APRIL 04, 2020

By K Srinivasan

AS everyone knows, there needs to be proper machinery provisions in place for levy of any tax. Such tax if not paid, you need to impose interests and penalties for the default of such taxes and interests, to curb tax defaults.

This is the central objective of any tax system and so does one hope with the GST. The GST Act is also aptly modelled on the above principles of levy and collection and recovery of taxes, interests and penalties, if remain unpaid.

In order to operationalize the same, the Government has put in to action various provisions for demand of such unpaid tax with interest and penalties.

In the above scheme of levy, collection and recovery functions of the GST Act, we wish to confine our discussion to the aspect of levy of interest and its recovery in case of any default in payment of tax and the aspect of refund of the same when found to have been paid by the tax payer, mistake, in excess of his actual tax dues.

Section 50 of CGST Act, provides that -

(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 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 day 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.

Incidentally, it may not be of context to mention here that rates of interest applicable for recovery under Section 50 are indicated to be 18% highest for belated tax payments and 24% highest for ITC related defaults.

It was also notified to be the same under Notification No. 13/2017-CTR dated 1/7/2017 besides interest rates for other sections 54 (6%) and 56 (9%) as well, which are not totally unconnected to our discussion, what if interests on refunds were to be given by the Department for their delay, if one may ask.

Further proviso to Section 50(1) was inserted vide  Finance (No. 2) Act, 2019  from the date to be notified which read as;

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.

Considerable time has lapsed since insertion of proviso to Section 50(1), but the same is not being notified yet.

Prior to this development, the department has started issuing notice to taxpayer for payment of interest calculated on gross tax liability.

Also CBIC vide its   letter   Dated 10th February 2020 to its officers, had given directions in the meantime to make recovery of interest on the gross tax amount, from its tax payers who have filed their GST returns belatedly, which came like a thunder bolt on them.

As per their letter, the said recoverable interest from such taxpayers, would stand reportedly at Rs.46,000 crores approximately.

The letter affirmed the following:

1. The interest is payable on the gross tax liability as shown in GSTR-3B and not on net cash liability.

2. 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.

Also, CBIC, in its series of tweets, has justified the same on the ground that, pending the notification, GST Act provisions permit the calculation of interest in case of delayed payment on gross tax liability.

It relied on the judgment of  Telangana High Court decision in the case of Megha Engineering & Infrastructure Limited - 2019-TIOL-893-HC-TELANGANA-GST, in this context.

It was held in the said judgment that interest u/s. 50(1) was chargeable on the gross tax liability. The said judgment was pronounced before proviso to Section 50(1) was inserted by Finance (No. 2) Act, 2019.

However, after that the Madras HC in its judgment dated 06.01.2020 in  Refex Industries Limited   case - 2020-TIOL-382-HC-MAD-GST has held that interest u/s. 50(1) is chargeable on net tax liability i.e. on tax payment in cash after the netting of the ITC available and not on Gross Tax liability.

It is imperative for the CBIC to justify the charging of interest on gross tax liability, where even in erstwhile statutes, the interest was charged only on net tax liability and not on gross tax amount shown in the Returns.

However, in the 39th GSTC meeting held very recently on the 14th March, it has been resolved to give retrospective effect to collection of interest on belated payments of tax, not on the gross tax liability but on the net tax liability paid through the electronic cash ledger, retrospectively from 1/7/2017, i.e. right from the start of GST.

In the wake of this development, the next question that naturally arises is what about the substantial recoveries made by the Department, of interests on the gross tax liability, calculated from 1/7/2017 to date?

Will the excess interests recovered by the Department in line with the retrospective amendment proposed in Section 50(1) of the Act with effect from 1/7/217, be returned to the tax payers, suo motu without any refund claim?

If not, whether a refund claim needs to be filed to claim the excess recovery of interest made by the Department, then what would be the time limit for filing such claims under the Act?

Refunds under the Act, is to be regulated by Section 54 and the recoveries of the same are to be made under Section 75(12) of the Act.

In the matter of Sec 50 refund, whether to be claimed with or without time limit, in the wake of proposed retrospective amendment, with effect from 1/7/2017, is going to be a major question to be answered by the tax payers and the Government, alike? Here, the Author is of the view that such interest paid/recovered by the Department on the principle of gross tax liability without considering the ITC earned by them, if not returned without insisting on a refund claim, would amount to collection of tax /interest and retention of the same without the Authority of law under Article 265 of the Constitution.

It will also rank as Payment of interest made under mistake of Law, as and when the retrospective amendment comes into effect from 1/7/2017.

Also, there appears to be no angle of unjust enrichment, as there is no scope for passing the burden of tax to anybody, as you could see visibly in these cases above.

And accordingly, attempts if any made by the Department to reckon time limit in terms of the definition of relevant date given under Explanation 2(h) to Section 54, would turn out to be wrong, for the said explanation is not even explicit with regard to interest.

To proceed on the above basis to apply limitation of time for refund claims made by the tax payers towards the recoveries of interest made or paid voluntarily as per Section 50 ibid, may also lack the support of judicial precedent in the matter.

But at the same time, the possibility of a special dispensation for refund of such recoveries of interest made, and as also some suitable amendments in the legalese employed in Section 54 of the GST Act, being under active consideration of the Government, can't be entirely ruled out.

One finds even sec 51 and 54 among many other Sections of the nascent legislation, requiring on grounds more than one, a tighter legal swathe, to make the Act more compact.

In the interest of National litigation policy to avert unwanted litigation and t o avoid blocking of tax money in prolonged litigation, government should notify the aforesaid amendment retrospectively at the earliest and also the other amendments to the Act and connected Rules.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)