some situations, does not militate with my conclusion as aforesaid. The availment and utilization of ITC are two separate events. Both are subject to the satisfaction of statutory conditions and it is always possible for an Officer to reverse the claim (of availment or utilization) if they are found untenable or not in line with the statutory prescription. Credit will be valid till such time it is invalidated by recourse to the mechanisms provided under the Statute and Rules.

15. The above 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.

That the above interpretation of the Madras High Court of considering the Proviso to be of Curative Nature and hence to be read with Retrospective nature is based on the Principles of the decision of Hon. Supreme Court rendered in the case of CIT vs. Vatika Township (P) Ltd. – (2014) 49 taxmann.com 249 (SC) wherein all the ground root principles on entirety basis and the reasoning for the consideration of a particular enactment or a change to be of Prospective or Retrospective Nature has been declared. 

Relevant Paras for your consideration. 

30. A legislation, be it a statutory Act or a statutory Rule or a statutory Notification, may physically consists of words printed on papers. However, conceptually it is a great deal more than an ordinary prose. There is a special peculiarity in the mode of verbal communication by a legislation. A legislation is not just a series of statements, such as one finds in a work of fiction/non-fiction or even in a judgment of a court of law. There is a technique required to draft a legislation as well as to understand a legislation. Former technique is known as legislative drafting and latter one is to be found in the various principles of ‘Interpretation of Statutes’. Vis-à-vis ordinary prose, a legislation differs in its provenance, lay-out and features as also in the implication as to its meaning that arise by presumptions as to the intent of the maker thereof.

33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India v. Indian Tobacco Association [2005] 7 SCC 396, the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra [2006] 6 SCC 286. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are confronted with any such situation here.

An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language ‘shall be deemed always to have meant’ is declaratory and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law which the Constitution came into force, the amending Act also will be part of the existing law.”

Hence in our considered view even the other Courts as and when called for will Hold-So

It is also well known now that Stay has already been granted and the matter of the correctness of the Charge of the Interest on Gross or Net basis in the following other cases

In view of the above we request you to kindly consider the charge of Interest only on the Cash Part, that needs to be calculated for the delay period and payable by the assessee even under the current scenario.

In the alternative, we request you to keep the matter in abeyance till the method is prescribed and also appropriate procedures in line with the GST Law are made available to the assessee in the GSTN which are in accordance with the GST Law and the assessee has been given the right to offset their output liabilities with the accrued ITC and disclose net liability of taxes to be paid/discharged on its account to the Government.

In case you need any other information, we shall be glad to provide you the same.

Thank you

Author Bio

Qualification: CA in Practice
Company: Harish K Lalwani and Associates
Location: Pune, Maharashtra, IN
Member Since: 29 May 2018 | Total Posts: 3

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13 Comments

  1. Velmurugan Rengasamy says:

    This is with respect to clarification on interest on Delay in filing 3B but cash available in ECL. No ITC had been availed. What is the remedy for delay in filing GSTR3B.

    1. Harish Lalwani says:

      As per the system of filing and offset of the liability from the Cash Ledger designed the Interest becomes applicable. However this interest is not automatic and has to be determined and order passed. The language used is Fails to Pay the tax, for levy of Interest and if the tax amount has already been paid and is available in the ECL than with the charge of the fees if any for delayed filing of GSTR3B Interest should not be applicable.

  2. V More says:

    Kindly guide, if liability of interest for delay payment is raise by government, we have to pay Interest part in CGST or IGST ?? (we had paid our monthly tax in IGST)

    1. Harish Lalwani says:

      The Interest is payable for delay in payment of each component of tax i.e. IGST, CGST and SGST as applicable in the delay. It will thus be Interest IGST, Interest CGST and Interest SGST since it has to go to respective allocation head.

  3. RAJENDRAN S AUDITOR says:

    Excellent reply to the department recovery notice of interest under section 50 of the CGST Act 2017 and one more thinks request to add recent exact case law is available judgement pronounced by Madras High Court in the case of M/s. Refex Industries Ltd and M/s.Sherisha Technologies Private Ltd Vs. The Asst. Commissioner of CGST and Central Excise with respective WP No.23360 and 23361

    Thank you

  4. Raghu Ram Bandaru says:

    excellent workout for the burning issue on sec.50(1) , all are facing the harsh issue by receiving letters from the GST department. thank you for the eloberation.

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