Prospective Effect is not at all a Problem – Interest on GST liability

“Every single move in life have Double Effect i.e. prospective as well as Retrospective”

Introduction

Interest is always considered as compensatory in nature and it has been imposed on a registered person who has failed to pay the tax liability within the applicable due dates. Also, every legislature includes recovery provisions for collection of taxes, interest, late fee and other dues respectively. The biggest dispute which is currently operating under the GST regime is whether Interest is payable on Gross Liability or Net Liability. There are series of Case laws under the erstwhile laws wherein it was well settled fact that interest is to be paid only on net liability. This article provides a minor discussion on governing section, Notifications, case laws etc. which will provide a quick overview on the aforesaid issue till date. 

Governing Section for levy of Interest under GST:

Section 50 of CGST Act, 2017 provides for levy of interest on late or Non-payment of tax. Interest liability triggers only when there is a late or non-payment of tax or excess claim of input tax credit. The rate of interest for cases such as late or non-payment of tax  –  Not exceeding 18% P.A as may be notified by the Government on recommendations of the Council.

Further, the rate of interest for cases such as;

– Section 42(10) –  undue or excess claim of input tax credit;

– Section 43 (10) – undue or excess reduction in output tax liability;

Interest to be paid on such undue or excess claim or on such undue or excess reduction – not exceeding 24% P.A as may be notified by the Government on the recommendations of the Council

Further, Rule 85(3) of CGST Rules, 2017 – Electronic Liability Register – Subject to the provisions of section 49, [section 49A and section 49B]121, payment of every liability by a registered person as per his return shall be made by debiting the electronic credit ledger maintained as per rule 86 or the electronic cash ledger maintained as per rule 87 and the electronic liability register shall be credited accordingly. 

Based on the aforesaid Rule, it may be noted that the payment date is to be considered as credit date to electronic liability register and not on the date of deposit to Electronic Cash ledger

Relevant Notifications, Updates & Case Laws 

Initial Notification Reference for Rates

Notification No -13/2017- Central Tax dated 28th June, 2017 which clearly notified all the rates applicable for various cases referred in the aforesaid para including Interest on delayed refunds.

Notification No. 49/2019 dated October 09, 2019

Form GSTR-3B is not a return as per Section 39 of the CGST Act, 2017. Further the said form was introduced as temporary measure in order to facilitate the tax payers in paying their GST liability on a regular basis. There are many supporting case laws in this regard. The aforesaid notification made few amendment in  CGST Rules. Which included Rule 61(5) by incorporating the wordings “the return specified in sub section (1) of Section 39 shall, in such manner and subject to such conditions as the Commissioner may by notification, specify, be furnished in Form GSTR-3B”.  Also a proviso has been inserted which states that “where a return in From GSTR 3B is required to be furnished by a person referred to in sub-rule (1) then such person shall not be required to furnish the return in Form GSTR-3”

(The aforesaid amendment was made retrospectively W.E.F July 01, 2017)

Rule 61(5) fails the test of being a return under Section 39(1) since complete information which is required to be furnished is not incorporated in Form GSTR-3B. It is well settled position that the Rules can only prescribe the procedural aspects which are required to be carried out as per the provisions of the Act and not anything beyond. A rule is a prescribing provision and cannot override the Section contained in the Act itself. Accordingly, we can consider the said retrospective amendment is unconstitutional.

Relevant Case Laws:

Karnataka HC in the Case of Union of India v/s LC Infra Projects Pvt Ltd [TS-776-HC-2019 (KAR)-NT] – Issuance of Show Cause Notice is pre requisite before initiating the recovery proceedings which amounts to violation of Principle of Natural Justice.

Raghava Constructions V/s Union of India – Telangana HC issued an interim order for stay on collection of interest on gross liability Further, High Courts of Karnataka and Gujarat are also  on the same view and have granted interim order stating that interest in to be paid on net liability in various cases.

AAP and Co v/s Union of India, 2019  ITL (GST) 687 – Gujarat High Court –  it was held that Form GSTR 3B is not a return in terms of Section 39 of CGST Act, 2017

Bombay HC in the case of Sahara Hospitality Ltd (HC Granted unconditional ad interim stay on recovery of interest u/s 50 of the CGST Act, 2017) 

Section 100 of Finance Act, 2019

This section provides for an amendment in section 50 of CGST Act, 2017 by way of introduction of a  proviso to section 50 which clearly provides that interest shall be charged on that portion of tax which is paid by debiting the electronic cash ledger. Though, the same was not notified till August 24, 2020 for enabling the said proviso.

GST Council Meeting Discussions

On 31st Meeting & 39th Council Meeting there was a discussion on charging interest on net liability. The actual  proposal was that Interest liability which arises due to delay in payment of GST is to be completely charged only on net cash tax liability by giving a retrospective effect from July 01, 2017.

Social Media Communications

A letter which was circulated on social media dated February 10, 2020 by CBIC to Principal Chief Commissioner  to recover an amount of  Rs. 45,996/- crore against interest on Gross liability which was a nightmare for many taxpayers. Also, instructions were clearly given to all the officers by the Commissioner to recover interest on gross liability only not on net liability. CBIC again on February 15, 2020 posted on its Social Media Account that the Section will be amended prospectively and till the date of such amendment, interest shall be charged only on gross liability.

Notification No.63/ 2020 – Central Tax dated August 25, 2020

The aforesaid notification gave a big surprise to all the tax payers since Section 100 of Finance (no.2) Act, 2019  which inserted a proviso to Section 50 of CGST Act  (“Interest on GST to be levied on Net Tax liability”)  was notified with prospective effect i.e. from September 01, 2020.

Press Release Dated August 26, 2020

CBIC has clearly state that no recoveries shall be made for the past period  and the same is in line with the decision taken in 39th GST Council Meeting which will ensure full relief to the taxpayers.

Conclusion: The Press release which was released on August 26, 2020 was in line with the  recommendation of GST Council in its 39th Council Meeting. This press release will give  proper solution to the taxpayers in relation to confusions on Interest Liability towards delay in payment of GST. Also given the Current pandemic situation, this press release will act advantageous  to all the taxpayers.

  • CA Sai Raghavendra Sumanth T

Writer can be reached at email: tsr.sumanth@gmail.com 

Disclaimer: The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Copying and sharing of the material without prior permission is restricted.

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One Comment

  1. VINAY SONPAL ADVOCATE says:

    The ITC is deemed to be payment of tax as per very old judgement of Empico Traders of Bomaby High Court. Hence all eventualites interest on delayed payment of tax has to be on cash liability because ITC is discharge of liability only.

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