Unjust enrichment of revenue by collection of interest from both receiver and supplier under GST law

[Suriyanarayanan Iyer]

Introduction

1. The substituted section 41 in Goods and Services Act, 2017 through Finance Act, 2022 is worthy of a discussion as far as interest levy is concerned..
2. The substituted section 41 is reproduced below.

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Availment of input tax credit

41. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger.

(2) The credit of input tax availed by a registered person under sub-section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed:

Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit.

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3. The substituted section 41 provides for payment of interest by receiver of supplies who has availed and utilised the input tax credit with applicable interest wherever his suppliers have not paid the tax to government. This provision is in line with section 16(2) ( c) which provides for receiver of supplies availing the credit only if tax has been paid by the supplier of goods and services. Section 50(3) provides for payment on interest by receiver of supplies only if he has utilised the credit availed.
4. The proviso to sub-Section (2) of section 41 does not mention about what happens to the interest to be paid on delayed payment of tax by supplier. It only says receiver of supplies who reversed the input tax credit (with interest if he had utilised the same) can re-avail the credit on supplier paying the tax.
5. Supplier who pays tax after delay to government has to pay interest for the period of delay in terms of section 50(1)  of the Goods and Services Tax Act, 2017.
6. Two consequences can arise in situations where supplier who does not pay tax in time pays the same with interest for the period of delay.

1. When the receiver of supplies has utilised the credit and pays with interest, revenue receives interest from both supplier and receiver at least for part of the period until receiver of supplies pays  the credit utilised with interest by him.  Government receives interest twice on same amount from both supplier and receiver at least for part of the period in such cases.
2. If the receiver does not utilise his credit due to supplier not paying the tax or utilises and reverses the credit with interest before supplier pays to Government, receiver of supplies incurs interest cost on  funds independent of interest paid to Government by him as he must have paid the tax amount to supplier along with price while receiving the supplies.

7. In an entirely different context, where revenue sought to levy interest under section 61(2) of Customs Act, 1961 on customs duty on warehoused goods cleared under exemption , Supreme Court held as below in paragraph 13 of its judgement reported as PRATIBHA PROCESSORS VERSUS UNION OF INDIA [1996 (10) TMI 88 - SUPREME COURT]

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13.In fiscal Statutes, the import of the words - "tax", "interest", "penalty", etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty - which is penal in character.

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8. As interest is compensatory in character, can revenue retain interest collected from receiver and supplier on same amount twice for the period upto which interest has been paid by receiver of supplies with payment of utilised credit due to default in payment of tax by the supplier?It will be the obligation of Government to refund the tax paid by receiver of supplies who has utilised and paid back the credit with interest as collecting interest from both parties on same amount for part of the period will be against law on interest as interpreted by Supreme Court.
9. Will the framers of GST law look into this issue? We can only ponder.