AUGUST 27, 2020

By Ravi Raghavan, Senior Partner and Brijesh Kothary, Joint Partner, Lakshmikumaran & Sridharan, Bengaluru.

NOTIFICATION 63/2020-CT dated 25.08.2020 ('Notification', for brevity) has been issued to bring Section 100 of the Finance (No. 2) Act, 2019 into effect from 01.09.2020. By virtue of this Notification, the much-awaited amendment with regard to the computation of interest for delay in payment of tax based on the net cash tax liability, has been brought into force. The taxpayers are however taken aback on noticing the date of implementation of this amendment, as everyone was expecting this provision to be brought into force with retrospective effect from 1st July 2017.

It would, therefore, be worth evaluating if the above Notification can be interpreted to have a retrospective effect. It would also be appropriate to analyse if this Notification can expose taxpayers with a liability for payment of interest for the period from July 2017 to August 2020, in case of delay in payment of tax, where the taxpayers had sufficient balance of input tax credit ('ITC', for brevity). Let us briefly understand the background and the need for this Notification at this point in time.

Brief Background

The taxpayers have been facing problems with timely furnishing of returns in FORM GSTR-3B for reasons such as technical glitches, requirement of sequential filing, non-availability of cash for payment of tax, etc. Resultantly, the taxes remained unpaid and the ITC did not get reflected in the electronic credit ledger, as the GSTN portal has linked both these activities to one another.

In view of the delay in payment of tax, the departmental authorities have issued notices to defaulters demanding tax along with interest and penalty on the amount of tax short paid. In some cases, even recovery proceedings have been initiated. The interest is being demanded on the entire tax payable without giving benefit of the ITC component The taxpayers are, however, of the view that interest is payable only on the amount to be discharged by them in cash, after adjusting the total tax liability from the ITC available, i.e., on the net tax liability.

Legal Provision

The provision relating to chargeability of interest on delayed payment of tax and on undue or excess claim of ITC is covered under Section 50 of the Central Goods and Services Tax Act, 2017 ('CGST Act', for brevity). The rate of interest for delayed payment of tax is 18%, as prescribed under Notification No. 13/2017-CT dated 28.06.2017.

At this juncture, it is pertinent to note that the GST law permits furnishing of returns without payment of full tax as self-assessed in the returns. Therefore, ideally, the GSTN portal ought to have allowed taxpayers to file returns by availing eligible ITC and payment of entire tax liability was not required to be linked to furnishing of returns. However, these functionalities have been merged in the simplified version of returns in FORM GSTR-3B.

Decisions of High Courts

The issue relating to chargeability of interest on the gross tax liability has been litigated in various judicial fora. This came into limelight based on a Division Bench Judgment of the High Court of Telangana ¹, wherein the Hon'ble Court held that filing returns belatedly, and consequently, payment of tax liability, partly in cash and partly in form of claim for ITC made beyond the prescribed period will result in the liability to pay interest automatically on the entire tax amount.

Thereafter, interim relief has been granted to the taxpayers by way of staying of the proceedings for recovery of interest liability on account of delayed or non-filing of FORM GSTR-3B by Delhi High Court ² , Madras High Court ³, Chhattisgarh High Court ⁴ and Jharkhand High Court⁵.

Inputs from Law Committee

The Law Committee of the GST Council suggested an amendment to be carried out to Section 50 of the CGST Act for allowing computation of interest on the net tax liability, arrived after deducting ITC available for utilisation in the said month.

As per the Law Committee, the facility of furnishing returns without payment of tax is yet to be made available on the GSTN portal and this inflexibility of the system increases interest burden considering the fact that GST is applicable only on value addition. They have accordingly proposed for allowing payment of interest on net cash liability. This required amendment to GST laws so as to provide that interest should be charged only on the net liability of the taxpayer, after taking into account the admissible credit, i.e., on the amount payable through electronic cash ledger.

Recommendations of GST Council

The above suggestions of the Law Committee were discussed by the GST Council in its 31st meeting held on 22.12.2018, wherein it was recommended that a proviso be inserted to Section 50(1) of the CGST Act. This amendment was introduced vide Section 100 in the Finance (No. 2) Act, 2019 as discussed supra.

In terms of the newly inserted proviso to Section 50(1) of the CGST Act, 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.

In view of the increased number of cases before various High Courts and the representation made by trade and industry, the GST Council in its 39th meeting held on 14.03.2020 recommended that the interest on account of delay in payment of GST is to be charged on the net cash tax liability w.e.f. 01.07.2017 and the law is to be amended retrospectively to this effect.

In light of this recommendation, recently the Hon'ble High Court of Orissa ⁶ directed the Revenue to dispose of the representation filed by the petitioner for not charging the interest on the ITC availed and to drop the proceeding.

Points to Ponder

It can be seen that the Courts have consistently taken a view that interest is to be computed on net tax liability and this position has also been accepted by the Government. Therefore, a question arises as to why the Notification giving effect to this beneficial amendment is made effective from 1 st September 2020 and not from 1st July 2017. If the intention was to give effect to the amendment prospectively, then the Notification could very well be brought into effect from the date of its publication in the official gazette rather than from a future date.

The above concern is genuine considering the fact that the notification giving retrospective effect to the amendment prescribing the time limit for taking transitional credits was issued within two weeks from the decision of the Delhi High Court ⁷, while other amendments had to wait to see the light of the day.

The timing and manner of implementation of this benevolent amendment has drawn a lot of debate and criticisms on social media. In response to an assortment of comments, the CBIC, in a press release dated 26.08.2020, clarified that the Notification relating to interest on delayed payment of GST has been issued prospectively due to certain technical limitations and has assured that no recoveries shall be made for the past period as well.

The Government has made it clear that Notification No. 63/2020-CT has brought the proviso to Section 50(1) of the CGST Act into effect prospectively. The Notification may have been issued now to avoid any litigation going forward; however, the taxpayer continued to remain exposed to interest liability for the past period. The law, as it stands today, leaves a window of opportunity for the Revenue to demand interest on the gross tax liability and the same needs to be corrected on priority.

Concluding Remarks

The Government's initiative to make amendment in law to restrict the chargeability of interest on the net tax liability has been appreciated by trade and industry. The proposal to implement this amendment retrospectively goes on to prove that the Government is receptive to the representations made to it and is conscious of the problems faced by the taxpayers. It is to be seen how early the retrospective amendment is brought, so as to avoid any misperception among the taxpayers, as the validity of press releases are questionable.

As the saying goes "a stitch in time saves nine", so an early and prompt action by the Government immediately after the 31st GST Council Meeting, to bring the proviso to Section 50(1) of the CGST Act into effect retrospectively, would have saved a lot of time and cost of the taxpayers as well as the judiciary. Nonetheless, it is not too late, and it would be interesting to see if this amendment is given effect by way of a Finance Act or by exercising the newly extended powers of the Government to remove difficulties under Section 172 of the CGST Act.

[The views expressed in the article are strictly personal.]

¹Megha Engineering & Infrastructures Ltd. v. The Commissioner of Central Tax - 2019-TIOL-893-HC-TELANGANA-GST

² Landmark Lifestyle v. Union of India - 2019-TIOL-1140-HC-DEL-GST

³ The Assistant Commissioner of CGST & Central Excise, Chennai v. Daejung Moparts Pvt Ltd. - 2019-TIOL-1802-HC-MAD-GST, Refex Industries Limited & Ors. v. The Assistant Commissioner of CGST & Central Excise, Chennai - 2020-TIOL-382-HC-MAD-GST

⁴Vandana Global Ltd. v. Principal Commissioner Central GST & Ors. -2019-TIOL-3042-HC-CHHATTISGARH-GST

⁵ Mahadeo Construction Co. v. The Union of India - 2020-TIOL-850-HC-JHARKHAND-GST

⁶ Prasanna Kumar Bisoi v. Union of India - 2020-TIOL-1424-HC-ORISSA-GST

⁷Brand Equity Treaties Limited & Ors. v. Union of India & Ors. - 2020-TIOL-900-HC-DEL-GST