The Saga of Interest on Gross Liability on delayed payment of GST liability

This article details the roller coaster journey of interest liability under GST. Goods and Services Tax Act, 2017 has come into effect from 01.07.2017, it is the youngest indirect tax law in the basket of all existing and extinct indirect taxes laws of India. All the pre-GST State and Central indirect taxation laws had the provision of levying of interest on delayed payment of taxes. However, none of laws had the provision of charging interest on gross tax liability. Interest used to be levied on net tax liability after setting off of admissible input tax credit / CENVAT Credit etc. against the output liability i.e. interest was charged on delayed payment of balance liability discharged through cash.

It is very interesting to note the interest under GST is calculated on gross liability. The provision of interest on late payment of GST liability is enumerated in section 50(1) of CGST Act, 2017. The provision is reproduced hereunder for convenient reading;

Section 50(1) – “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 recommendation of the Council.”

Unlike late fees, the interest liability is not auto calculated by the GST portal. The interest u/s 50(1) of CGST Act, 2017 is automatic and is to be reported suo moto i.e. the taxpayer on his own has to report and discharge interest on delayed payment of GST liability.

When the provision of the section is read ad literam, it clearly states that interest is to be levied on gross tax liability before utilizing any admissible Input Tax Credit (ITC). However, this might not be the intention of the lawmakers. Taking cognisance of the matter, 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 to charge interest on net tax liability i.e. after taking into account the admissible Input Tax Credit.

The above recommendation of the GST Council had given some repose to the taxpayers until one fine day a Standing Order No: 01/2019 dated 04.02.2019 issued by the Office of The Principal Commissioner of Central Tax-Hyderabad GST Commissionerate directing recovery of interest as recoverable arrears. Albeit the Council had recommended amending of Section 50, there was no legal backing to it. It remained a mere recommendation on paper. Since, Lok Sabha elections were due in 2019 the interim budget was presented on 01.02.2019. The Finance (No. 1) Act, 2019 did not incorporate the recommendation of the council with respect to amending of section 50 of CGST Act, 2019.

This draconian provision is very harsh and will impact negatively to the taxpayers having pile of Input Tax Credit and inadvertently filed GSTR3B belatedly. The following illustration will substantiate the statement.

Calculation of GST Liability for the month of Jan, 2018
SN Particulars CGST SGST Total Tax
A GST Liability on Outward Taxable Supplies 35,00,00,000 35,00,00,000 70,00,00,000
B Admissible Input Tax Credit available to utilised 43,75,00,000 43,75,00,000 87,50,00,000
C Net Liability to be payable in cash C=(A)-(B) (non-negative)                      –                      –                      –
Calculation of Interest on Gross GST Liability as per Section 50(1) of CGST Act, 2017 – Jan, 2018
SN Particulars Particulars CGST SGST Total Tax
P Due date of Filing GSTR3B of Jan, 2018 20-02-2018
Q Actual date of filing of GSTR3B of Jan, 2018 23-02-2018
R Delay in number of days 3 3
S Interest at 18% p.a. on Gross GST Liability
(A)*18%*1/365
5,17,808 5,17,808 10,35,616

From the above illustration, one has to ponder that mere delay of 3 days in filing of GSTR3B will cost Rs. 10,35,616 interest though there is no liability to be paid in cash on account of admissible Input Tax Credit. It is frightening!

A Writ Petition filed by aggrieved M/s. Megha Engineering & Infrastructures Ltd. against the demand of interest on ITC component was dismissed by the Hon’ble Telangana High Court 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.

This case law had made lots of rounds throughout the country. The Lok Sabha Election for 2019 was over and new Government in the Centre was formed in May, 2019. The Finance (No. 2) Bill, 2019 vide clause 100 proposed to amend section 50 by inserting following proviso to section 50(1) of CGST Act, 2017;

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.”.

Post enactment of the Finance (No. 2) Bill, 2019 on 01.08.2019 there has been a positive normalcy in the industry with respect to interest on delayed payment of the GST liability. All the taxpayers and professionals did welcome the amendment.

The Honourable Madras High Court in case of M/s Refex Industries Limited and M/s. Sherisha Technologies Pvt. Ltd., dated 06.01.2020 has allowed Writ Petitions praying for quashing of impugned notices demanding interest on ITC component. In the said case, the Hon’ble Court has relied on proviso to section 50(1) and set aside the impugned notices.

But….. But…….. But…… the story of interest on gross liability which seemed to have taken legal settlement has started to crawl out now to recover the interest on GROSS LIABILITY.

How!? Let’s See:

The Finance (No. 2) Bill, 2019 was presented in Lower House of the Parliament on 05.07.2019 proposing, inter alia, to amend section 50 of CGST Act, 2017. The bill was passed in both Houses of the parliament and received the assent of the President on 01.08.2019. The clause (b) section 2 of Finance Act, 2019 mandated that “sections 92 to 112 and section 114 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

The Government has not yet notified section 100 of Finance Act, 2019 which inserted a proviso to section 50(1) of CGST Act, 2017 to provide for levy of interest on the portion of the tax that is paid by debiting the electronic cash ledger.

Taking this further, 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 dated 10.02.2020 addressed to Prinicipal Chief Commissioner / Chief Commisoner 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.

This letter when made public by media created a hue and cry among taxpayers and professionals. Many started to question the legality of the letter as Finance Act, 2019 has already inserted proviso to Section 50 (1) to levy interest on net cash liability. However, since the section is not notified yet, nobody had any clue whether said the amendment will be made effective prospectively or retrospectively?

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 speculation which many had whether the said amendment would be made effective retrospectively has now been clarified by CBIC that such amendment will be brought in with prospective effect.

Till the time this amendment is given life the interest will be calculated on gross GST liability.

Whether bringing in prospectively the interest calculation on net tax liability will actually serve the intentions of lawmaker is the key thing that CBIC must think upon? When such amendment is thought to be made effective prospectively then why there is this huge delay in notifying it? The concept of Ease of Doing Business sheer takes a negative hit.

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11 Comments

  1. Manu says:

    I got a demand notice regarding interest on late payment through GSTR 3B filing. The interest is calculated on Cash & ITC ledger. Do i have to pay both the interest..? ALSO How do I make the payment for the same through which form.?
    Thanks

    1. haralesh says:

      1. Interest is to be paid on net liability i.e. only on cash component. GST Council, in its 39th meeting dated 14.03.2020, has recommended to amend the Sec 50 with retrospective effect from 01.07.2017.
      2. Payment to be made through DRC-03.

      1. manu says:

        Thank you Haralesh for your reply.
        1. wanted to ask while Filling DRC-03 they are asking place of supply for IGST act but we have more than 300 bills do we have to show one by one bill wise which is not practical.
        2. Also though the GST council has made the recommendation is it the law already.? do I counter the demand notice as the in the notice interest is charged on gross liability.

  2. Vaibhav Thapar says:

    DATED: 17.02.2020
    DIN-20200250ZE09013Y52C6
    To
    GSTIN 03**********1ZB
    Legal Name VAIBHAV THAPAR
    Trade Name SINGH PAUL THAPAR & SONS
    Address DANA MANDI,,,PHILLAUR,PHILLAUR,Jalandhar,144410
    E mail id VAIBHAVTHAPAR@GMAIL.COM
    Phone No. 7696760076
    Dear Taxpayer,
    GST interest liability U/Sec. 50 of the CGST Act, 2017 on
    account of the delay in filing the GSTR-3B returns – regarding.
    This is to inform that you have not paid/short paid the interest for
    the year 2017-18 amounting to Rs. 2192/-, for the year 2018-19 amounting to
    Rs.0 /- and for the year 2019-20 (up to Dec-2019) amounting to Rs.0 /-, Total
    amounting to Rs. 2192/-on delayed payment of GST under Sub Section (1) of
    Section 50 of the CGST Act, 2017.
    You are hereby directed to deposit the pending government dues
    as mentioned above, within three days from the receipt of this notice. If already
    paid, submit the proof of the same. If no reply is received by the aforesaid time, it
    will be presumed that you have nothing to say in the matter and proceedings in
    accordance with law may be initiated against you without making any further
    reference to you in this regard.
    (No physical signature required being issued from e-office)
    Superintendent
    OFFICE OF THE SUPERINTENDENT
    CENTRAL GOODS & SERVICE TAX RANGE-I
    HARGOBIND NAGAR,
    PHAGWARA-144401
    e-mail id:- cxr.i.phg@gmail.com
    File No.SoR/46/2020-RNG1-DIV-GST-PHG

    My reply to this mail
    ear sir/Madam,

    This is in regard to the notice which I received on 17.2.2020 for the liability of interest. As I go through and found that during the whole of the year 17-18 there was not any tax liability on my part, moreover my Input tax credit is always on the higher side throughout the year.

    I request you to please intimate me if there is any tax liability on my part. If there is no such liability exist kindly vacate the notice.

    Thanks and regards
    7696760076

    Superintendent reply on this :-
    The tax liability is already mentioned in the notice dated 17.02.2020. Further, it is pertinent to mentioned here that the interest is applicable on Gross liability shown in GSTR-1 returns under Section 50. Therefore, you are once again requested to deposit the due interest as intimated in the notice dated 17.02.2020.

    SUPERINTENDENT
    CGST RANGE-1
    PHAGWARA.

  3. CA ASHISH SHUKLA says:

    Dear Team,
    If we read the section 50(1) of CGST Act,

    “the tax or any part thereof remains unpaid,”

    i think its indicate the net tax liability by reading this statement but no one is ready to accept this statement.

    Another thing is that they are charging interest from the date of delay of returns , please check on portal till september 2018 under form 3B the due date is showing 31/03/2019 but they (department) has not
    calculated according to that date but they took monthly date next month 20th.

    Its really very harsh for all taxpayers who are legally doing a business and following all the statutory obligation.

    Government is also not bothered for all taxpayers , who are backbone for Indian economy,from there tax revenue, the Indian government is working.

    They have just pass a bill 2019 section 100 but they want its should be more complicated so that we can avoid department others loop holes. They should work on Portal but they just made people busy in stupid things.

    1. haralesh says:

      The report is not made public. I suppose Department would send demand notices to each taxpayer based on that report, it would not make the list public.

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