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Interest on delayed GST payment whether payable on gross or net tax liability?

Traditionally, under the erstwhile Indirect Tax Laws viz. Service Tax, VAT, etc. interest is payable on the amount of tax due after adjustment of the Input Tax Credit (ITC), which remains unpaid by the due date.

However, under the GST law, the said practice got destroyed under the concepts of ‘Electronic Cash Ledger’, ‘Electronic Credit Ledger’, etc. and offsetting the liabilities with amounts in cash and credit ledgers through return in Form GSTR-3B.

Section 50 of the CGST Act prescribes for payment of interest when there is a delay in payment of tax. It does not expressly provide that interest is payable even on the tax liability that was offset with accumulated ITC.

In February 2019, the Principal Commissioner (Hyderabad) had issued a Standing Order No. 01/2019 to clarify that interest is payable on gross liability, including on the portion of the liability that was adjusted using the accumulated ITC.

Amidst a lot of controversy over the issue, recently, the Madras High Court in the case of Refex Industries Ltd.  has held that levy of interest on delayed payment of GST is purely compensatory. Accordingly, interest is liable to be charged on the net cash payment and not on the gross liability.

In this case, the taxpayer had filed belated GST returns for the period August 2017 to March 2018. The revenue authorities issued a demand notice to the Banks for recovering arrears of interest from the bank account of the taxpayer.

The taxpayer filed a writ petition before the Madras High Court against the coercive recovery of interest. The taxpayer argued that they had sufficient ITC available, and the interest could be demanded, if at all, only on the cash component paid after the due date.

After considering the various provisions/rule of GST law, the High Court observed as under:

  • The levy of interest on late payment of GST is automatic as it is intended to compensate the revenue for the remittance of tax paid beyond the time frame provided under the GST law.
  • 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 specifically intends 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 taxpayer.
  • 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 taxpayer.
  • The proviso inserted under Section 50(1) of the CGST Act (although not yet notified) provides for payment of interest only on the cash portion, as it merely seeks to correct an anomaly in the provision as it existed before such insertion.
  • The Court deviated from the earlier adverse decision of the Telangana High Court in the case of Megha Engineering and Infrastructures Ltd. (2019-TIOL-893), on the basis that the proviso inserted under Section 50(1) was only at the stage of a press release when the order was passed. It may also be noted that the Telangana High Court has also admitted the review petition against the said adverse ruling.

This decision is a welcome move since the Court has dealt with the two important aspects  – nature of levy and proviso inserted in the CGST Act on the levy of interest.

The Court has laid down the correct law by upholding the levy of interest only on the net portion of the tax paid by cash. Further, concerning the proviso inserted in the CGST Act, it is important to note that it has not been made effective since few states have not yet incorporated the same in their respective SGST Act.

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