MAY 30, 2016

By V Sivasubramanian

SECTION 11AA of the Central Excise Act, 1944 provides for levy of interest on delayed payment of excise duty. The interest is to be calculated from the date on which such duty becomes due upto the date of actual payment. The rate of interest is to be notified by the Government subject to a lower and upper caps of 10% and 36% respectively. Similar provisions for levy of interest ondelayed payment of customs duty and service tax exist in section 28AA of the Customs Act, 1962 and section 75 of the Finance Act, 1994 respectively.

Each of these Acts also provide for payment of interest by the Government on delayed refunds as well as on delayed remittance of amounts collected by any person in any manner as representing duty/tax, in excess of the duty/tax assessed or determined and paid. Though the issues raised in this Article are relevant even for such provisions, the asymmetric nature of rates and period notified in these cases warrant an even more detailed analysis and hence I restrict my discussions here only to the levy of interest on delayed payments.

In the case of Pratibha Processors v. Union of India [2002-TIOL-273-SC-CUS], the Hon'ble Supreme Court "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 compensatory nature of the interest is now well settledand this principle has also been fully accepted by the Central Excise Department. In the Tariff Conference held on 28-29/10/2015 the Departmental officials discussed the character of tax, interest and penalty as explained by Hon'ble Supreme Court in the Pratibha Processors case referred above and clearly recognized [ vide para 37B, Annexure-B of CBEC instruction F.No. 96/85/2015-CX.I , dated 7/12/2015] that "it is in this background that courts have directed that interest should be charged only for actual no. of days of delay as revenue is entitled for compensation for actual number of days of delay only” [Emphasis added].

'Compensation' literally means something, typically money, awarded to someone in recognition of loss, suffering, or injury. The question which remains to be answered in the present case is:What is the loss, suffering or injury, if any, suffered by the revenue which is sought to be compensated by the levy of interest?Here I draw attention to the contract law principle that in estimating the loss or damage, the means which existed of remedying the inconvenience caused must also be taken into account. Yes, the Government does not receive the amount into the Treasury for the period of delay, and to such extent incurs additional fiscal deficit which it finances through additional market borrowings on which it pays interest. This interest is the actual loss to the Government which may require compensation. At best there may also be an argument to add a spread to cover the cost incurred by the Government for recovering such payments.

What is the cost of borrowing for the Government from the market? In the last auction held on 20/5/2016, Government of India sold securities of residual maturity between 5-29 years at implicit yields ranging between 7.46%-7.85%. The weighted average maturity of Government of India's market borrowings in 2015-16 was 16.07 years at a weighted average yield of 7.89%. The weighted average yields of the Government borrowings peaked in the last 30-year period at 13.75% during 1995-96 and has remained significantly below 10% continuously from 2001-02 onwards [Source: RBI and Finance Ministry websites].

As regards cost of collection, the then Finance Minister Shri P. Chidambaram is on record in Parliamentary debates and in his address to the Consultative Committee on Finance that the cost of collection in India is less than 1% both in the case of direct and indirect taxes which is one of the lowest in the world.My computations (based on BE 2016-17 figures) indicates that the trend continues and the current cost of collection isonly about 0.68% for indirect taxes and 0.63% for direct taxes.

Thus, even adding together the cost of borrowing and the cost of collection, the actual loss suffered by the revenue due to delayed payment of the tax/duty is only about 8.5% per annum, which iswell below 10%.Considering the fact that interest levy is only compensatory, it would appear that there is actually no legal basis to fix the interest rate beyond the lower cap of 10% specified in the section.

As against this legal position which has also been accepted by the department, actual 'rationalized' interest rate notified by the Government with effect from 1/4/2016 is 15%. There are two exceptions to this rate both of which apply only to service tax: the rate for service tax collected but not deposited is 24% and for smaller assessees with value of taxable services below Rs. 60 lakhs in the previous year is 12%. Prior to Budget 2016-17, the rate of interest notified for service tax ranged from 18% to as high as 30% in case of delays beyond one year! In the case of customs and excise duties, it was 18%!

Thesenotified interest rates are surely penal and not compensatory! And definitely not in consonance with the agreed and settledlegal position.

Perhaps there is a strong case for the policy elites toexplain the gap even without waiting for the rates to be challenged by someone!

(The author is Director, Lakshmikumaran & Sridharan& the views expressed are strictly personal.)