INTEREST was, Interest is and it will always be charged on NET LIABILITY Section 50 of CGST Act, 2017
In this article author tries to unfold the mystery of interest as per section 50 of CGST Act, 2017 with backdrop of recent judicial, departmental and Twitterial development
For the sake of brevity section 50 of CGST has been reproduced below
|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 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.
(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.
Based on Reading of Section 50 of the CGST Act it is apparently clear that payment of interest is by self declaration of assessee it will not be counted by the GSTN system unlike late fees.
Further based on combined reading of Section 49, 50 and Rules made there under it is apparently clear that tax has been considered as paid when there is credit entry in electronic liability ledger with debit of electronic cash and/or credit ledger.
PART – 1. INTEREST UNDER GST WAS NEVER INTENDED TO BE LEVIED ON GROSS LIABILITY
Before GSTR 3B, i.e. when assessee is requried to file, the DREAM GST Returns of the Government, GSTR 2 by 15th of Month next month the Input Tax Credit can be availed by the taxpayer by filling GSTR 2. The Combined Reading of Section 41 and Rule 36 (which even there in statue book as on date despite the fact that GSTR 2 was put in abeyance indefinitely by government) has been reproduced below
|Section 41. Claim of input tax credit and provisional acceptance thereof.
(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.
Rule 36. Documentary requirements and conditions for claiming input tax credit.
(2) Input tax credit shall be availed by a registered person only if all the applicable particulars as specified in the provisions of Chapter VI are contained in the said document, and the relevant information, as contained in the said document, is furnished in FORM GSTR-2 by such person.
Now after the Hon’ble Gujarat High Court’s a landmark ruling in the case of AAP & Company, Chartered Accountants v/s Union of India that the FORM GSTR-3B is not a ‘Return’, rather Return specified for Section 39 in FORM GSTR-3 is a ‘Return’, Government vide notification no. 49/2019- CT dated 9 October 2019 amended the Rule 61 of the CGST Rules retrospectively with effect from 1 July 2017 to notify that the return furnished in Form GSTR-3B would be considered as a return specified in section 39(1) of the CGST Act, 2017 and the assessee would not be required to file Form GSTR-3 where returns are required to be filed in Form GSTR-3B.
Further for better understanding of the matter let’s broadly discuss to format of GSTR 3 and how it’s different from GSTR 3B
|GSTR 3 contained two parts i.e. Part A, Part B.
• Part A of the return shall be electronically generated on the basis of information furnished through returns in FORM GSTR-1, FORM GSTR-2 and based on other liabilities of preceding tax periods.
• Parts B contained the Tax Liability, interest and penalty paid and refund claimed from cash ledger, if any. Part B is also auto populated; the system will compute the tax liability on the basis of GSTR-1(Output tax) and after adjustment of Input tax credit as claimed in GSTR-2.
Based on above format read with Section 41 and Rule 36 as above we can conclude that, when we are going to file GSTR 3 we need to make the Payment of tax through cash ledger only in case there is shortfall at the time of payment through credit ledger, Meaning there by when we file PART A of GSTR 3 Balance of Credit ledger get off sated with the liability ledger and Balance amount if any payable in cash will get reflected in PART B along with other liabilities of interest, late fees etc. which can only be paid in cash. Process of filling PART A of GSTR 3 is considered as provisional filling of GST Return and when assessee files PART B i.e. after offsetting the Balance in liability register with Cash laager the GSTR 3 return is considered to be filled.
(This is based on our limited understating of from GSTR 3 and Instruction available for filling of GSTR 3 in statue books as no one has ever filled GSTR 3 on GSTN website as it’s never made operational)
Further as per the design of GSTR 3B on GSTN Portal debit entry in liability leager (Known as Payment of tax) cannot be made separately from credit ledger to the extent balance available in the credit ledger whether Credit pertains to current month or it’s a previous accumulated credit and already there in credit ledger unlike its there in PART A of GSTR 3.
Even After the amendment that GSTR 3B is the return for all the purpose under GST in lieu of GSTR 3 and per se GSTR 2 as well, There are no consequential changes in neither Section 50 to clarify the about interest on Gross or net liability nor in Return filling process on GSTN Portal to allow the assesses to claim to provisional credit as per above Section 41 and Rule 36 before filling GSTR 3B. Hence the issue whether interest should be paid on Gross tax liability or only on net tax liability? Arises. Even if remember the earlier days when GST was going to be enacted on one has apparently raised this issue.
Conclusion – PART – 1
Based on above, it is clear that at the time of drafting of Section 50 legislature has kept in mind the format and process of filling GSTR 3 which allows a taxpayer to file only the PART-A of GSTR 3 which will be considered as provisional return and but if before the due date taxpayer doesn’t file PART B then return will be considered invalid and therefore the legislature has never bothered about mentioning the words GROSS or NET Tax payable in the said section.
PART – 2. INTEREST UNDER GST IS NOT TO BE LEVIED ON GROSS LIABILITY
Meanwhile GST Council in its 31st Meeting held at New Delhi on 22nd December, 2018 has recommended amending of section 50 of the CGST Act, 2017 via agenda no 7(XX) which is in principal approved by the all the member present in the meeting to charge interest on net tax liability i.e. after taking into account the admissible Input Tax Credit. The minutes with signature of chairman of the meeting is reproduced below.
The agenda clearly state and even what we all know that GST is Value Added Tax and it even talks that though law permits to file provisional return (i.e. PART A of GSTR 3) but the said procedure was not available on GSTN Portal and GSTC was in principally recommended to amend the section 50 of CGST Act.
But to over surprise Hon’ble Telangana High Court in case of the A Writ Petition filed by aggrieved M/s. Megha Engineering & Infrastructures Ltd. against the demand of interest on ITC component has dismissed on 18.04.2019, stating that section 50(1) states interest is to be paid on amount of tax remained unpaid. The tax amount is said to be discharged by way of ITC and cash only when the necessary electronic credit and cash ledgers take a debit hit, until then the tax remains unpaid. Since the return is filed belatedly there is no debit to the Electronic Credit Ledger, hence tax was not discharged by way of ITC although ITC was available to be utilized.
While reading the whole judgment with due respect to the high court, one can conclude that high court has not applied the ground rule of interpretation of “the whole act rule” and golden rule of interpretation of “purposive interpretation”. (The above case at present is pending for review at Hon’ble Telangana high court )
But After taking the above opportunity government has twisted the recommendation of GST Council and The Finance (No. 2) Bill, 2019 has vide clause 100 proposed to amend section 50 by inserting following proviso to section 50(1) of CGST Act, 2017 as follows though the GST Council has clearly agreed to amend that Section 50 of the act
|100. In section 50 of the Central Goods and Services Tax Act, in sub-section (1), the following proviso shall be inserted, namely:
“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.”
Even to our fortune government has till date not notified the above Clause 100 of Finance (No. 2) Bill, 2019, even after we already have the Finance Bill, 2020 tabled in Parliament on 01.02.2020.
But meanwhile on 10.02.2020 Mr. A. K. Pandey, Special Secretary & Member, Government of India-Ministry of Finance-Department of Revenue-Central Board of Indirect Taxes & Customs in a letter vide F.No. CBEC-20/16/07/2020-GST addressed to Principal Chief Commissioner / Chief Commissioner drawn attention towards belatedly filed GSTR3B returns without discharging interest on GROSS LIABILITY. The letter also made reference to GSTIN wise list of registered persons generated and shared by The Principal Additional Director General (Systems) on 01.02.2020. The said report states that interest amount on Gross GST Liability to tune of Rs. 45,996 Crores remains unpaid to the Government. The said letter as clear as crystal stated interest shall be levied and collected on GROSS LIABILITY AND NOT ON THE NET CASH PORTION.
In continuation to this the CBIC through its official Twitter handle tweeted series of tweets on 15.02.2020, the same are reproduced hereunder:
|1/n There are some discussions in social media w.r.t. interest calculation on delayed GST payments post a few media reports regarding Rs. 46,000 Cr interest on the delayed GST payments to be collected by tax authorities. On this issue of interest calculation, it is clarified that-
2/n The GST laws, as of now, permit interest calculation on delayed GST payments on the basis of gross tax liability. This position has been upheld in the Telagana High Court’s decision dated 18.04.2019.
3/n In spite of this position of law and Telangana High Court’s order, the Central Government and several State Governments, on the recommendations of GST Council, amended their respective CGST/SGST Acts to charge interest on delayed GST payment on the basis of net tax liability.
4/n Such amendment will be made prospectively. The States of Telangana and West Bengal are in process of amending their State GST Acts. After the process of amendments is complete, the changed provisions can be put in operation for the entire country.
The above two things have made a lot of chaos among the taxpayers and tax professional. But as it is said by Mahatma Gandhi that “TRUTH Stands, even if there be no public (Department) support. It is Self-sustained ” Hon’ble Madras high court in case of Refex Industries Ltd. Vs Assistant Commissioner of CGST & Central Excise ruled that “Interest should be Levied on Belated GST Cash Payments but not on ITC” Even at the Hon’ble Gujarat High Court A division bench consisting of Justice J B Pardiwala and Justice Bhargav D Karia said while hearing a petition filed by Amar Cars Private Limited, directed “We direct the respondents not to take any coercive steps for the purpose of recovery of the interest,” The court has also issued a notice to Centre, Gujarat Government, and the GST Council. Respondents including Central and State Government and three others have to reply to notice by March 11.
Conclusion – PART – 2
At present the Hon’ble Madrash High court as already delivered the judgement and Hon’ble Gujarat high has grated the stay in above matter and outcome of other writs filled in other high courts will expected to follow the same line of judgment. Therefore at present GST Interest is only payable on NET Tax payable.
PART – 3. INTEREST UNDER GST WILL BE PAYABLE ON GROSS LIABILITY FOR JULY 2017 TO EFFECTIVE DATE OF CLAUSE 100 OF FINANCE BILL IF THERE IS PROSPECTIVE AMENDMENT BY GOVERNMENT?
Now As per the above tweet the CBIC is planning to introduce the proviso as per clause 100 of Finance (No. 2) Bill, 2019 from prospective effect then can department required assessee to pay interest on Gross liability as proviso will be having prospective effect. The Answer to the above can derived by below observation of the Hon’ble Supreme Court
The Hon’ble Supreme Court in case of CIT v. Vatika Township P.Ltd in para 32 and 33 observed that
|32. The obvious basis of the principle against retrospectively is the principle of ‘fairness’, which must be the basis of every legal rule as was observed in the decision, reported in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd . Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later.
33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by legislation, the rule against a retrospective construction is different. If 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 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 & Ors. v. Indian Tobacco Association, 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 & Ors. 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.
Further the Hon’ble Supreme Court in the case of Calcutta Export Company (the taxpayer) held that
|A legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced, but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies.
Any provision with a purpose of tax compliance should not have been converted into an iron rod provision, which metes out stern punishment and resulted in malevolent results disproportionate to the offending act and intention of the legislature.
A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section, is required to be read into the section to give the section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole.
Conclusion – PART – 3
Based on the observation of The Hon’ble Supreme Court in the above cases, even it Government make the proviso, to be inserted under section 50 of CGST vide clause 100 of the Finance Bill (No. 2) of 2019, having prospective effect will not have any impact.
Based on all the above 3 conclusion it can conclude that Government or per se legislature was never intending to levy interest on Gross tax liability (Part–1), even after the letter of Special Secretary & Member, Government of India-Ministry of Finance-Department of Revenue-Central Board of Indirect Taxes & Customs and clarifying tweets of CBIC, based on ruling of Madrash and Stay by Gujarat High court Interest under section 50 is going to be paid on NET liability only (Part – 2) and even when government notify, through proviso, clause 100 of the Finance Bill (No. 2) of 2019, clarifying the matter with prospective effect to pay interest on delayed payment of GST only on liability discharged through cash ledger, it will have retrospective effect as per the guidance provided by The Hon’ble Supreme Court (Part -3)
In toto INTEREST was, Interest is and it will always be charged on NET BASIS as per section 50 of CGST Act.
(The author is highly grateful to CA. Drashti Sejpal for her valuable contribution at various palaces of this article)
Views express in these articles except the bare act, rules and extract of judgments are personal views of the author. Author or his associates were no where responsible for any loss or adverse legal consequences caused to any person by relaying on the above views. The Author, CA Ravi Tanna, is a partner in charge of GST at KST & Associates Chartered Accountants having offices at Rajkot & Pune and can be reached on firstname.lastname@example.org.