Interest on delayed filing of GST return: On gross or net tax liability?
FEBRUARY 17, 2020
By Bipin Kumar Verma
TWO news items on GST, almost parallely, are in public domain.
The first one is the CBIC letter dated 10th February issuing directions to the officers to make recovery of interest amount from the assessees who have filed their GST returns belatedly. As per this letter, approximately Rs. 46,000 crores is recoverable as interest from the defaulters. The letter goes on record to affirm following two legal understandings:
- The interest is payable on the gross tax liability as shown in GSTR-3B and not on net cash liability.
- The amount is recoverable directly under Section 79 as the situation of delayed filing of return (GSTR-3B) without paying due interest is covered by the provisions of Section 75(12) of the CGST Act.
The second news item relates to the recent ruling of the Madras High Court in the case of a writ petition filed by Refex Industries Limited. - 2020-TIOL-382-HC-MAD-GST The specific question before the High Court was as to whether in a case where credit is due to an assessee, payment by way of adjustment can still be termed as delayed. The High Court observed that 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 court observed that the availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, the Court held that 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. The relevant part of the High Court judgement is as below:
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"In my considered view, 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, in my view, neither belated nor delayed."
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Evidently, the legal position emanating from the above two news items is contradictory. It can be seen that the CBIC letter merely refers to unamended Section 50 as it stands today. It has not referred or discussed the amendment to Section 50 which is yet to be made effective.
The Madras High Court too has referred and interpreted the unamended provision of Section 50 holding that 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 High Court has also taken note of the amendment and held that the amendment by way of insertion of the proviso seeks to correct an anomaly and thus be read as clarificatory and operative retrospectively.
Thus, the stand taken in the CBIC letter taking support from the unamended Section 50 may not be sustainable in the light of the judicial interpretation of unamended Section 50 made by the Madras High Court in the above writ petition.
However, it is pertinent to note that High Court of Telangana, in the case of Megha Engineering Infrastructures Ltd - 2019-TIOL-893-HC-TELANGANA-GST, has on the same issue while interpreting the unamended Section 50, upheld the Department's contention that interest would be payable on the gross amount of tax declared in the belatedly filed GSTR-3B.
The Madras High Court has in this case of Refex Industries noted the above Telangana High Court decision and distinguished the same taking support from the proviso to Section 50 observing that 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 Telangana High Court Division Bench passed its order. Madras High Court has noted that the Telangana High Court while pronouncing its order has itself observed that they can not interpret Section 50 in the light of the proposed amendment as the recommendations of the GST Council were still on paper. The Madras High Court went on to say that the amendment now stands incorporated into the Statute and comes to the aid of the assessee.
It is noteworthy that High Court has, in its judgement noted that the said proviso of amendment has been inserted with effect from 1.8.2019 but the said proviso though inserted by the Finance (No.2) Act, 2019, has not yet become effective.
It is understood that the bill for amendment to pay interest on net cash liability has been passed by all the States except the States of Telangana and West Bengal . Once this process is completed, the amendment is likely to become effective.
So, whenever the amendment to Section 50 becomes effective the same as per the Madras High Court would have retrospective operation and thus interest only on net cash liability would be payable and not on gross liability.
It will be interesting to see how the CBIC will react to this Madras High Court decision (supra). Only time will tell as to which side the issue will get settled but one thing is certain that entire recovery proceedings initiated by the department would face tough judicial challenge in future and the road to recovery of ambitiously quantified interest amount of Rs 46,000 crores on gross tax liability will not be smooth.
[The author is an Executive Partner, Lakshmikumaran & Sridharan, Hyderabad and the views expressed in this article are strictly personal.]
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