Interest u/s 50 of CGST Act 2017

[CA Akash Phophalia]

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.

The legal provision regarding chargeability of interest is as under:-

Interest on delayed payment of tax.

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 recommendations of the Council:

[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. ] [This proviso not yet made effective]

(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.

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent, as may be notified by the Government on the recommendations of the Council.

The scheme of CGST Act with respect to the filing of returns is contained under provisions of Section 39 of the CGST Act, 2017. The said provision links the due date for payment of tax with the due date for filing of the return. However, the said provisions do not mandate filing of return only after payment of the entire tax amount as disclosed in the return. Provisions contained u/s 2(117) of CGST Act, 2017 related “valid return” cannot be undermined. Accordingly a return is said to be a valid return if entire tax has been paid. Therefore a return filed on the due date reflecting the tax paid by way of utilizing the input tax credit and showing the balance tax as payable, although not a valid return, would still remain a return filed u/s 39.

However the GSTN portal does not permit filing of the return showing the tax payable by cash as outstanding. The same is thus contrary to the legal provisions cited above. The GST Council in its 31^st Meeting held on 02.12.2018 wherein the GST Council has acknowledged the fact that the GSTN portal does not permit filing of return with tax amount due. Further the fact that GST is a tax on value addition was also acknowledged and thus had agreed to insert the proviso to Section 50(1) of the CGST Act 2017 as reproduced above. Relevant extract of the agenda is as under:

“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, 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.”

Further, it also acknowledges the contradiction of scheme of filing of GSTR-3B with the legal provisions. The relevant extract of the agenda note is as under :- 

A perusal of above provisions indicate 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 but 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 ₹ 100/- for a particular tax period. He has an amount of ₹ 10/- as balance in his electronic credit ledger and he is eligible to avail ₹ 80/- as input tax credit (which would be credited to his electronic credit ledger only on furnishing of return). He is, therefore, required to pay only ₹ 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 ₹ 80/- will not be credited in his electronic credit ledger) until he is in a position to discharge his complete self-assessed liability of ₹ 100/-. He would be liable to pay interest on the entire self-assessed tax liability of ₹ 100/- as he is not able to pay ₹ 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 ₹ 10/- but presently he is liable for interest on entire tax liability of ₹ 100/-.

Courts on charging Interest!!!

Hon’ble Supreme Court in the case of Eicher Motors Ltd v union of India 1999 (106) ELT 3 (SC) = 1999 (1) TMI 34 - SUPREME COURT has held that the credit is as good as tax paid. Said principle was also reiterated in the case of Collector of Excise v Dai Ichi Karkaria Ltd 1999 (112) ELT 353 (SC) = 1999 (8) TMI 920 - SUPREME COURT. The relevant extract of Dai Idchi Karkaria (Supra) is reproduced here as under :-

…..We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.

18. It is, therefore, that in the case of Eicher Motors Ltd v union of India 1999 (106) ELT 3 (SC) = 1999 (1) TMI 34 - SUPREME COURT] this Court said that a credit under the Modvat scheme was “as good as tax paid.

Hon’ble High Court of Madras in the matter of Refrex Industries Limited and Shreisha Technologies Private Limited (WP No 23360 and 23361 of 2019) = 2020 (2) TMI 794 - MADRAS HIGH COURT in para 12 which is reproduced as under :-

12. The specific question for resolution before me is as to whether in a case such as the present, where credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’. The use of the word ‘delayed’ 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. The availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. In my considered view, the proper application of section 50 is one where interest is levied on belated cash payment but not on ITC available all the while with the Department to the credit of the assessee. The latter being available with the Department is, in my view, neither belated of delayed.

Lightening inferences!!!

In view of the legal provisions cited above, verdicts of court of laws and the intent of GST laws since inception it can be fairly inferred that

1. Interest liability under section 50(1) of the CGST Act 2017 is always to be computed on ‘Net Basis’ i.e. after giving due benefit of the ‘Input tax Credit’ as availed by the taxpayers.
2. Non-availability of option to file return with amount due is technical default of GSTN and taxpayer cannot be penalized for the said fault.
3. The amendment introduced as proviso to Section 50 (1) to the CGST Act 2017 is a clarificatory amendment and should be applied retrospectively.