PROVISO TO SECTION 50 (1): WHETHER RETROSPECTIVE?

Issue involved:-

Finance Act (No. 2) Act, 2019 dated 01/08/2019 in its section 100 contained:-

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.”.

Section 100 of the Finance Act (No. 2), 2019 has been notified on 25/08/2020 vide Notification no. 63/2020-Central Tax Dated 25.08.2020. Strong reactions have been witnessed in last few hours after the aforesaid notification made public. Let us recall the total issue before making any bold reaction.

Sections 50 (1) & 50 (2) of the CGST Act, 2017 were inserted as below:-

50 (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.”

50 (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.”

Interpretation of section 50 (1) of the CGST Act, 2017:-

Two interpretations of the aforesaid section 50 (1) (pre-amended) were made by two different schools of thought. Some were of the view that section 50 (1) does not specify the amount on which interest is to be levied, and thus they opine that as the section is not specifying the principal amount, it is not a substantial provision and in light of the judgment of the Apex Court in the case of India carbon, the said section is not valid. They further says that even if the test of validity is passed by this sub-section, there is no scope to levy interest on gross amount.

Whereas second school of thought has interpreted that, as per this sub-section interest is leviable on the gross amount of output GST. Some people have strongly opined that section 50 (1) cannot be make effective till the ‘manner of calculation’, as mentioned in section 50 (2), is prescribed.

People have also argued that being interest is compensatory in nature, it can only be levied on the actual unpaid amount. Till 22nd December 2018 common people were of the view that interest under GST, even if chargeable, it will be charged on the net amount cash liability.

Law Commission and 31st meeting of the GST Council:-

On the advice of the Law Commission, agenda dated 22/12/2018 of the 31st meeting of the GST Council inter-alia contained a proposal for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability.

Agenda Item 7(xx): Proposal for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability.

1. The liability to pay interest in case of non-payment of tax arises out of the provisions contained in Section 50 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) which reads as follows:

Every person who is liable ……. Government on the recommendations of the Council.

2. It may be seen from the above provision that interest is applicable to the amount of tax that has not been paid by the registered person.

i. Various other sections related to payment of tax are as follows: Section 49 (2) of the CGST Act provides that the input tax credit as self-assessed in the return (not necessarily be a valid return) of a registered person shall be credited to his electronic credit ledger.

ii. Section 49 (3) and 49 (4) of the CGST Act provides that the amount available in the electronic cash ledger may be used for payment towards tax, interest, penalty, fees or any other amount whereas the amount available in the electronic credit ledger may be used for payment towards output tax. The term “tax dues” has been defined, as per Explanation (b) to section 49 of the CGST Act so as to mean the tax payable under the CGST Act and does not include interest, fee and penalty.

iii. Section 39 (7) of the CGST Act provides that the tax payable as per the return is required to be paid not later than the last date on which the return is required to be furnished.

iv. Section 2 (117) of the CGST Act provides that a valid return means a return furnished under section 39 (1) of the CGST Act on which self-assessed tax has been paid in full.

3. A perusal of above provisions indicates 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 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. The same is illustrated as below:

Suppose a registered person has self-assessed his tax liability as Rs. 100/- for a particular tax period. He has an amount of Rs. 10/- as balance in his electronic credit ledger and he is eligible to avail Rs. 80/- as an input tax credit (which would be credited to his electronic credit ledger only on furnishing of return). He is, therefore, required to pay only Rs. 10/- from his electronic cash ledger. The IT system will not allow the said registered person to furnish his return (and therefore the ITC of Rs. 80/- will not be credited in his electronic credit ledger) until he is in a position to discharge his complete self-assessed liability of Rs. 100/-. He would be liable to pay interest on the entire self-assessed tax liability of Rs. 100/- as he is not able to pay Rs. 10/- or part thereof from his electronic cash ledger.

It may be seen from the above that if the facility for part payment, as permitted under law, was available, the registered person would have been required to pay interest only on Rs. 10/- but presently he is liable for interest on the entire tax liability of Rs. 100/-.

4. It is also pertinent to mention that the liability of any registered person is related to the value addition made by him since GST is leviable only on value addition. Accordingly, the input tax credit is allowed to the registered person in respect of the tax paid by him on his inward supplies. And, while making the outward supplies, the input tax credit so allowed is permitted to be utilised for discharging his output tax liability. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, by this mechanism, the registered person effectively pays tax only on the value addition made by him. If this concept is applied for interest payable, then, it appears that the interest should also be charged on the tax payable on the value addition only, i.e. the amount of tax which is required to be paid through electronic cash ledger.

5. Presently the interest is not calculated by the IT system. The registered person himself calculates the said interest and deposits the same. It appears, therefore, that any change would not pose any IT-related challenge.

6. The issue was deliberated by the Law Committee in its meeting held on 15.12.2018. The Committee observed that the proposal to charge interest only on the net liability of the taxpayer, after taking into account the admissible credit, may be accepted in principle. Accordingly, the interest would be charged on the delayed payment of the amount payable through the electronic cash ledger. However, where invoices/debit notes have been uploaded in statements pertaining to the period subsequent to the period in which they should have been uploaded, the interest shall be calculated on the amount of tax calculated on the taxable value from the date on which the tax on such invoices was due. This would require an amendment to the Law.

7. Accordingly, in-principle approval of the GST Council is sought for carrying out the amendment in the CGST/SGST Act as per the proposal contained in para 6 above. Law Committee may be directed to frame suitable amendments in the law. Similar amendments would be required in the respective SGST Acts also.

In the said meeting the Hon’ble GST Council has approved the above. Minute of the meeting does not contain any discussion on this issue.

After 31st meeting of the GST Council, it has been published on 22nd December, 2018 that the council has principally approved to amend section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger.

Standing Order of the Principal Commissioner of Central Tax, Hyderabad:

Thereafter a standing order has been passed by the Principal Commissioner of Central Tax, Hyderabad on 04/02/2019. The said order inter-alia contained “Since ITC/Credit in balance in the ‘Electronic Credit Ledger’ cannot be treated as the Tax paid, unless it is debited in the said credit ledger while filing the return for off-setting the amount in the ‘Liability Ledger’, the interest liability under Sec. 50 is mandatorily attracted on the entire Tax remained unpaid beyond the due date prescribed”.

High Court Judgments:-

Several cases were filed before Hon’ble High Courts in different states. The following two cases, in the opinion of the author, are most important”-

1. In the case of Megha Engineering And Infrastructures Ltd. Vs. The Commissioner of Central Tax, Hyderabad Hon’ble Telangana High Court held that interest is leviable on the gross amount. (18/04/2019)

2. Refex Industries Ltd. Vs Assistant Commissioner of CGST & Central Excise (Madras High Court)–  Hon’ble Madras High Court held that the proper application of Section 50 is one where Interest is levied on a belated cash payment but not on ITC available all the while with the Department to the credit of the assessee. (06/01/2020)

It was interpreted that the aforesaid section levies interest on the total output GST without deducting the available input therefrom.

Finance Act (No. 2) Act, 2019:-

Intentionally or unintentionally, the Hon’ble GST Councils recommendation was silent regarding prospective or retrospective effect of the suggested amendment in section 50  (1). The amendment as produced in the Bill was also silent on the retrospective effect. Once the bill was passed it was liable to be notified, but due to some reasons it has been notified after a period of more than 12 months from the date of assent of the president of India.

39th Meeting of the GST Council:-

The 39th GST Council meeting declared that the interest on delayed GST payments would be applicable only on net cash tax liability after the deduction of the available input tax credits. The interest on a delayed GST payment will no longer be charged based on the gross tax liability. This change will be applicable retrospectively with effect from 1 July 2017, the date on which GST legislation came into force.

Will Interest be levied on gross Amount?

In the opinion of the author, the Finance Bill had got the assent of the Hon’ble President of India and the Government was legally bound to notify it. However this notification does not mean that recommendation of the GST Council in its 39th meeting has been ignored. It may be reasonably expected that amendment in the said proviso will be notified soon. Further the author is of the view that even in absence of any specific mention of retrospective effect, it should carry retrospective effect. Hon’ble Madras High Court in the case of Refex Industries Ltd. (supra), in the context of the said proviso has held- “The above proviso, as per which Interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 01.08.2019, but clearly seeks to correct an anomaly in the provision as it existed prior to such insertion. It should thus, in my view, be read as clarificatory and operative retrospectively.”

We may be hopeful to get a proper notification or clarification in a very short time. We should hope that authorities will always appreciate that “Taxes are the life-blood of any Government; but it cannot be overlooked that such blood is taken from the arteries of the tax-payer”.

Hon’ble Orissa High Court in the case “Prasanna Kumar Bisoi Vs Union of India (Orissa High Court) dated 21/08/2020 considered that in the 39th meeting of GST Council held on 14.03.2020 it was decided that interest for delay in payment of GST is to be charged on the Net Cash Tax Liability w.e.f. 01.07.2017 retrospectively and accordingly disposed the writ petition with a direction to the Superintendent, Central GST and Central Excise, Berhampur to dispose of the representation filed by the petitioner on 06.05.2020 keeping in view the decision taken in the 39th meeting of GST Council, as expeditiously as possible, preferably within a period of eight weeks from the date of receipt of this order.

So till now, in my opinion there is no breach of promise. So, nothing to worry, we should just wait and watch.

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