MARCH 06, 2020

By Shuchi Agrawal and Shreya Aggarwal, ALA Legal, Advocates & Solicitors

IN the matter of computation of interest u/s 50 of the CGST Act, 2017, the industry argument is that the interest liability shall arise only in respect of that portion of output tax which is being paid by cash. And that, it is very harsh and unreasonable on the part of the department to ask for interest on that portion of output tax that is being paid from the Input tax credit.

The said dispute is explained with the help of the following example -

Suppose the output tax liability of an assessee for the month of September is Rs. 10,000. The balance of ITC in the e-credit ledger of the assessee as on 30.09.2019 is Rs. 8,000. Thus, after utilizing ITC, the balance of Rs. 2,000 will have to be paid in cash through the e-cash ledger. The due date of filing of return for the month of September is the 20th of October. However, the assessee has filed the return belatedly on 10th November. The issue in the given case is whether the interest under Section 50 on the delayed payment of tax will be paid on Rs. 10,000 (total output tax) or Rs. 2,000 (output tax paid using cash).

Section 50 of the Act is reproduced below:

50. Interest on delayed payment of tax.

"(1) Every person 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 per cent, as may be notified by the Government on the recommendations of the Council.

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the succeeding the day on which such tax was due to be paid.

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council."

Upon a closer reading of section 50, it is clear that interest shall be paid suo moto by the assessee in case of failure to pay tax or part thereof within the prescribed period at a rate prescribed by the Central Government. Notification No. 13/2017-CT dated 28th June 2017 has been issued by the Government of India prescribing 18% rate of interest in respect of Section 50(1) of the Act.

An assessee pays tax either by way of utilizing his input credit available in the e-credit ledger or by way of cash through the use of e-cash ledger. Ideally, in our view, the interest should be charged on the amount of tax, net of the input credit existing in the e-credit ledger of the assessee.

However, the department has been issuing notices to the taxpayers to calculate the interest on the gross liability of tax (i.e. including the amount of output tax paid using ITC). Assesses have challenged the said notices before various High Courts. The High Court of Telangana in the case of Megha Engineering & Infrastructures Ltd. V Commr of C.T., Hyderabad - 2019-TIOL-893-HC-TELANGANA-GST held that the interest charged on the gross liability of tax cannot be found fault with as there is no provision in the law prohibiting the same.

The Court further added - " 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…the claim made by the respondents for interest on the ITC portion of the tax cannot be found fault with. Hence, the writ petition is dismissed ".

However, the said order of the High Court has been stayed by its Division Bench in the matter of Megha Engineering with W.P.N. 44517 of 2018. The Court has also admitted the review petition and opened the case for rehearing. - 2020-TIOL-412-HC-AP-GST

To bring clarity on the subject and to bring to rest the underlying dispute the GST Council in its 31st Meeting held on 22nd December, 2018 vide the Agenda Item No. 7(x)(x) recommended that " …the interest would be charged on the delayed payment of the amount payable through the electronic cash ledger ".

Thus, the GST Council recommended that the interest under Section 50 should be charged on net tax and not on that portion of the output tax which is being paid using ITC.

In accordance with the recommendation of the GST Council, the Central Government proposed an amendment in Section 50 of the CGST Act vide Finance Act (No. 2) of 2019 (hereinafter referred to "Finance Act, 2019").

As per Section 100 of the Finance (No. 2) Act, 2019 the following proviso is inserted in Section 50(1) of the CGST Act:

" 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 . "

As per the said proviso, the interest in cases where the tax return has been furnished after the due date (but furnished before commencement of proceedings under Section 73 or Section 74) shall be levied on that portion of the output tax which is being paid by debiting the electronic cash ledger. This means that the interest liability shall not arise on that portion of the output tax liability which is paid using the ITC available in the electronic credit ledger.

However, it is important to note that the said amendment has not been made effective till date.

Recently the High Court of Madras in case of Refex Industries Ltd. - 2020-TIOL-382-HC-MAD-GST has delivered its judgment on the issue at hand. The legal issue that was agitated before the High Court of Madras was whether interest would at all be payable on the component of ITC that was, admittedly, available with the Department throughout and that has been adjusted towards the tax demands for the period August, 2017 to March, 2018.

The High Court held that interest under Section 50 would be levied on a belated cash payment but not on ITC available all the while with the Department to the credit of the assessee.

Following are the highlights from the said judgment -

1. On the perusal of Section 50, it is observed that the section provides for interest on 'belated' or 'delayed ' payment of tax and such levy is 'automatic', and is intended to compensate the revenue for the remittance of tax belatedly and beyond the time frames permitted under law.

2. The use of the word 'delayed' connotes a situation of deprival, where the State has been deprived of the funds representing tax component till the time the Return is filed accompanied by the remittance of tax.

3.   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 (by way of ITC) to the credit of the assessee. Thus, the ITC available is neither ' belated ' nor ' delayed '.

4.   The Judge relied on the recent amendment (brought in by Finance Act 2019) in Section 50(1) by virtue of which the interest would be levied only on that part of the tax which is paid by cash.

5.   The Court even held that the said amendment was made to correct an anomaly in the provision as it existed prior to such insertion and thus, be read as a clarification and operate retrospectively.

6. The High Court distinguished the Judgement of Madras High Court in the case of Megha Engineering and Infrastructures Ltd., for the reason that at the time of the said judgment the amendment brought in Section 50(1) was only at the stage of press release by the Ministry of Finance.

7.   Accordingly, the High Court quashed the Notices issued by the Department asking for the interest on the gross amount of tax paid by the petitioners.

Additionally, an order of stay was given by the High Court of Gujarat, in a similar case of M/s Amar Cars Private Limited[R/SCA No. 4025 of 2020] ordering the respondents not take any coercive steps for recovering the amount of interest.

Given the effect of this issue on the industry at large, and to avoid excessive litigation leading to blockage of funds of business, it is hoped that the Government notifies the proviso to Section 50(1) at the earliest and with retrospective applicability.

(The views expressed are strictly personal.)