GST Interest not payable until manner of calculation is notified u/s 50(2)

GST Interest not payable until manner of calculation is notified u/s 50(2)- Interest Liability on gross or net tax under CGST Act, 2017?

Recently a controversy developed whether interest under the GST Act is to be paid on the Total Tax Liability or on Total Tax Liability less Input Tax Credit.

Interest is payable under the GST Act for delay in payment of due tax as per the provisions of Section50 (1).  In the erstwhile indirect taxes regime, tax due can be paid partly depending upon the availability of funds. In some cases, tax can be paid even before filing the return also.

In GST, 3 separate events are clubbed together into one event. The 3 events are:

1. Declaring the self assessed tax liability
2. Declaring the self assessed ITC
3. Payment of tax due

All these separate events are clubbed together into one single event in GST and this is causing enormous difficulty to the tax payers.

Some peculiar situations:

1. Total tax is to be paid before filing the return.
2. Payment of tax in instalments not allowed.
3. Claiming of ITC is time bound procedure and this has nothing to do with declaring the output tax liability. But both are linked together in GST.

Coming to the interest liability, bare reading of Section 50(1) cast liability on tax payer to pay the interest on total tax liability without considering the ITC, TDS & TCS amounts available to his credit in his electronic credit ledger. So it has become very difficult to the tax payer to pay interest even on the amounts which are already with the Government.

Taking into the difficulty of the tax payers, GST Council taken a decision to collect interest on tax paid by way of cash only. In other words, there will be no interest if tax is paid by way of adjustment of input tax credit. As per the decision of the GST Council, Sec 50 of CGST Act is amended to that effect but the effective date is not yet notified.

Meanwhile tax payers are receiving notices to pay interest on total tax liability. On 15-02-2020, through Twitter handle CBIC has clarified that interest is to be calculated on gross tax liability. Read-CBIC justifies Interest on delayed payment based on gross GST liability

However various High Courts have held that interest cannot be collected on ITC set-off portion. Recently on 26-02-2020, Andhra Pradesh High Court also stayed the interest collection on ITC set off portion.

In light of the above situation, once again the relevant provisions of the Act have been analyzed which led to an interesting conclusion. Readers’ discretion is recommended.

Analysis of the interest charging sections under the CGST Act:

1. Charging Section for Interest:

Section 50(1) is the charging section in CGST Act 2017 which makes it obligatory to pay interest on delayed payment of tax. This section attracts:-

1. Tax is liable to paid as per the Act

2. Such tax is not paid within the due date

If the above 2 conditions are satisfied, then interest is to be paid for the delay.

For calculating interest, following parameters are required:

1. Amount on which interest is to be calculated

2. Period for which interest is to be calculated

3. Rate of interest

4. Manner of calculation of interest

2. Amount on which interest is to be calculated:

Interest is to be calculated on unpaid tax i.e., tax due but not paid. As per explanation (b)(i) to Sec 49(9) “tax dues” means the tax payable under the provisions of this Act.

Under the provisions of the Act, tax is payable on outward supplies, inward supplies liable to RCM, Imports, Advances received.  The tax payable or the tax liability for any tax period will be self assessed in the return filed under Section 39(1). Interest if any, is to be calculated on this self assessed tax.

3. Period for which interest is to be paid:

 As per Section 50(1) & 50(2), the interest is payable for the period of delay in payment of tax. The due date for payment of tax is the last date on which return is required to be filed. Period of delay is to be calculated from the next day of the due date for tax payment till the payment of tax.

4. Rate of interest:

Rate of interest is notified by vide Notification Number 13/2017 – Central Tax dated 28-06-2017 under the provisions of Sub-Section (1) of Section 50.

5. Manner of calculation of interest:

Sub-Section 2 of Section 50 mandates interest is to be calculated in such a manner as may be prescribed. However, so far no notification is issued under this Sub-Section.

Hence no interest is payable under the provisions of CGST Act, until the manner of calculation is notified under the provisions of Section 50(2) of CGST Act.

It is not the law makers’ intention to collect the interest on gross liability. They wanted to give the benefit of ITC set-off and also the TDS & TCS amount and it was left to the Government to prescribe the rules in this regard i.e., manner of calculation of interest. Accordingly law makers have given the power to Government vide Sub Section 2 of Section 50 of CGST Act, 2017.  The specific subsection is meant for providing this benefit only.  Hope Government may issue notification under this sub-section giving benefit not only to ITC set-off portion but also to TDS & TCS set off portion. It is taking lot of time to notify the proviso to Section 50. So, meanwhile a notification may be issued with retrospective effect.

Some issues:

Q1. Whether balance available in the electronic credit ledger can be considered as payment of tax?

A1. As per the Provisions contained in Sec 49, balance available in electronic credit ledger cannot be treated as payment of tax. The date on which the tax payer adjusts the available balance in electronic credit ledger towards tax due, then only it will be treated as payment of tax.

Q2. Whether balance available in the electronic cash ledger can be considered as payment of tax?

A2. As per the Provisions contained in Sec 49, balance available in electronic cash ledger cannot be treated as payment of tax. The date on which the tax payer adjusts the available balance in electronic cash ledger towards tax due, then only it will be treated as payment of tax.

Q3. Whether tax can be paid in instalments as per Act?

A3. Nowhere in the Act, it was mentioned that total tax due has to be paid at once. All it was said in Sec 39(7) is that tax due should be paid within the due date of filing the return. So there is no prohibition in the Act to pay the tax in instalments.

Q4. Whether GSTIN allows payment of tax in instalments?

A4. As per the present procedure available in GST portal, payment of tax in instalments is not allowed. It allows only total payment of tax at once that too at the time of filing of the return only.

Q4. Whether tax payer can adjust the credit balance available in electronic credit ledger (ITC) before filing the return towards the tax dues for that month?

A4. There is no express prohibition in the Act for adjustment of ITC towards tax payable even before filing of the return. But there is no procedure available in the GSTIN system for the same.

Q5. Whether tax payer can adjust the balance available in electronic cash ledger before filing the return towards the tax dues for that month?

A5.  No.