Interest on delayed payment of GST

1.      Introduction: 

On 01st February,2020, the Principal Additional Director General (Systems) had generated a report containing the GSTIN wise list of the registered person, who have not discharged the due interest liability while filing their GSTR-3B liability belatedly. Upon perusal of the said report, it has been observed that interest amounting to Rs. 45,996 Crores remains unpaid to the Government on account of delayed payment of tax. Further, the said report has been shared on the SFTP Portal for initiating the process for recovery of such unpaid interest as per the provisions of section 79 read section 75(12) of the CGST Act. 

Consequently, many taxpayers have received notice for interest payable on delayed payment of GST. In this article, an attempt is being made to explain the journey of the provisions relating to ‘interest on delayed payment of GST’. This article also covers answer to the question, whether the interest on delayed payment of tax to be paid on 'Gross Tax Liability' i.e. including Input Tax Credit or on 'Net Cash Liability'? To know more, read on…. 

2.      Provision of Interest on delayed payment in GST (Prior to Amendment): 

Section 50 of the CGST Act, 2017 provides for interest on delayed payment of tax. Section 50(1) of the CGST Act has been reproduced below: 

“Section 50 (1) of the CGST Act: 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.” 

On perusal of the language, it can be seen that the provisions of section 50(1) are very clear that interest liability is required to be paid on the tax liability that is paid belatedly and it is automatic in nature. 

Section 50(2) of the CGST Act states that 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. 

Section 50(3) applies when a taxable person 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. Accordingly, taxable person shall be liable to pay interest at such rate not exceeding twenty-four per cent. on such undue or excess claim or on such undue or excess reduction.  

3.      Agenda Item No. 7 (xx) of 31st GST Council Meeting: Proposal for amendment of Section 50 of the CGST Act, 2017 to allow payment of interest on net cash liability: 

On review of the agenda of the 31st GST Council Meeting held on 22nd December,2018, it is observed that the GST Council has acknowledged the fact that, the GSTN portal does not permit filing of the return with tax amount due. Further, they have acknowledged that, GST is a tax on value addition and interest should be charged only on the value addition i.e. the amount of tax which is required to be paid through electronic cash ledger. Relevant extract of the agenda is reproduced below:  

“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.” 

4.      GST Council’s recommendation “to allow payment of interest on net cash liability” in their 31st Meeting held on 22nd December, 2018: 

GST Council in its 31st meeting, recommended that Interest on delayed payment shall be charged on ‘Net Cash Liability’. Accordingly, the proposed change in law would be made through an amendment in the CGST Act. 

From the above, it can be noted that GST Council had also recommended that interest should be paid only on the ‘net cash liability’ and the proposed change in law, should also be made by way of amendment. Before, the law was amended, a decision was pronounced by Hon’ble Telangana High Court on interest on delayed payment, which is elucidated below: 

5.      Judgement in Case of Megha Engineering & Infrastructure Ltd. V/s. Commissioner of Central Tax and others (2019) Telangana High Court: 

Brief facts of the case: Assessee was engaged in the manufacture of MS Pipes and in the execution of infrastructure projects. For the period from October, 2017 to May, 2018, assessee had filed the returns in form GSTR-3B belatedly. The total tax liability of the assessee for the period from July, 2017 to May, 2018 was Rs. 1,014 crores and the input tax credit (ITC) available to the credit of the assessee during this period was Rs. 968 crores. Thus, there was a shortfall to extent of Rs. 46 crores, which the assessee was obliged to pay by way of cash. The assessee wiped out the entire tax liability in May, 2018. After the assessee discharged the entire tax liability, the GST Authorities issued a letter dated 4-10-2018 demanding interest, in terms of section 50, on the total tax liability of Rs. 1014 crores. 

Petitioner’s contention: Interest demanded by Department should not be on the total tax liability. 

Issue: Whether the liability to pay interest under Section 50 of the CGST Act, 2017 is confined only to the net tax liability or whether interest is payable on the total tax liability including a portion of which is liable to be set-off against ITC?

High Court’s Observations:  

(i) Section 50 of the CGST Act:

“It is seen from Sub-section (1) of Section 50 that the liability to pay interest arises automatically, when a person who is liable to pay tax, fails to pay the tax to the Government within the period prescribed. The liability to pay interest is in respect of the period for which the tax remains unpaid. In fact, the liability to pay interest under Section 50 (1) arises even without any assessment, as the person is required to pay such interest "on his own".

While Sub-Section (1) of Section 50 speaks about the liability to pay interest under one contingency, viz., the failure to pay tax within the period prescribed, Sub-Section (3) of Section 50 speaks about the liability to pay interest under a different contingency. Whenever an undue or excess claim of ITC is made or whenever an undue or excess reduction in out-put tax liability is made, a liability to pay interest arises under Sub-section (3). The words "on his own" used in Sub-section (1), are not used in Sub-section (3) of Section 50.

Therefore, it is clear that the liability to pay interest under Section 50 (1) is self-imposed and also automatic, without any determination by any one. Hence, the stand taken by the department that the liability is compensatory in nature, appears to be correct.”   

Moreover, Hon’ble Telangana High Court analysed the broad scheme of Section 39 which deals with the filing of returns, Section 41 which deals with the claim of ITC and its provisional acceptance, Section 16 which deals with the conditions and eligibility for taking ITC and Section 49 which deals with payment of tax. Further the court observed that, the scheme of the Act makes a distinction between (i) the entitlement to take credit which comes first; (ii) the actual entry of credit in the electronic credit ledger, which comes next; and (iii) the actual payment from out of the credit, which comes last. 

The court also observed that in the entire scheme of the Act three things are of importance. They are; (i) the entitlement of a person to take credit of eligible input tax, as assessed in his return; (ii) the credit of such eligible in-put tax in his electronic credit ledger on a provisional basis under Section 41 (1) and on a regular basis under Section 49 (2); and (iii) the utilization of credit so available in the electronic credit ledger for making payment of tax, interest and penalty etc., under Section 49 (3).

(ii) Claim of ITC under GST:

“Until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. As a consequence, no payment can be made from out of such a credit entry. It is true that the tax paid on the inputs charged on any supply of goods and/services, is always available. But, it is available in the air or cloud. Just as information is available in the server and it gets displayed on the screens of our computers only after connectivity is established, the tax already paid on the inputs, is available in the cloud. Such tax becomes an in-put tax credit only when a claim is made in the returns filed as self-assessed. It is only after a claim is made in the return that the same gets credited in the electronic credit ledger. It is only after a credit is entered in the electronic credit ledger that payment could be made, even though the payment is only by way of paper entries.

If we take a common example of banking transactions, this can be illustrated much better. An amount available in the account of a person, though available with the bank itself, is not taken to be the money available for the benefit of the bank. Money available with the bank is different from money available for the bank till the bank is allowed to appropriate it to itself. Similarly, the tax already paid on the in-puts of supplies of goods or services, available somewhere in the air, should be tapped and brought in the form of a credit entry into the electronic credit ledger and payment has to be made from out of the same. If no payment is made, the mere availability of the same, there in the cloud, will not tantamount to actual payment.”

Petitioner’s Contention on “In-principle approval by the GST Council to make amendments in the GST Act”:

Petitioner has also relied upon an approval made in principle by the GST Council for the amendment of the Act. The Press release of the Ministry of Finance in this regard reads as follows:

"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 issue.

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.” 

Held: Unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment. Hence, the assessee is liable to pay interest on total tax liability of Rs. 1014 crores. 

6.      Insertion of a proviso in section 50(1) of the CGST Act – Amendment vide the Finance (No.2) Act, 2019 – Whether Clarificatory? 

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.” 

This newly inserted proviso states that interest shall be levied @ 18% on ‘Net Cash Liability’, i.e. on the amount of GST which has been paid through Electronic Cash ledger. However, the said amendment is yet to be notified. 

After reading the above proviso, whether, can we say that the amendment in law was made to correct an anomaly in the provision, which existed prior to such insertion and can this be read as clarificatory? Before answering, we should have a look at the decision pronounced by Hon’ble Madras High Court. 

7.      Judgement in Case of Refex Industries Limited V/s. Assistant Commissioner of CGST & Central Excise and others (2020) Madras High Court: 

Brief facts of the case: The petitioner is registered as assessee under the provisions of the CGST Act, 2017. The petitioner has admittedly filed returns of income belatedly for the period 2017-18. Notice computing the delay in filing of returns and consequently the interest to be remitted on the tax on gross total liability accompanying the returns were issued by the respondent. The petitioners objected stating that they had sufficient Input Tax Credit (ITC) available with the Department and thus interest could be demanded, if at all, only on the cash component of the tax remitted belatedly.

Issue: Whether interest would at all be payable on the component of ITC that was, admittedly, available with the Department throughout and that has been adjusted towards the tax demands?

Petitioner’s contention: Section 50 provides for levy of interest on belated payments. The same would apply only to payments of tax by cash, and would not stand triggered in the case of available ITC, since such ITC represents credit due to an assessee by the Department held as such.

High Court’s Observations:  

(i) Section 50 of the CGST Act: 

“The Section provides for interest on belated payment of tax as held such levy is 'automatic', and is intended to compensate the revenue for the remittance of tax belatedly and beyond the time frames permitted under law. Though in the context of the Income-tax Act, 1961, the question of whether remittance of interest under sections 234 A, 234B and 234C of the Income-tax Act, 1961 for belated filing of return, belated remittances of advance tax and deferment of advance tax are mandatory came to be considered by the Supreme Court in the case of Commissioner of Income Tax, Mumbai v Anjum M. H. Ghaswala & Ors (252 ITR 1), and held to be compensatory and hence mandatory. The principle of the said judgment applies on all fours to the present case.” 

(ii) Payment by way of adjustment of ITC 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. Hence, the proper application of Section 50 is one where interest is levied on a 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, neither belated nor delayed.” 

(iii) Proviso inserted to Section 50 (1) – Clarificatory and should operate retrospectively:

“The proviso, as per which interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 01-8-2019, 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.”

(iv) Decision of Hon’ble Telangana High Court – Megha Engineering and Infrastructures Ltd:

“Petitioners has also drawn attention to the decision of the Telangana High Court in the case of Megha Engineering and Infrastructures Ltd. v. The Commissioner of Central Tax and others (2019-TIOL-893), where the Division Bench interprets Section 50 as canvassed by the Revenue. The amendment brought to Section 50(1), was only at the stage of press release by the Ministry of Finance at the time when the Division Bench passed its order and the Division Bench thus states that 'unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment'. Today, however, the amendment stands incorporated into the Statute and comes to the aid of the assessee.”

Held: levy of interest on belated payments would apply only to payments of tax by cash, belatedly, and would not stand triggered in case of available ITC, since such ITC represents credit due to an assessee by Department held as such.

8.      Intention of the law-makers and its effect on economy: 

If the purpose of the Government was to charge interest on the gross tax liability, then, there was no need for such an amendment in the law. At the same time, if interest is chargeable on the gross amount, then, it would have adversely affected the trade and consumers. Accordingly, by inserting a proviso to section 50(1) vide Finance (No.2) Act, 2019, the legislature has cured an existing defect in the law, this will benefit the trade and consumers. 

9.      Cases relating to “Interest on delayed payment” wherein relief is provided to petitioners through stay of demand by the Court:  

9.1 Sunrise Autoworld Private Limited V/s. Union of India (2020) Delhi High Court: The Hon’ble Delhi High Court, had in a petition challenging the demand notice issued by Department over payment of interest on gross tax liability has granted stay on demand notice. The Department has sought to levy interest on the input tax credit which stood credited in the electronic credit ledger and hence was already lying with the Government. Further, the Petitioner has already paid and deposited admitted interest payable on delayed cash payment of tax liability. However, the Respondent, Assistant Commissioner has issued a demand notice seeking to recover interest on gross tax liability arising due to belated filing of statement in Form GSTR-3B. 

9.2 Landmark Lifestyle V/s. Union of India (2019) Delhi High Court: Hon’ble Delhi High Court, has granted stay on recovery of interest amount on gross GST Liability, where there was delay in filing of GST return. The petitioner has challenged the calculation of interest payable for delayed payment of GST as determined by revenue to be erroneous as same had been calculated even on amount constituting input tax credit which is in fact to be adjusted against tax liability. 

10.  GST Council’s recommendation “Interest for delay in payment of GST to be charged on the net cash liability w.e.f. 01.07.2017” in their 39th Meeting held on 14th March, 2020: 

GST Council in its 39th meeting, recommended that interest for delay in payment of GST to be charged on the net cash liability w.e.f. 01.07.2017. Accordingly, the law to be amended retrospectively.

11.  Before Parting: 

Recommendation of the GST Council for amending the law retrospectively w.e.f. 01st July, 2017 is a welcome step for the tax-payers and this will definitely have a positive impact on the Economy. Hence, the tax-payers, who have received notices will discharge their interest liability on net cash liability. Moreover, possibly litigations will also end due to this action.