Interest payable on net tax liability under GST

Since its inception, payment of interest under Goods and Services Tax (i.e., GST) has always been controversial. A wide amount of clarifications and amendments has been undertaken in the matter. However, notably, all are going to be at the standstill with the passing of the proposed Budget 2021 amendment.

The present article covers the current confusing provisions prevailing in the matter along with a pyramid of actions taken till the date and proposed amendment announced vide the Union Budget 2021.

Current provisions relating to payment of interest under GST

Provisions of section 50 of the CGST Act, 2017 deals with the levy of interest on delay payment of tax under GST. The following pyramid of action clarifies the current provisions and various actions undertaken by the government in the matter-

• Basically, as applicable from 1^st July 2017, section 50(1) stated that every person who fails to pay the tax within the due date is liable to pay interest @18% per annum for the period for which the tax remains unpaid. The said provision created lots of confusion.
• In order to clarify the position, the proviso to section 50(1) was inserted vide the Finance (No. 2) Act, 2019 dated 1^st August 2019 which clarified interest payment on net tax liability. However, the provisions were to be effective from the date to be notified in future.
• Press release of 39^th GST Council meeting (held on 14^th March 2020) recommends the following two crucial points in the matter-
  • Interest on delayed payment of tax should be charged on net tax liability; and
  • The interest provisions should be amended retrospectively.
• Notably, the proviso inserted vide the Finance (No. 2) Act, 2019 dated 1^st August 2019 was made effective prospectively from 1^st September 2020 [notification no. 63/2020-Central Tax dated 25^th August 2020].
• Post issuance of notification no. 63/2020-Central Tax dated 25^th August 2020, the Central Board of Indirect Taxes and Customs came up with the press release dated 26^th August 2020. It was clarified that proviso is made effective prospectively only due to technical limitations and no recoveries will be made for the earlier period.

Thus, summing up all the above actions, the present provision means as under-

• The interest is payable on net tax liability; and
• The same is effective from 1^st September 2020.

Amendment proposed vide Budget 2021 covering payment of interest under GST

Budget 2021 proposes the substitution of the proviso to section 50(1) of the Central Goods and Services Tax Act, 2017. As per the proposal the changes would be effective retrospectively from 1^st July 2017. The proviso simply means as under-

• Interest on delayed payment of tax will be payable on the amount of tax paid by debiting ‘electronic cash ledger’.
• The above provisions don’t apply under cases when the return is furnished post commencement of the proceedings either under section 73 or under section 74.

Thus, clearing all the above confusions, the budget amendment clarifies that interest on delayed payment is payable only on the net tax liability (i.e. amount debited via electronic cash ledger) and the said provisions are effective from 1^st July 2017.

Calculation of interest on net tax liability with an example

Once the above amendment, as proposed vide Budget 2021, gets applicable. Interest would be calculated as under-

Interest amount = Net Tax Liability * 18% p.a. * Number of days delayed/ 365.

Please note, Net Tax Liability = amount of tax paid via electronic cash ledger

For example, M/s. XYZ had an output tax liability of INR 1,00,000 for the tax period December 2020. M/s. XYZ paid the tax late by 20 days. Notably, M/s. XYZ paid INR 60,000 using an electronic credit ledger and a balance of INR 40,000 using an electronic cash ledger.

Accordingly, interest would be payable @18%p.a. on only INR 40,000 (i.e. amount paid using electronic cash ledger) for 20 days. Thus, the interest payable would be INR 395.