It is well known Principal that if a taxpayer delays in payment of any statutory tax then interest liability is charged on the amount of tax outstanding. Under GST the same principal may be applicable. However, for each tax period the taxpayer has to calculate GST Tax Liability and the same is derived by: –
- Output GST Tax (i.e tax collected from customer on sales/services) minus
- Eligible Input Tax Credit (i.e. GST paid on purchases/expenses charged by your vendor in your expense or purchase bill)
The net liability arrived, if positive, is to be paid in cash (through banking channel) by the taxpayer. Now Ideally, considering the principal of natural justice if there is delay in payment of GST Tax then interest is to be charged on net liability (i.e. output tax minus input tax), however certain Judgments/instruction issued by various authorities has created the confusion because as per judgments and instruction issued by such authorities Interest on GST is to be paid on Output GST Tax i.e. on Gross liability and not on the net liability. This kind of decision and instruction from GST Department has created hue and cry in the market scenario where there was delay in tax payment by the tax payers. Let us see the sequence of events occurred under the Law creating such situation.
01.07.2017 – GST Act was enacted and Section 50(1) of CGST Act, 2017 provided for interest Payment on Gross Liability of GST
The relevant extract of Section 50(1) of CGST Act, 2017 is as under: –
Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, 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.
22nd December 2018 – Anomaly in Law – Recommendation of GST Council
The literal interpretation of Section 50(1) of CGST Act, 2017 states that interest on GST is to be paid on Gross Liability of GST and not on net GST liability. Since this is not justifiable and this may not be the intention of Law
the GST council in its 31st Meeting held at new delhi on 22nd December, 2018 recommended to amend Section 50 of CGST Act, 2017 to charge interest on the net liability of GST instead of Gross liability of GST.
01st February 2019 – The recommendation was not incorporated in the Finance Actl
The GST Council made recommendation however the recommendation remained on Paper as the interim budget was presented on 01.02.2019 and the Finance (No. 1), Act 2019 did not incorporate the recommendation of council and Section 50 was not amended.
04th February 2019 – Standing Order No. 01/2019 dated 04.02.2019 issued by the Office of The Principal Commissioner of Central Tax – Hyderabad
The standing order was issued by Principal Commission of Central Tax – Hyderabad directing the GST officers wherein one of the issues was to recover interest on Gross Liability of GST instead of Cash Component.
18th April 2019 –Decision of High Court of Telangana – to pay Interest on Gross Liability of GST instead of Net Liability of GST
In case of M/s Megha Engineering & Infrastructure Limited Vs. Commissioner of Central Tax (Hyderabad), it has been held that interest is to be paid on Gross Liability of GST. The relevant extraction of Judgement is as under: –
Extract of Case Law defining Credit Scheme
22. Thus, 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, make it clear that the moment all the four conditions stipulated in Sub-section (2) of Section 16 are complied with, a person becomes entitle to take credit of ITC. Once a person takes credit of ITC, the amount gets credited on a provisional basis to his electronic credit ledger under Section 41 (1).
23. In other words, Section 16 (2) makes a registered person entitled to take credit of input tax. Section 41 (1) provides for a credit entry to be made on a provisional basis in the electronic credit ledger. But, the time at which this credit is made under Section 41 (1) is important. Section 41 reads as follows:
“41. Claim of input tax credit and provisional acceptance thereof (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self- assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger. (2) The credit referred to in sub-section (1) shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section.”
24. It is seen from Section 41 (1) that a person gets credited with the input tax, in his electronic credit ledger, only upon his filing of the return on self-assessment basis. Till a return is filed, no credit becomes available to his electronic credit ledger.
25. It is only after a credit becomes available in the electronic credit ledger that the utilization of the same for payment of self-assessed out-put tax, arises under Section 41 (2).
26. Thus, 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 8 VRS,J & PKR,J W.P.No.44517/2018 the electronic credit ledger, which comes next; and (iii) the actual payment from out of the credit, which comes last.
27. There can be no doubt about the fact that even in respect of the input tax credit available in the electronic credit ledger, there is a necessity to make payment. Section 41(2) talks about utilization of the credit available in the electronic credit ledger, for payment of the self- assessed output tax. Section 49(2) also confirms the stage at which a credit entry is made and Section 49(4) enables a registered person to make payment from out of the credit so available in the electronic credit ledger. Therefore, for finding an answer to the dispute on hand, one must find out:
(i) when a credit entry is entered in the electronic credit ledger of the registered person; and (ii) when payment out of the same is made in lieu of cash.
Once it is statutorily prescribed that payment can be made either by way of cash or from out of the credit available in the electronic credit ledger, the date of payment in respect of both assumes significance for determining the liability to pay interest.
Extract of Case Law specifying the recommendation of GST Council
41. Mr. Gandra Mohan Rao, learned counsel 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:
- 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.
- 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.”
42. But, unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment.
Therefore, considering the above judgement, the Telangana High court has given its decision in favor of department to charge interest of GST on Gross Liability instead of net liability.
01st August 2019– The Finance (no. 2) Bill, 2019 proposed to amended Section 50 of CGST Act, 2017.
The Finance (No. 2) Act, 2019 No. 23 of 2019 has inserted a Proviso to Section 50 (1) which rectify the anomaly in Law and incorporate the Principal of charging interest on Cash component of GST instead of Gross Liability of GST. It is through Section 100 of The Finance (No. 2) Act, 2019 No. 23 of 2019 which insert proviso to Section 50(1) of CGST Act. The relevant extract of Section 100 is as under: –
100. 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.”
The Finance Bill was presented and passed in the Parliament House and received President assent and the Act dated 01st August 2019 came into existence. Now, GST Department issues notification defining section of the aforementioned Finance Act and their respective appointing date. In nutshell from the appointing day the section in the Finance Act shall come into force.
31st August 2019- GST Department has issued a notification appointing day for certain section of Finance Act (No. 2) Act, 2019 No. 23 of 2019 in which Section 100 of the said Finance Act was not adopted.
As mentioned above notification number 39/2019- Central Tax was issued by GST Department in which only Section 103 of Finance Act (No. 2) Act, 2019 No. 23 of 2019 was appointed and the appointed day was 01st September 2019. Therefore, Section 100 of Finance Act was not appointed through this notification.
01st January 2020- GST Department has issued a notification appointing day for majority of section of Finance Act (No. 2) Act, 2019 No. 23 of 2019 in which again Section 100 of the said Finance Act was not adopted.
GST Department has issued a notification no. 01/2020 dated 01st January, 2020 through which majority of provisions of Finance Act (No. 2) Act, 2019 No. 23 of 2019 was appointed from 01st January 2020 except Section 92, 97, 100 and Section 103 to 110. The relevant extract of the notification is as under: –
G.S.R. …..(E).—In exercise of the powers conferred by sub-section (2) of section 1 of the Finance (No. 2) Act, 2019 (23of 2019), the Central Government hereby appoints the 1stday of January, 2020, as the date on which the provisions of sections 92 to 112, except section92, section 97, section 100and sections 103 to 110of the Finance (No. 2) Act, 2019 (23of 2019),shall come into force.
Hence even through the aforesaid notification Section 100 of Finance Act (No. 2) Act, 2019 No. 23 of 2019 didn’t came into force and the question of charging interest on Gross liability or net liability of GST was not addressed and rectified.
06th January 2020- Decision of Madras High Court laying down the Principal of charging Interest on Net liability of GST instead of Gross Liability of GST.
In case of Refex Industries Limited v. The Assistant Commissioner of CGST & Central Excise the decision of Madras High Court gave some relief to the assesse as the court laid down the Principal of Charging interest of GST on net liability instead of Gross Liability.
The Writ Petition was filed by M/s.Refex Industries Limited and M/s.Sherisha Technologies Pvt. Ltd before the High Court of Madras and the question before the court was whether interest under GST is to be charged on gross liability of GST or net liability of GST, the Hon’ble Madras High Court has held that: –
14. I am supported in my view by a recently inserted proviso to Section50(1) reading as below:
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 proceedingsunder section 73 or section 74 in respect of the said period, shall be leviedon that portion of the tax that is paid by debiting the electronic cash ledger.
15. The above proviso, as per which interest shall be levied only on thatpart of the tax which is paid in cash, has been inserted with effect from01.08.2019, but clearly seeks to correct an anomaly in the provision as it existedprior to such insertion. It should thus, in my view, be read as clarificatory andoperative retrospectively.
16. Learned counsel for the petitioners also draw my attention to the decision of the Telengana 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.
Therefore, considering the above decision of Madras High Court interest under GST is to be paid on net liability instead of Gross Liability.
10th February – Letter from Finance Department Revenue Central Board of Indirect Tax & Customs to Principal Chief Commissioner
The said letter says that interest amount is to be recovered on the basis of Gross Liability on GST and not on the Net liability of GST. The letter specifies that amount of Interest to recovered will be Rs 45,996 Crores.
The Anomaly
- The notification issued by the GST Department does not specify the appointment day of Section 100 of the Finance (No. 2) Act, 2019 (23of 2019). Therefore, from which day this provisions of Section 100 shall come into force is not yet clarified.
- The decision of Madras High Court says that the amendment in Section 50(1) of the CGST Act is made Prospectively. Therefore, two questions will arise: –
- Section 100 of the said Finance Act is a prospective amendment but the same is effective from which date is not clarified in the Judgement
- Since the amendments are prospective in nature, what about the interest liability for the period before the amendment whether the same will be on Gross Liability or Net liability of GST
- The notification issued by the GST Department does not specify the appointment day of Section 100 of the Finance (No. 2) Act, 2019 (23of 2019). Therefore, from which day this provisions of Section 100 shall come into force is not yet clarified.
- The decision of Madras High Court says that the amendment in Section 50(1) of the CGST Act is made Prospectively. Therefore, two questions will arise: –
– Section 100 of the said Finance Act is a prospective amendment but the same is effective from which date is not clarified in the Judgement
– Since the amendments are prospective in nature, what about the interest liability for the period before the amendment whether the same will be on Gross Liability or Net liability of GST