MAY 11, 2020

By Shivam Mehta, Partner & G K Das, Senior Associate, Lakshmikumaran & Sridharan

INTEREST on delayed payment of taxes under GST regime is one amongst various issues which has been troubling the taxpayers. For the purpose of levying interest on delayed payment of tax, the amount on which the interest component is required to be computed has been subject matter of much dispute in the recent past. In order to bring in clarity on the subject issue, the GST council time and again has recommended various changes in the GST law. In its 39th meeting, the council has brought in a much needed correction in respect of the above issue which will ensure the ongoing disputes are put to rest. GST council has recommended that interest for delay in payment of GST is to be charged on the net cash tax liability w.e.f. 01.07.2017.

With this retrospective amendment, it will be interesting to see the fate of those taxpayers who have already discharged the interest at a higher value for the past periods. The article focuses on the provisions of refund of interest and the conditions that are required to be fulfilled by the taxpayer for getting refund of such interest.

Before delving into the subject issue, let us first briefly understand how the provisions in relation to interest on delayed payment of tax under GST law have evolved during this period after GST implementation.

Section 50(1) of the Central Goods & Service Tax Act ("CGST Act") prescribes that in case where the tax payer fails to pay the tax within the prescribed period, he will be liable to pay interest @ 18% p.a. for the delay period.

Under the GST law, the payment of tax is made while filing GSTR 3B return. Therefore, the due date for payment of tax shall be due date of filing of GSTR 3B. Hence, delay in filing of GSTR 3B will result in delay in payment of tax. Accordingly, any payment of tax post such due date would attract interest under above provision at 18%.

Now, the question which is required to be analysed is to determine the amount on which such interest is to be computed. The tax payment for a particular period is made after deducting the eligible input tax credit available for the said period. For the sake of brevity, lets denote the total tax liability of a particular period as "Gross Liability" and the amount paid after reducing the input tax credit as "Net liability". The existing provision under the CGST Act was not specific as to whether the interest amount should be computed on the Gross Liability or on the Net Liability. This triggered the confusion.

Under the GST Law, the payment of tax liability by any taxpayer can be made by debiting the electronic credit and cash ledger. However, the system works in such a manner that it does not allow the taxpayer to adjust part payment of liability through electronic credit ledger in case where there is an insufficient balance in electronic cash ledger.

The Courts in the past have consistently held that interest is compensatory in character and is imposed on the assessee who has withheld payment of any tax as and when it is due and payable. In order to compensate the loss sustained by the Revenue, the interest is imposed, i.e. interest is payable for the period during which the Revenue is deprived of the duty, which it was legitimately entitled to and as the assessee had the benefit of the duty amount by not paying the duty payable on the due date.

In this case, the taxpayer was getting debarred to utilize its available input tax credit balance against tax liability due to system constraint. The GST council was able to identify the anomaly in the above provision. Therefore, to bring clarity on the subject, GST Council  in its  31 st  Meeting  held on  22nd  December, 2018 recommended amending Section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, 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, i.e. on Net Liability and not on the Gross Liability.

Before the above recommendation could have been brought in as an amendment in the CGST Act, the above issue was taken up for consideration before the  Hon'ble High Court of Telangana in the case of Megha Engineering & Infrastructures Ltd. ¹ where the Hon'ble High Court held that mere availability of credit without being brought in form of credit entry into electronic credit ledger would not tantamount to payment, therefore, 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 said judgment added fire to the much-disputed subject. The department swiftly went into action and a substantial number of notices were issued for demand of interest on the gross liability.

Based on the recommendation of the Council, the CGST Act was amended vide the Finance Act (No.2) 2019 and a proviso has been added to Section 50(1) of  the CGST Act which inter alia provides that interest shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger. However, the above amendment has not been given effect till date. Since the above proviso is not notified, it is uncertain whether the said amendment would be introduced prospectively or retrospectively from 01.07.2017.

In this context the  Hon'ble High Court of Madras in case of Refex Industries Ltd .  ² held the said amendment is made to correct an anomaly in the provision and, thus, be read as a clarification and operated retrospectively. (Incidentally, it may be noted that the Court has misquoted that the amended proviso to Section 50(1) has been made effective from 01.08.2019.) Similar view has also been held by various other Courts.

Considering the recent trends of the decisions of the Courts and taking into account the taxpayers who have already paid interest on Gross Liability, GST council in its latest meeting (39th) dated 14th March 2020 has clarified that the proviso be inserted with a retrospective effect. This has come as a welcome relief for the taxpayers and it will put to rest the existing disputes raised by the department.

Now let us understand the recourse available for those taxpayers who have already deposited the interest on Gross Liability for the past period in compliance of the existing provisions.

Section 54 of the CGST Act inter alia provides that a registered person can file an application for refund of interest paid on tax within prescribed time line. Section 54(4) of the CGST Act inter alia provides that the application shall accompany such documentary or other evidence to establish that the incidence of such tax and interest had not been passed on to any other person. Therefore, the taxpayer can claim refund of such interest, however, it has to pass the test of unjust enrichment by establishing that the interest amount has not been recovered by them from their customer.

In this context, we can refer to the erstwhile excise laws to draw some inference in respect to the doctrine of unjust enrichment. In the landmark case of Mafatlal Industries Ltd. ³ the Supreme Court held that the refund of duty either under Central Excise Act, Customs Act, in a civil suit or a writ petition grantable only when it is established that burden of duty has not been passed on to others. Person ultimately bearing the burden of duty can legitimately claim its refund otherwise the amount is to be retained by the State.

In the case of Solar Pesticide Pvt. Ltd. ⁴, the Apex Court observed the significance of the words ‘incidence of such duty'. It observed that the expression ‘incidence of such duty' in relation to its being passed on to another person would take within its ambit not only the passing of the duty directly to another person but also cases where it is passed on indirectly. Therefore, in cases where the duty amount on raw material which has been added to the price of the finished goods and recovered from customer, it has been held by the Court that the burden or the incidence of the duty on the raw material is considered to be passed on to the purchaser of the finished product. Similarly, t he landmark judgement of the Supreme Court in the case of Sahakari Khand Udyog Mandal Ltd. ⁵ has held that the principle of ‘unjust enrichment' is based on equity. Before claiming a relief of refund, appellant has to show that he has paid the amount for which relief is sought, he has not passed on burden on the consumers and if such relief not granted, he would suffer loss.

Having said the above, there is also a decision of Tribunal (upheld by Supreme Court) in the case of Ashok Leyland V/s Commr. Customs Chennai ⁶, wherein the Tribunal held that refund of interest is not a refund of duty, therefore, same would not be hit by the doctrine of unjust enrichment.

However, the provision of GST law has not made any exception in this regard. Therefore, in order to get the refund of interest component, the taxpayer has to establish that the incidence of interest has not been passed on to customers either directly or indirectly.

Considering the retrospective amendment in the law, the honest taxpayers who have already paid higher interest will start applying for the refund of such undue interest. It will be interesting to see how the doctrine of unjust enrichment is going to be tested by the department for granting refund of such interest.

[The views expressed are strictly personal.]

¹ 2019-TIOL-893-HC-TELANGANA-GST

² 2020-TIOL-382-HC-MAD-GST

³ 2002-TIOL-54-SC-CX-CB

⁴ 2002-TIOL-57-SC-CX-LB

⁵ 2005-TIOL-48-SC-CX-LB

⁶ Appeal no. No.- C/108-149/97/MAS, Order No.- 449-490/2001 dated March 29, 2001.