Interest Whether on Gross or Net GST Dues?? HC Ruling and Additional Contentions
1. Recently, Telangana High Court in the case of Megha Engineering & Infrastructures Ltd. v. The Commissioner of Central Tax and others (Writ Petition No. 44517 of 2018) held that in the event of the delayed filing of the return, the interest payable u/s 50(1) of the CGST Act, 2017 shall be on the gross amount of the dues and not on the net amount of the dues (i.e. after adjusting the ITC). Let us first understand the said ruling along with the logic adopted to reach the said conclusion. Subsequently we shall also see the additional contentions not considered in the said ruling.
2. In the said case the petitioner had filed GSTR-3B for the months of July, 2017 to May, 2018 with some delay. It was submitted by the petitioner that they were entitled to ITC equivalent to almost 95% of the dues and were required to pay only 5% of the dues by cash. However since GSTR-3B cannot be filed unless entire dues are paid, they were not able to file the same in time. Petitioner thereafter discharged the interest liability by computing the same on the net dues (i.e. dues on outward supplies less the ITC). However the department demanded the said interest on the gross amount contending that unless the ITC is not availed and utilized through the online electronic credit ledger, the amount of dues to the extent of the said ITC cannot be said to have been paid. Hence the writ petition was filed seeking an answer from the Court as to whether in such facts and circumstances, the interest shall be computed on the gross dues or only on the net dues.
3. Court ruled against the petitioner by holding that the interest u/s 50(1) of the CGST Act, 2017 has to be computed on the gross dues and not on the net dues. Following reasons were given by the Court to reach the said conclusion:
a. The broad scheme of Section 39 which deals with the filing of returns, Section 41 which deals with the claim of ITC and its provisional acceptance, Section 16 which deals with the conditions and eligibility for taking ITC and Section 49 which deals with payment of tax, make it clear that the moment all the four conditions stipulated in sub-section (2) of Section 16 are complied with, a person becomes entitle to take credit of ITC. Once a person takes credit of ITC, the amount gets credited on a provisional basis to his electronic credit ledger under Section 41(1). Thus, the scheme of the Act makes a distinction between (i) the entitlement to take credit which comes first; (ii) the actual entry of credit in the electronic credit ledger, which comes next; and (iii) the actual payment from out of the credit, which comes last.
b. As per Sec. 50(1), liability to pay interest arises automatically, when a person who is liable to pay tax, fails to pay the tax to the Government within the period prescribed. The liability to pay interest is in respect of the period for which the tax remains unpaid. In fact, the liability to pay interest under Section 50 (1) arises even without any assessment, as the person is required to pay such interest “on his own”.
c. Thus until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. As a consequence, no payment can be made from out of such a credit entry.
d. Suppose a registered person under the Act purchases goods, which have suffered tax, to be used as inputs in the goods to be sold by him. Let us assume that the purchase is made in January and hence the same is reflected in the return filed by February 20. While filing the return in February, the dealer could have taken credit and it is possible that the credit is available in the electronic credit ledger for the month of February. If after some kind of processing, the goods are sold in March, the output tax becomes payable while filing the return by April 20. This payment can be either by way of cash or by way of adjustment against the claim for ITC. The payment is made by way of cheque in the case of the former and by way of a claim made in the return by way of an entry. Only when the payment is so made, the Government gets a right over the money available in the ledger. Since ownership of such money is with the dealer till the time of actual payment, the Government become entitled to interest upto the date of their entitlement to appropriate it.
1. In our opinion following contentions should have been considered by the Hon’ble Court before reaching the above mentioned conclusion:
2. Let us first consider whether the act of the payment of tax and the filing of return are linked in the scheme of the Act. Sec. 39(1) reads as under:
“SECTION 39. Furnishing of returns. — (1) Every registered person, other than an Input Service Distributor or a non-resident taxable person or a person paying tax under the provisions of section 10 or section 51 or section 52 shall, for every calendar month or part thereof, furnish, [in such form, manner and within such time as may be prescribed], a return, electronically, of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid and such other particulars as may be prescribed”
3. Hence the above provision clearly provides for the filing of return declaring the tax payable as well as the tax paid. However it does not lay down that only if tax is fully paid that the return can be submitted.
4. This conclusion shall be apparent if one considers Sec. 39(7). Same is also reproduced below:
“(7) Every registered person, who is required to furnish a return under sub-section (1) or sub-section (2) 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”
5. Above referred provision specifies the due date for payment of tax. It provides that the tax shall be due not later than the last date on which one is required to furnish the return. Hence only the due date for the payment of tax has been linked with the due date for filing of the return. The condition that return can be filed only if the entire dues are paid is not coming out from the reading of the above referred provisions.
6. Above contentions shall also hold good even under the proposition that GSTR-3B is not a “return” u/s 39. This is because paragraph 2 of Notification No. 13/2019 – CT which prescribes the due date for GSTR-3B reads as under:
“2. Payment of taxes for discharge of tax liability as per FORM GSTR-3B.– Every registered person furnishing the return in FORM GSTR-3B of the said rules shall, subject to the provisions of section 49 of the said Act, discharge his liability towards tax, interest, penalty, fees or any other amount payable under the said Act by debiting the electronic cash ledger or electronic credit ledger, as the case may be, not later than the last date, as specified in the first paragraph, on which he is required to furnish the said return.”
7. Hence similar to Sec. 39(7), only the due date for the payment of tax is linked with the due date for the filing of GSTR-3B. Said notification nowhere provides that the said GSTR-3B can be filed only if the entire dues are paid.
8. Said issue can even be looked at from another perspective. The term “valid return” has been defined u/s 2(117) as under:
“(117) “valid return” means a return furnished under sub-section (1) of section 39 on which self-assessed tax has been paid in full”
9. Hence a return furnished u/s 39(1) for which self-assessed tax has not been paid in full shall still remain a “return” but cannot be considered as a “valid return” for the purpose of matching of the claim of ITC u/s 42.
10. Now Sec. 50(1) under which interest is levied does not distinguish between a “valid return” or otherwise. Hence a conclusion can be reached that the law in fact visualises a scenario wherein a return is filed with the amount due. The said return may not be a valid return for the purpose of matching ITC but the filing of the same cannot be restricted by the GSTN portal unless the entire dues are paid.
11. Hence it is submitted that the consequences of the fault of the GSTN portal by not allowing filing of the return where the amount is partly due even if the law as discussed above allows it cannot be imposed on the tax payer.
12. With the said background the levy of interest on the gross amount of tax is not proper.
13. Close perusal of Sec. 50(1) is also required. Said provision is reproduced below for ready reference:
“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.”
14. Reading of the above provision shall entail that the interest can be imposed only on the failure to pay the tax “or any part thereof” by the supplier “on its own”. Hence the provision visualises a scenario wherein even on the self-assessment basis, interest is to be paid on any part dues if the same remains unpaid. Hence the GSTN portal not permitting filing of return with part dues also goes against the above referred provisions and hence even on this ground, interest should not be imposed on the gross amount.
15. Another contention to consider is that the ITC amount availed by the registered supplier in question cannot be said to be the amount under the ownership of the said supplier and hence cannot be considered as the amount which the Government can appropriate thereby permitting the levy of interest on the gross dues. Reference is invited to the Goods and Services Tax Settlement of Funds Rules, 2017 formulated by exercising the powers conferred by various provisions of the CGST Act as well as IGST Act. Said Rules provides for furnishing of various reports by the GSTN to determine the amount due to the respective State and the Central Government. Accordingly as per the procedure laid down in Rule 11, the funds collected by the Centre/State shall be transferred based on the reports by the RBI between “the Consolidated Fund of India and the Consolidated Fund of States”. Hence the tax paid by the supplier for which ITC will be claimed has been credited to the consolidated fund of the India/State depending on the nature of tax. Said funds shall then be transferred to the respective States or Union based on the utilization, if any. Hence till such time it shall remain in the said consolidated fund. Hence the said amount cannot be considered as the tax which is beyond the reach of the Government so as to impose the tax on the gross amount.
16. Intent behind the levy of interest must also be noted. The Apex Court in the case of Prathiba Processors v. Union of India reported in 1996 (88) ELT 12 (SC), explaining the term tax, interest and penalty in Fiscal Statute held as under:
“In fiscal Statues, the import of the words – “tax”, “interest”, “penalty”, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is compulsory exaction of money by a public authority for public purposes, the payment of which is enforce by law. Penalty is ordinarily levied on an Assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an Assessee who as withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount off tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty – which is penal in character.”
17. Said theory of interest being compensatory in nature also remains to be tested judicially in light of the design of the GST.
18. Hence we conclude by opining that the above contentions must also be considered by the Courts to resolve the issue. It is also suggested that the Government must apply the proposed amendment u/s 50, which seeks interest only on the net dues, retrospectively to put this debate to an end. Doing otherwise may only incentivize short reporting of the tax payable (to the extent of ITC available) in the returns filed within the due dates to avoid undue hardship by way of interest.
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