Interest Saga- Gross Vs. Net GST Liability

Introduction:

GST is a tax on value addition. Accordingly, a tax payer is allowed to set off input tax credit in respect of the tax paid by him on his inward supplies against the tax payable by him on outward supplies. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, what is paid by a tax payer is effectively only on the value addition made by him.

The dictionary meaning of interest is “money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.” In a value added system (like that of GST) what is payable by the tax payer is tax on value addition. Therefore in the event of delay in payment of tax what the government is deprived of is limited to the extent of the tax on value addition. The Apex Court in the case of Pratibha Processors v/s [UOI 1996(11) SCC 101] has held that interest is compensatory character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. However since the advent of GST there has been a hue and cry over the manner in which the interest in late payment of GST shall be calculated.

What is the hue and cry over the interest on late payment in GST?

In a latest letter, Special Secretary and Member, CBIC has instructed the field officers to collect Interest amounting to Rs.46,000/- crores (approx) on account of delayed payment of GST. In the letter in para 4, it has been stated that:

“Doubts have been raised by field formations, whether the interest has to be paid on the gross tax liability or the net cash liability. In this regard, the provisions of section 50 are very clear that interest liability is required to be paid on the tax liability that is paid belatedly, either through cash or through utilization of the input tax credit (ITC). In other words, interest is required to be paid on the total amount of tax liability as shown in Form GSTR-3B”

From the above, it is clearly evident that the intention of the department is to levy interest on the gross tax liability without adjusting the balance in input tax credit or electronic cash ledger.

In light of the above, let’s examine the provisions of the GST Act.

Provisions of the GST Act in respect of payment of interest:

Section 50 of the CGST Act which deals with payment of interest reads as under:

“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.

(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) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.”

Upon reading the above, the following conclusions can be drawn:

1. Interest is payable if a tax payer fails to pay tax within the prescribed period

2. Failure can be in respect of total tax liability or part tax liability

3. The interest shall be calculated for the period during which such tax remains unpaid

4. Interest shall be calculated in the manner as prescribed

5. Rate of interest shall be the rate as notified by the government on recommendation of the GST Council subject to the maximum as stated below:

Particulars	Maximum rate of interest
Undue or excess claim of input tax credit	24%
Undue or excess reduction in output tax liability	24%
Others	18%

 Amendment to section 50 of the CGST Act

The CGST Amendment Act, 2019, inserted the following proviso to section 50(1) of the CGST Act however it is yet to be notified.

“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 the above proviso has not been notified, it clearly showcases the intent of the legislature is not to levy interest on the tax paid by way of input tax credit. Yet the CBIC issued instructions to field officers to collect tax on gross liability and did not mention anything about the proviso which is not notified.

Whether interest is chargeable on gross GST liability or net GST liability?

In the case of Megha Engineering & Infrastructures Ltd Vs Commissioner of Central Tax in Writ Petition No.44517 of 2018 the Hon’ble Telangana High Court held that interest is chargeable on gross liability as input tax credit cannot be claimed unless return is filed. Reference was made to the provisions of section 49 which deal with payment of tax. As per section 49(4), “The amount available in the electronic credit ledger may be used by virtue of Sub-section (4) of Section 49, for making any payment towards output tax under the Act”  

The observed that Hon’ble Court further observed that

“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. It is true that the tax paid on the inputs charged on any supply of goods and/services, is always available. But, it is available in the air or cloud. Just as information is available in the server and it gets displayed on the screens of our computers only after connectivity is established, the tax already paid on the inputs, is available in the cloud. Such tax becomes an in-put tax credit only when a claim is made in the returns filed as self-assessed. It is only after a claim is made in the return that the same gets credited in the electronic credit ledger. It is only after a credit is entered in the electronic credit ledger that payment could be made, even though the payment is only by way of paper entries.”

It is worthy to note that the above judgment was passed when the proviso was only in the Press release of the Ministry of Finance. It is worth noting that the Hon’ble Telegana High Court has admitted a review petition in this regard after the CGST Amendment Act and granted a stay on the recovery of interest until further orders.

In a latest judgment in the case of Refex Industries Limited in Nos.23360 and 23361 of 2019 & WMP Nos.23106 and 23108 of 2019, the Hon’ble Madras High Court has held as under:

“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 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”

Consequently the Madras High Court has allowed the contention of the petitioner that interest is chargeable only on that portion of tax which the Government has been deprived of. Similarly in the case of M/s. Landmark Lifestyle v/s Union of India & Others [2019] 105 taxmann.com 354 (Delhi) and in the case of Amar Cars Private Limited Vs Union of India in (R/Special Civil Application No. 4025 of 2020) the Delhi High Court and Gujarat High Court respectively has granted the stay on recovery of interest amount on gross GST Liability where there was a delay in filing of GST return.

However this decision also leads to the following questions:

• The decision has been given on the premise that the proviso to section 50 has been inserted in the Act. However it failed to note that the same has not been notified yet.
• Whether the proviso is clarificatory in nature and seeks to correct the anomaly in the law? Nothing to the effect of its retrospective operation has been stated in the CGST Amendment Act. It is worthwhile to note the decision of the Apex Court in CIT v. Vatika Township Private Limited [TS-573-SC-2014-O] wherein it was held that “Where a benefit is conferred by legislation, the rule against the 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 legislator 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. Where a law is enacted for the benefit of the community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature.”

 Going by the principle in the decision that interest can be levied only on the amount that the government is deprived of, a question arises whether no interest would be leviable on the balance in Electronic cash ledger, if any.

Whether return can be filed with partial payment of tax?

Consideration an example: A tax payer has an outward liability of Rs.100/- and an input tax credit of Rs.80/-. The net liability is Rs.20/- However the portal is currently designed in a way not to allow the filing of GSTR 3B unless the tax payer pays Rs.20/- in cash. Unlike the pre GST regime it is not possible for a tax payer to file a return by declaring a liability payable.

The term used in section 50 is “fails to pay the tax or any part thereof”. Further Section 2(117) states that “valid return” means a return furnished under sub-section (1) of section 39 on which self-assessed tax has been paid in full”.This means that the law-makers had envisaged a situation when there could be part payment of tax. However, the GST portal does not allow filing of GSTR 3B unless the tax is paid in full, otherwise the tax payers could file an invalid return with partial payment of tax.

A reference is here required to the provisions of section 39(7) which deal with filing of returns wherein it is stated that

“(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.”

Thus section 39(7) requires payment of tax due as per “such return”, which means return could be filed without payment of tax.

On perusal of the above it can be clearly demarcated that the law allowed filing of return with partial payment of tax. This is also evident from the agenda of the 31^st Council Meeting

“A perusal of above provisions indicate that the law permits furnishing of a return without payment of full tax as self-assessed as per the said return but the said return would be regarded as an invalid return. The said return, however, would not be used for the purposes of matching of ITC and settlement of funds. Thus, although the law permits part payment of tax but no such facility has been yet made available on the common portal. This being the case, a registered person cannot even avail his eligible ITC as he cannot furnish his return unless he is in a position to deposit his entire tax liability as self-assessed by him. This inflexibility of the system increases the interest burden.” 

Thus the GST portal ought to have allowed the tax payers to file an invalid return and claim the input tax credit and declare a liability. However the portal does not allow such act which also causes hardship to the tax payers.

The levy of interest is automatic?

Any tax/interest/demand cannot be automatic as it would be against the principle of natural justice. However the Special Secretary and Member, CBIC has also stated  vide his letter No. F. No. CBEC-20/16/07/2020- GST Dated the 10th February 2020 that recovery of interest is automatic in terms of section 75(12). Section 75(12) reiterated under:

“(12) 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.”

Thus what is stated in section 75(12) is only self assessed tax. Only self assessed interest declared in return can be recovered under section 75(12). For any amount determined in excess of that determined by the tax payer in self assessment cannot be recovered without issue of show cause notice u/s.73/74. Thus show cause notice has to be issued for recovery of interest.

Conclusion

Interest is levy on delayed payment. The intention of the legislature is also evident from the agenda of the 31st GST Council meeting and the various precedents. It is worth asking that when the amendment has been put in the Act what are the reasons for not making the amendment effective till date? Official reason shared by the CBIC on Twitter is that State Governments of West Bengal and Telangana are yet to amend their respective SGST Acts. In such scenario is it just on the part of the CBIC to issue such coercive instructions?