MAY 04, 2020

By L S Karthikeyan, Advocate

A peep into the history

1. Rule 14 of the Cenvat Credit Rules, 2004 provided that where credit has been taken or utilized wrongly, the same shall be recovered with interest in terms of Section 11AA of the Central Excise Act, 1944 / Section 75 of the Finance Act, 1994. Similarly Rule 15 provided that where credit has been taken or utilized wrongly, the manufacturer / service provider is liable for penalty in terms of Section 11AC or Section 76 / 78, as the case may be.

2. Hon. Supreme Court in the case of Union of India Vs Ind-Swift Laboratories Limited - 2011-TIOL-21-SC-CX held that 'credit taken OR utilized' cannot be read down as 'credit taken AND utilized' and hence interest is payable once the credit has been 'taken', irrespective of whether the credit was utilized or not.

3. High Court of Karnataka in the case of Commissioner of Central Excise & Service Tax, Bangalore - 2011-TIOL-799-KAR-HC-CX after discussing Ind Swift decision, observed that if by taking the credit, the assessee had not paid the duty, the Government would have sustained loss to that extent and to compensate such loss, interest under Section 11AB would arise. IF DUTY IS NOT LIABLE, THE LIABILITY TO PAY INTEREST WOULD NOT ARISE. Hence, it was held that where a wrong credit has been taken, but reversed before utilisation, the assessee is not liable to pay any interest.

4. Later, Rule 14 was amended to read as 'credit taken AND utilized' in 2012 and again in 2015 that if the credit has not been utilized, the same can be recovered, and if the credit has been utilized, the same can be recovered along with interest.

5. Rule 15 continued to read as 'any person, takes OR utilizes CENVAT Credit'.

GST Scenario

6. Section 73 / 74 of the CGST Act (and corresponding SGST Acts) provide that 'where any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised' notice shall be issued as to why the noticee should not pay 'the amount specified in the notice along with interest payable thereon under Section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder'.

7. It may be noted that under Section 16, a Registered person shall 'take' credit and in terms of Section 49, the credit can be 'utilised' for payment of integrated tax / central tax / state or union territory tax. Thus, the expression 'availed' used in Section 73 / 74 can be construed to mean 'taking' of credit and the term 'utilized' refers to use of the credit for payment of taxes. The confusion which prevailed over meaning of the term 'availed', whether it refers to 'taking' or 'utilizing', is seemingly put to rest.

8. Now, coming to the subject matter whether interest is liable to be paid when the credit has been taken, but not utilised, it would be gainful to reproduce Section 50 of the CGST Act.

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 per cent., as may be notified by the Government on the recommendations of the Council :

(2) xxxx xxxx xxxx

(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.

9. The scope of sub-section (3) is restricted to cases falling under sub-section (10) of Section 42 & 43. Section 42 & 43 relate to matching, reversal and reduction of ITC and output tax liability respectively. For the purpose of this article, Section 43 mentioned in Section 50(3) is not relevant. Section 42(3) requires communication of ITC claimed in excess of the outward supply declared, to both the supplier and recipient. Section 42 (4) requires communication of duplicate claims of ITC to the recipient. If the discrepancy as communicated is not rectified, the excess or duplicate claim of credit shall be added to the output tax liability of the recipient in terms of sub-sections (5) & (6) and the recipient is liable to pay interest at the rate specified under Section 50(1) on such amount added to the output tax liability as per Section 50(8). Sub-section (7) states that if the supplier declares the output tax liability on his own, in the month in which the omission or incorrect particulars is noticed (not later than September of next financial year or date of filing annual return), the recipient can reduce the output tax liability added in terms of sub-section (5). Section 42(10) provides that if the amount of output tax liability has been reduced in contravention of sub-section (7), the amount reduced can be again added to the output tax liability and the recipient shall be liable to pay interest at the rate specified in sub-section (3) of Section 50. Thus, interest under Section 50(3) is restricted to limited cases where the output tax liability 'added' has been reduced in contravention of Section 42(7).

10. In respect of excess credit and duplicate claims of credit, interest is payable in terms of Section 42(8) at the rate specified under Section 50(1) from the date of availing credit till the addition of output tax liability under sub-sections (5) or (6). However, as the process of furnishing details of inward supplies under Section 38 has not been implemented, the procedures for 'matching', communicating to supplier /recipient of 'excess credit' or duplicate claims and consequently, 'adding' to the output tax liability if the discrepancies are not rectified, also do not arise. In short, the process of adding a 'wrong credit' to the output tax liability, through Section 42 is not in vogue. It may be noted that Form GSTR-3B, which is now considered as THE RETURN, by way of retrospective amendment of Rule 61(5), under Table 4(B) requires declaration of 'Input Tax Credit Reversed' as per Rules 42 or 43 and 'Others'. Therefore, the 'wrong credit' on account of excess availment or duplicate claims, do not get the colour of an 'output tax liability' and as of now, no interest is liable to be paid, if the credit has not been utilized.

11. In respect of other types of 'wrong credits' - such as ineligible inputs / input services or credits without receipt of goods or services etc. - there is no provision which specifies payment of interest and the liability of interest can only be determined through Section 50(1). Section 50(1) provides for payment of interest where there is failure to pay TAX or any part thereof within the prescribed period and where the tax or any part thereof remains unpaid.

12. When a person has taken (availed) Input Tax Credit wrongly and used the same for payment of output tax, such payment becomes a nullity and to that extent interest is payable under Section 50(1). On the other hand, where the credit has not been utilised, the wrong credit does not assume the character of a 'tax' and HENCE THE GST LAW does not require payment of interest on credit wrongly taken, but not utilised.

13. The following observations of the Apex Court Pratibha Processors Vs Union of India - 2002-TIOL-273-SC-CUS is still relevant and would apply to interest on unutilised Input Tax Credit under GST:

13. In fiscal Statutes, the import of the words - "tax", "interest", "penalty", etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforce by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. 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.

14. Therefore, if a registered person takes ITC and has not used the same for payment of tax, there is no loss to the Government. As such, Government cannot and as per the provisions discussed above, does not expect any compensation in the form of interest for the loss not incurred. After all, isn't it the case of Revenue that even if credit balance is available in Electronic Cash / Credit ledgers, the tax has not been paid?

15. As regards penalty, Section 73 provides that the notice may require the person who has wrongly availed or utilised Input Tax Credit to show cause as to why he should not pay the amount specified in the notice along with interest and a penalty leviable under the provisions of the Act or rules made thereunder. Whereas, Section 74 provides that the noticee shall be required to show cause as why the amount specified in the notice along with interest and 'penalty equivalent to tax specified in the notice' shall not be paid by him.

15. Section 122(2) prescribes penalty equivalent to ten thousand rupees or 'the tax due' whichever is higher in cases of 'wrong credit' by reason of fraud or wilful misstatement or suppression of facts. In other cases, the penalty shall be ten thousand rupees or ten percent of the 'tax due'. Thus, in both cases, the penalty is linked to the 'tax due'. Accordingly, in respect of notices issued under Section 73, where the credit has been utilised the penalty shall be ten per cent to the extent of utilisation and in respect of proceedings under Section 74 the penalty shall be equal to the credit utilised. Where the credit has not been utilised, the penalty in either case can be only ten thousand rupees.

16. However, penalty where the credit has been taken without actual receipt of goods or services, covered by clause (vii) in Section 122(1) is complicated. Reading of 122(1), only with reference to clause (vii) would be as under:

'Where a taxable person who takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;…"

…he shall be liable to pay a penalty of ten thousand rupees or Input Tax Credit availed, whichever is higher.'

17. Clause (vii) talks about a person who 'takes or utilises' Input Tax Credit, whereas the penalty prescribed is for 'credit availed of'. Since, Section 73 / 74 uses the word 'availed' as equivalent of 'taking' as seen earlier, it could be stated that the penalty for cases falling under clause (vii) could be equal to the credit 'taken' itself, even if the same has not been utilised.

18. Now the challenge is, whether Input Tax Credit taken or utilised, without receipt of inputs or input services covered by clause (vii), is a credit availed or utilised 'wrongly' and if so, whether the penalty is imposable on such cases under section(s) 122(1) or under 122(2) or both?

19. Section 75(13) provides that - where any penalty is imposed under Section 73 or Section 74, no penalty for the same act or omission on the same person shall be imposed under any other provision of the Act. Since Section 74 itself states that the penalty shall be equivalent to the 'tax specified' in the notice, if a notice is issued for recovery of 'Input Tax Credit' without receipt of goods or services or both, if penalty equivalent to the tax due is imposed under Section 74, can penalty be imposed again under Section 122(1)(vii)? For notices issued under Section 73, since the penalty is leviable under the provisions of the Act, can it be said that penalty equal to the credit availed under Section 122(1) and also ten percent of the tax due under Section 122(2) be imposed?

20. On the other hand, if cases falling under clause (vii) are considered as a separate class and not falling under 122(2), can the demand for recovering the same be issued under Section 73 or 74?

21. Meanwhile, the following provision has been inserted under Section 122 by Finance Act, 2020:

'(1A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.'

22. The above provision has been inserted apparently in the backdrop of the mushrooming cases of bill trading/circular trading. The usage of expression 'any person' as against 'taxable person' used in 122(1) and 'registered person' used in 122(2), indicates that the new provision seeks to impose penalty on persons who gain financially by organizing the transactions, without themselves 'taking or utilising' the credit (referred to as the 'kingpin' unofficially).

23. Annexure to Part B of Finance Minister's speech, states that 'Section 122 of the CGST Act is being amended by inserting a new sub-section to make the beneficiary of the transactions of passing on or availing fraudulent Input Tax Credit liable for penalty similar to the penalty leviable on the person who commits such specified offences'.

24. However, going by the plain reading of the provision as inserted, if the 'kingpin' himself happens to be a 'registered / taxable person', would he be penalized again under 122(1A), in addition to penalty under 122(1) and under Section 73 read with 122(2) / 74?

Conclusion:

25. We are just looking at 'GST, the beginning'. The D.O. letter of JS (TRU), CBIC, post Budget 2020 states that 'the CGST Act, IGST Act and UTGST Act are being amended to facilitate trade, and improving compliance as per the directions of the GST Council'. If the CBIC feels and believes that the GST Act and its amendments are facilitating trade, we will have to wait for a long-long time for the 'Conclusion'.

[The views expressed are strictly personal.]