APRIL 25, 2019

By Abhijit Saha

Recently Telangana High Court in the case of M/s Megha Engineering and Infrastructures Ltd. - 2019-TIOL-893-HC-Telangana-GST has decided on a very interesting point. It held that as per Section 50 of the CGST Act 2017 if the GST is not paid on the due date, then interest is to be paid on the gross amount of tax payable for the period of delay. Incidentally, in this case, 95% of the gross amount of tax was paid by utilizing the Input Tax Credit (ITC) and the balance amount of 5% (net tax liability) was paid by cash. The question before the court was that interest is to be paid on the net tax liability and not on the gross tax liability. The Court held that interest is to be paid on the gross tax liability.

It is interesting to observe that the High Court has inter alia held that the stand taken by the department that the liability is compensatory in nature appears to be correct. Here, the pertinent point is that interest is in the nature of compensation for loss of revenue due to delayed payment of tax. In this respect it is to be mentioned that the Government Revenue is the amount received by the Government in its coffers as tax. For example, if A sells goods to B and pays GST of Rs.100/- by cash and B takes credit of the same and resells the goods and pays Rs.200/- as GST (Cash Rs.100/- after utilizing credit of Rs.100/-); then the Government revenue is only Rs.200/- which is paid by cash. Although A has paid Rs.100/- as tax and B has paid Rs 200/- as tax, the Government revenue is only Rs.200/- and not Rs.300/-. Hence, if B does not pay the tax, then the government lost only Rs.100/- as tax. Hence the delayed payment of tax of Rs.200/- by B does not mean that the Government has lost Rs.200/-. The Government has lost only revenue of Rs.100/- and hence the interest should be paid on Rs.100/- only. There is no question of compensating the government for the loss which it has not suffered.

The above view is vindicated by the GST Council in its 31st meeting when it gave in principle approval to the following amendments in GST Act:

Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the tax payer, 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.

The Hon'ble High Court has held that the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment.

In view of the above let us have a glimpse of Section 50 about which the issue decided by the Court revolves -

Section 50. Interest on delayed payment of tax – (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 percent., as may be notified by the Government on the recommendation of the Council.

(2) The 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.

(3) …

It is evident from above that the word tax has not been defined in the above section 50. So it can be gross amount of tax or the net amount of tax. It is a matter of interpretation since the statute does not clarify. So, there is a room for interpretation. It cannot be held that section 50 is very clear as to the nature of tax on which interest is to be paid. Moreover, GST Council has clarified that the word TAX means net amount of tax after deducting the amount of credit adjusted from the gross amount of tax. In other words, the amount of tax is to be paid by cash.

It is a settled position of law that if there is an ambiguity in the present law and the subsequent law clarifies the correct legal position, then such subsequent clarification should be read into the earlier law for the purpose of interpretation of statute.

Hon'ble Supreme Court in the case of State of Bihar vs. S. K. Roy AIR 1966 SC 1995 held:

"It is a well-recognised principle that subsequent legislation may be looked at in order to see what is the proper interpretation to be put upon the earlier Act where the earlier Act is obscure or ambiguous or readily capable of more than one interpretation."

In addition to above, it may be stated that it is also well settled that if two view is possible then the view favourable to the taxpayer should be followed. Hon'ble Supreme Court in the case of M/s Achal Industries Vs State of Karnataka - 2019-TIOL-133-SC-CT extracted paragraphs 24 & 34 from the decision in Dilip Kumar and Company and Others - 2018-TIOL-302-SC-CUS-CB where it is mentioned -

"(ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section; and (iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of the legislature's failure to express itself clearly."

In view of the above, as per author's understanding the Hon'ble High Court's order needs to be revisited.

(The views expressed are strictly personal)