DELAYED INTEREST LIABILITY ONLY ON NET GST PAYMENT

[Dr. Sanjiv Agarwal]

Under GST, payment of tax has to be accompanied by a return. GSTR 3B is a simple return form introduced by the CBIC which is to be filed by 20th of the following month. Wherein only total values for each field have to be provided, this value must be for the month for which return is being filed. However, GSTR-3B can be submitted only after making payment of GST due. If the return is filed late, GSTN automatically reflects the late fee to be paid whereas interest has to be computed manually.

Under section 43A of CGST Act, ITC can be availed as prescribed in Rules 85 to 87 under which electronic credit ledger is debited and electronic liability register is credited on the basis of returns filed. Any delay in payment would attract interest under section 50 of the CGST Act, 2017.

Under section 49, payment of tax is required to be made on the basis of self assessment and the ITC is credited to assessee’s electronic credit ledger as per sections 41 and 43A on the basis of return maintained by GSTIN. This amount can be used for payment of tax.

Interest liability under Section 50 of the CGST Act, 2017

According to section 50:

1. Every person who is liable to pay tax 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.

It is immaterial whether the self-assessed tax is paid through ITC or cash. Once the payment is made beyond the prescribed date, interest liability is attracted on the entire tax amount. It is pertinent to mention that the amount of the interest payable in terms of the section 50 of the CGST Act, 2017 would automatically become recoverable arrears, which needs to be recovered in terms of section 79 of CGST Act, 2017.

Interpretation of Section 50 in M/S. MEGHA ENGINEERING AND INFRASTRUCTURES LTD. VERSUS THE COMMISSIONER OF CENTRAL TAX, HYDERABAD, THE ASSISTANT COMMISSIONER OF CENTRAL TAX, KUKATPALLY AND THE SUPERINTENDENT, O/O THE SUPERINTENDENT OF CENTRAL TAX, HYDERABAD[ 2019 (4) TMI 1319 - TELANGANA AND ANDHRA PRADESH HIGH COURT ]

The interpretation of section 50 was made by Telangana High Court, Hyderabad Bench in the case of M/s Megha Engineering & Infrastructure Ltd. vide Order dated 18.04.2019 in WP No. 44517 of 2018. The judgment analyzed the provisions of section 50 and came to the conclusion that interest under section 50 of the CGST Act, 2017 shall be payable on the gross amount of tax payable i.e., on the ITC portion also.

However, the High Court of Telengana took note of the Press Release of the GST Council proceeding of 31^st meeting held on 22.12.2018 as extracted below:

“The GST Council in its 31st meeting held today at New Delhi gave in principle approval to the following amendments in the GST Acts:

1. Creation of a Centralised Appellate Authority for Advance Ruling (AAAR) to deal with cases of conflicting decisions by two or more State Appellate Advance Ruling Authorities on the same

2. Amendment of 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.

The above recommendations of the Council will be made effective only after the necessary amendments in the GST Acts are carried out.”

It is evident from the above and even the Court has recognized this fact that this has already been recommended by GST Council but is still on paper as it is not yet part of the law.

Thus, the proposal to charge interest on net of ITC value was recommended by the 31^st GST Council in its meeting held on 22.12.2018.

Further, in 39^th GST Council meeting held on 14.03.2020, it was recommended that Interest for delay in payment of GST is to be charged on the net cash tax liability w.e.f. 01.07.2017 (Law to be amended retrospectively).

Scenario post Megha Engineering Judgment

As a consequence of Telangana High Court Order, the Department has came into action and has started issuing notices for recovery of interest on gross liability to business entity across the country stating that interest  is payable on the ITC component also in terms of section 50 read with Rule 85, 86 and 87.

In continuation to this, the CBIC through its official Twitter handle recently tweeted series of tweets on 15.02.2020, as extracted 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 ₹ 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 Telangana 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.”

In Allied Motors Ltd. v. CIT [CA No. 3175/91 and 2380/91] = 1997 (3) TMI 9 - SUPREME COURT Supreme court held that “a proviso which is inserted to remedy unintended consequences and to made the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give it a reasonable interpretation , requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole.”

Thus, proviso ought to have retrospective application w.e.f. 1.7.2017 only 

Its amply clear from the aforementioned pronouncements that the intention of the Government and GST Council is not to levy interest on gross liability but only on the actual tax liability after adjusting the due credit on account of eligible input tax audit.

Post the Telangana High Court Judgment, there have been various judicial pronouncements by High Court and Supreme Court wherein it has been held that interest on delayed payment, if any is payable on amount net of ITC only.

Various judicial pronouncements holding interest liability on net amount

1. M/S. REFEX INDUSTRIES LIMITED, M/S. SHERISHA TECHNOLOGIES PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF CGST & CENTRAL EXCISE, THE SUPERINTENDENT OF CENTRAL TAX, BANK MANAGAR, BANK MANAGAR, ICICI BANK - 2020 (2) TMI 794 - MADRAS HIGH COURT

Hon’ble Madras High Court vide its Order dated 06.01.2020 in WP(C) No. 23360 has held that:

• The use of the word 'delayed' in section 50 of CGST Act, 2017 connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax.
• Availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Section 50 which is specifically intended to apply to a state of deprival cannot therefore, apply in a situation where the State is possessed of sufficient funds to the credit of the assessee.
• The proper application of Section 50 is one where interest is levied on a belated cash payment but not on ITC available with the Department to the credit of the assessee. The later being available with the Department is, thus, neither belated nor delayed.
• Proviso to Section 50(1), according to 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 be read as clarificatory and operative retrospectively.

(2)  M/S. LANDMARK LIFESTYLE VERSUS UNION OF INDIA & ORS. - 2019 (5) TMI 1608 - DELHI HIGH COURT

Hon’ble Delhi High Court vide its Order dated 27.05.2019 in WP(C) No. 6055/2019 in case of M/s Landmark Lifestyle Cars Pvt. Ltd., Delhi had stayed the charging of interest under section 50 by stating that no coercive action to be taken against the petitioner for non-payment of the interest amount which indicates that the issue is in dispute.

(3)  M/S SUNRISE AUTOWORLD PVT. LTD. VERSUS UNION OF INDIA & ORS. [2020 (3) TMI 1321 - DELHI HIGH COURT]

On 02.03.2020, the Hon’ble High Court of Delhi at New Delhi, has in a petition challenging the demand notice issued by Department over payment of interest on gross tax liabilty, granted stay in the matter of Sunrise Autoworld Pvt. Ltd. v. Union of India. The Petitioner has already paid and deposited admitted interest payable on delayed cash payment of tax liability. However, the Respondent has issued demand notice seeking to recover interest on gross tax liability arising due to belated filing of statement in Form GSTR-3B.

(4) M/S. MAANSAROVAR MOTORS PRIVATE LIMITED VERSUS THE ASSISTANT COMMISSIONER, THE SUPERINTENDENT OF GST & CENTRAL EXCISE, THE BRANCH MANAGER - 2020 (11) TMI 107 - MADRAS HIGH COURT; 

In this case , bunch of petitions were decided wherein the petitioner's have challenged the levy interest on remittances of tax by adjustment of available ITC on ground that (i) the credit was available even prior to the arising of the output tax liability and hence the question of delay does not arise (ii) no opportunity was granted prior to raising of the impugned demand and consequential proceedings (iii) interest is a measure of compensation and since ITC is already available in the electronic ledger, there is no question of the same being due to the revenue (iv) the proviso to section 50 which states that interest shall be levied only on part paid in cash has been inserted to set right an anomaly and is therefore retrospective in operation.

The petitioners submitted that the interest liability relating to belated payment of tax both by cash and reversal of ITC has been coercively recovered. In light of decision as aforesaid, a direction is issued to the appropriate authority to compute the interest liability for belated remittances of cash and refund the balance of the amount collected from the petitioner within a period of four weeks from date of uploading of the order. It was held that proviso to section 50 of CGST Act is operative retrospectively with effect from 01.07.2017, and no interest is liable to be levied on tax remitted by reversal of available ITC. Accordingly, the writ petitions were allowed.

Amendment of Section 50 of CGST Act, 2017 by Finance Act, 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:

 “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.”.

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.

Amendment by Finance Bill, 2021

The Union Budget for financial year 2021-22 has been laid in Parliament on 1^st February, 2021.

It proposes to amend section 50(1) by way of clause 103. Accordingly,

• Section 50 of CGST Act, 2017 provides for interest on delayed payment of tax.
• Finance Bill, 2021 has proposed to substitute proviso to section 50(1) so as to charge interest on net cash liability.
• Thus, interest shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.
• This will be effective retrospectively w.e.f. 01.07.2017 implying that Department will have to forego such demands raised till now and interest will only be payable on tax liability payable in cash.

Epilogue

It has been proposed to substitute the proviso to Section 50(1) of the CGST Act, so as to charge interest on delayed payment of GST on net tax liability only and that too retrospectively with effect from the July 1, 2017.