DECODING GST INTEREST: GROSS LIABILITY VS. NET TAX IMPACT

Introduction

Tax Consultant In Gurgaon and Chartered Accountant firms in India are essential pillars of the financial landscape, especially in the context of complex tax regulations like GST. Interest is meant to be levied on the delayed payment of the amount. Payment of taxes like GST can be made in two ways, one by utilizing the credits and one by paying the balance liability in cash. Credit has been paid to the government, but utilization of is by way of return can be delayed. However one must appreciate the fact that interest shall be calculated on net tax liability i.e. on the liability which ought to have been paid in cash. In earlier laws like VAT, and Service Tax, this methodology of paying interest had been opted.

But let us understand the methodology of levying interest under GST:

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.”

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 definitely might not be the intention of the lawmakers.

This issue has been the limelight out of various issues arising under the GST era. Below are the highlights of this issue as how this has been addressed and Pop up many times –

Key Highlights of the Issue

• 31stGST Council Meeting dated 22.12.2018 – 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.
• Interim budget for FY 19-20 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.
• Standing Order No: 01/2019 dated 04.02.2019– Order issued by the Office of The Principal Commissioner of Central Tax-Hyderabad GST Commissionerate directing recovery of interest as recoverable arrears.
• Writ Petition filed by M/s. Megha Engineering & Infrastructures Ltd. – A Writ Petition filed by 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.
• Section100 of The Finance (No. 2) Act, 2019 the proposed to amend section 50 of CGST Act 2017 by inserting following proviso to section 50(1) of CGST Act, 2017.

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.”.

• Honourable Madras High Court in case of M/s Refex Industries Limited and M/s. Sherisha Technologies Pvt. Ltd., dated 06.01.2020– Honourable Madras High court 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 this is not the end, please hold on to read the article till the end. Though the Madras high court had taken favourable view as described above, there still is some ambiguity in this issue.

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.

Though the Finance Bill has amended the provision of section 50, but this has not come into effect yet. Government is yet to notify the date from which this amendment will be effective.

Government to Calculate Interest on Gross Tax Liability

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.

CBIC Clarified the Position through Official Twitter Handle

In continuation to this the CBIC through its official Twitter handle tweeted series of tweets on 15.02.2020, the same are reproduced hereunder:

• 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 as follows
• 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.
• 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.
• 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.

Conclusion

It has now been clarified by CBIC that such amendment will be brought in with prospective effect.

Till the time this amendment is effective, the interest will be calculated on gross GST liability.

Though this will not be the intention of law makers, this will impact negatively to the taxpayers having pile of Input Tax Credit and inadvertently filed GSTR3B belatedly.

Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy.