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Payment of Tax, and Interest under GST - Some Anomalies and Contradictions

AUGUST 03, 2022

By B N Gururaj, Advocate

PROBABLY this topic more appropriately falls within the domain of Chartered Accountants and GST Practitioners who guide the assessees to navigate through the tropical jungle of procedural compliance under GST, and, of course, the assessees who courageously navigate this, by themselves. However, payment of tax or any other due is so crucial under tax law, a lawyer per force has the right to write about it.

Irrespective of what the law says, the assessee can do only what the portal permits the assessee to do. At least in one respect concerned with the topic under discussion, the GST Portal seems to disobey the GST law.

Payment of GST wrongly linked to monthly return

For a useful discussion of this topic, it is necessary to briefly recapitulate the history payment of tax under erstwhile indirect tax laws:

1. Before the advent of information technology and service tax, the assessees maintained a wide-bodied ledger known as Personal Ledger Account (PLA) with about dozen columns, wherein the duty payable was deposited in cash. As and when the Gate Pass or Excise Invoice was issued, the duty payable was debited. Similarly, another wide-bodied ledger known as RG23A Part II, in which Modvat Credit was taken. As and when the excisable goods were removed, duty payable could be debited in this ledger either wholly or partially. Before 1999, duty had to debited for every consignment removed by the assessee. Between 1999 and 2000, excise duty was allowed to be paid first, on fortnightly basis, and then on monthly basis.

2. Upon introduction of Service Tax through the Finance Act, 1994, no wide-bodied ledgers were required to be maintained for service tax. The records maintained by the assessee in the ordinary course of business were sufficient for the purposes of Service Tax also. Upon introduction of the Service Tax Credit Rules, 2002, the assessees maintained a Credit ledger, and made debit and credit entries as and when taxable services were billed.

3. From September 2004, the Cenvat Credit Rules, 2004 became common for both Central Excise and Service Tax. Since then, same system continued until the introduction of GST. The assessee maintained a Cenvat Credit ledger as a part of the books of accounts for making credit and debit entries. The Assessees paid the duty/tax on monthly basis by debiting, either in their Cenvat Credit ledger or in the PLA, or in both. Thus, payment of duty, or tax was always an act done by the assessee by making a debit entry in the appropriate ledger. It was never related to the filing of monthly or half-yearly returns. The returns merely served as a means of declaring the period's transactions to the Revenue including the input credits taken, utilised and balance available.

Now, one may turn to the present law, the CGST Act, 2017. Section 49 describes the credits which can be made to both the Electronic Cash Ledger, the Electronic Credit Ledger and payment of these credit balances towards tax and other liabilities. Sub-section (5) lists the order in which the balance in the Electronic Credit Ledger can be used. Suffice it to notice that each clause thereunder refers to utilisation of the credit balance. Who can utilise the credit balance in the Electronic Credit Ledger? Evidently the assessee. Sub-section (8) further amplifies this by stipulating that the taxable person shall discharge his tax and other dues in the order stipulated thereunder: Self assessed tax for the previous return periods, self-assessed tax for the current tax period and thereafter, any other due payable. Section 50(1) which requires payment of interest on the tax paid beyond the prescribed date also refers to failure to pay tax on the part of the assessee. This provision also does not link the payment of tax with the filing of the monthly return. Therefore, it is reasonable to conclude that the payment of taxes is a task to be performed by the assessee, not by the GST Portal.

How is the tax actually paid under GST? Does the assessee actually make a debit entry towards his output tax liability and other dues on the GST Portal? The answer is in the negative. The debit entry occurs in both the Electronic Cash Ledger and the Electronic Credit Ledger only when the GSTR 3B return is successfully filed. Section 49 which deals with the payment of tax does not prescribe that the cash/credit ledgers shall be debited only when the monthly returns are filed. Even if more than adequate balance is available in both the ledgers, the assessee is not free to pay tax by debiting the ledgers. He can pay tax only through GSTR 3B return. Thus, while the GST law itself makes no such stipulation, the GST Portal has snatched away the assessee's right to pay tax independently of filing of the monthly return.

Order of utilisation of GST Credits -Anomalies and Contradictions

For some unfathomable reason, the GST law is obsessed with the sequence of use of available credits of three types of taxes (IGST, CGST, and SGST or UTGST) in the Electronic Credit Ledger. As already noted, sub-section (5) of Section 49 stipulates the order of use of IGST, CGST, SGST and UTGST. As though this is not adequate, by the CGST (Amendment) Act, 2018, w.e.f, 1.2.2019. Sections 49A and 49B were inserted which leads to some anomalies and contradictions. It is best seen in tabular form:

Type of Credit Section 49(5) Section 49A with non obstante clause. Rule 88A made Pursuant to Section 49B which also has non obstante clause
IGST Pay IGST first, then use for paying CGST, SGST / UTGST Use CGST, SGST and UTGST credits for payment of those taxes, only after the IGST Credit has been fully utilised for payment of CGST, SGST or UTGST. Section 49B. Central Government shall specify the order and manner of utilisation of credits based on the recommendations of the GST Council. Rule 88A. Utilise IGST credit first for payment of IGST and then use balance credit for payment other taxes.
CGST Pay CGST first and then use balance credit for paying IGST. - Rule 88A. Utilise IGST credit first for payment of IGST and other taxes.Then use CGST credit for paying IGST and CGST.
SGST Pay SGST first and then use balance credit for paying IGST only when CGST credit is not available for paying IGST. - Rule 88A. Utilise IGST credit first for payment of IGST and other taxes. Then use SGST credit for paying SGST,and IGST.
UTGST Pay first UTGST and then use balance credit for paying IGST only when CGST credit is not available for paying IGST. - Rule 88A. Utilise IGST credit first for payment of IGST and other taxes. Then use UTGST credit for paying UTGST, CGST, and IGST.

The refrain of Rule 88A is that the assessee should first utilize IGST credit for discharging all the output tax liabilities. Where IGST Credit balance is insufficient, then the credit balance of CGST and SGST/UTGST can be utilised for paying the three taxes. This is emphasised by the phrase " …credit available on account of integrated tax has first been utilised fully" at the end of proviso to Rule 88A. Same phrase appears in Section 49A too.

In effect, Rule 88A which is framed pursuant to the power under Section 49B, plainly contradicts the provisos under clauses (c) and (d) of Section 49(5). Further, the language of Section 49A and the proviso to Rule 88A are substantially same. One fails to understand the need for framing Rule 88A when the Act itself states the same method of utilisation of credit in substantially the same language. One can only attribute this to clumsy legislative drafting. One devious motive could be that amending the rule is easier than amending the Act. Anyway, the parliament has hardly discussed the GST amendments, after the passage of CGST and IGST Acts in 2017. So, there is no need to frame rules so as to avoid the parliamentary debate.

Problematic interest recovery provisions

Coming to the interest liability under the Act, it may be noted here that when an assessee makes cash deposit into the Electronic Cash Ledger, the money is available at the disposal of the Government. Nevertheless, if the monthly return is filed late, under proviso to Section 50(1), he would be liable to pay interest on the cash component of the tax liability. It may be recalled that this proviso was inserted with retrospective effect by the Finance Act, 2021, after much tinkering through notifications. Rule 88B has been inserted by Notification No. 14/2022-CT, dated 5.7.2022, also w.e.f. 1.7.2017, substantially reiterates the same position. This rule elaborates the procedure for computation of interest and is not of much interest for this discussion.

The demand of interest on the cash deposit available at the disposal of the Government seems patently unfair to the assessees. From the Revenue's view point, one may say that unless the GSTR 3B return is filed, the share of tax between the Centre and State will not be known. But that is beside the point. It is a matter to be resolved between the Centre and the States. The assessees must not be saddled with interest liability on that ground.

Once the assessee is deprived of the use of this money, and the Government has access to it, saddling the assessee with interest liability on the pretext of belated filing of return is patently unjust. Therefore, it would be just and proper to restrict the applicability of the proviso to Section 50(1) to the cases where the assessee has insufficient balance in both the ledgers to meet the current month's and preceding months' taxes. With this suggested change to Section 50(1), the Revenue would be justified in demanding interest on the entire tax due for which there is deficit balance in both the ledgers.

Besides, Section 50, there are a few other provisions in the CGST Act, which create interest liability on the assessee. These provisions may be discussed briefly:

A. First such provision is the second proviso to Section 16(2). If the recipient fails to pay the supplier the money consideration towards the supply within 180 days from the date of issue of invoice, the ITC will be added to the output liability ledger on the GST Portal. On such supply, the assessee is liable to pay interest in such manner as may be prescribed. In respect of tax required to be paid back under Section 16(2), rule 37(3) prescribes that interest shall be payable at the rate prescribed in Section 50(1). Notification No. 13/2017-CT, dated 28.6.2017 prescribes 18% interest on tax paid with delay. It prescribes 24% interest under sub-section (3) of Section 51 with respect to ITC wrongly availed and utilised. Now, returning to the second proviso to Section 16(2), which rate of interest should be applied? Since it is added to output liability ledger, should 18% interest be paid by treating it as output tax liability, or being ITC should be treated as ITC wrongly availed and utilised and 24% interest be paid?

B. Section 51(6) which deals with deduction of tax at source is also problematic. It requires payment of interest if the deductor fails to pay tax. What about delayed payment of the deducted tax? Would that come under the term fails to pay? Evidently, one understands “fails to pay” as total failure to pay until demand is made by the Revenue. In the case of delayed deposit of TDS, there is indeed belated payment, and no failure to pay the tax.

C. Section 77(1) provides for refund of CGST + SGST, on a transaction which was treated as intra-State supply by the assessee, but held to be inter-State supply subsequently. Evidently, this can happen only pursuant to litigation. It also means that while paying the adjudged IGST, the assessee would also be required to pay interest thereon. The only liberal provision one finds with respect to interest is Section 77(2) which stipulates where IGST has been paid on a transaction, which has been subsequently held to be an intra-State transaction, interest need not be paid on CGST or SGST. The reason for the anomaly between the two sub-sections is not clear.

D. The Revenue seems to be under the impression that the principles of natural justice such as audi alteram partem need not be applied to the recovery of interest. This is in contrast with Section 11A(15) of the CE Act, 1944, which clearly provides for applying the demand and recovery proceeding for recovery of interest also. On the other hand, Section 75(12) explicitly provides for recovery of interest on self-assessed tax under the provisions of Section 79, i.e., the manner in which tax due which has attained finality is recoverable. Since the Revenue thinks that interest liability is linked to date of filing of return and not the date of payment of tax, disputes are bound to arise. The Revenue cannot unilaterally invoke Section 79 for recovering interest. In UOI v. LC Infra Projects Pvt Ltd, 2020-TIOL-827-HC-KAR-GST, the Hon'ble High Court of Karnataka dismissed a writ appeal of the Revenue upholding the learned Single Judge's order that interest could not be recovered without issuing notice to the assessee, even if Section 73 or 74 did not specify interest as recoverable under those provisions. This judgment has been challenged before the Supreme Court [2021-TIOL-218-SC-GST]. The government is so obstinate that it does not want its officers to follow the principles of natural justice, which is the corner stone of any quasi -judicial proceeding.

E. Section 67(6) requires as a condition for release of seized goods, payment of tax, interest and penalty too. It is needless to add that Sections 73 and 74 also invoke interest liability under Section 50. Rather strangely, Section 75(9) states that the interest on the confirmed demand shall be payable whether or not the order determining the tax liability specifies interest liability. Plainly, this is an insurance against the errors that may be committed by the adjudicating authorities by failing to demand the interest on the tax demand confirmed.

There are many more provisions which routinely require payment of interest on tax resulting from rectification of returns, or seizure of goods, and e-Commerce transactions.

There are no apparent legal issues under these provisions:

a. Section 21 invokes interest liability on excess credit passed by an Input Service Distributor.

b. Section 37(3) requires reversal of ITC with interest if the rectification of error or omission in the GSTR 1 return results in short payment of tax.

c. Section 39(9) also prescribes payment of interest if the rectification of return results in short payment of tax.

d. Section 52(6) which allows e-Commerce Operator to collect and pay tax also allows rectification of return, and rectification of return subject to payment of interest.

e. Section 52(9) requires payment of interest if there is a mismatch between the details of outward supply furnished by the e-Commerce Operator and the supplier. If the e-Commerce Operator has shown higher turnover, and neither party take steps to rectify the discrepancy, the higher turnover is simply added back to the output liability ledger of the supplier, further requiring payment of interest (Sec 52(10)).

f. Section 62 empowers the GST officer to issue assessment order to non-filers. That is, persons who are registered on the GST portal but do not file returns. If such a person files a valid return within thirty days of the service of the assessment order, the order is treated as withdrawn. Interest liability, presumably on such declared tax, will subsist.

From this brief and critical survey of the CGST provisions governing the payment of tax and interest, it is evident that the law is loaded against the assessees. It is not clear why a tax law should impose the condition that the suppliers must be paid within 180 days from the date of issue of tax invoice? It is hardly the duty of the Governments to manage the problems of working capital face by the assessees. This is a rule inherited from Service Tax. Payments are made according to the tenor of the contract between the supplier and the recipient. I have noticed that especially when major EPC contracts are involved, payments are necessarily withheld on account of liquidated damages, or unsatisfactory execution of work, or towards performance guarantee. On the basis of Section 16(2), the Revenue is apt to treat all such cases as delayed payment of consideration to the supplier, and demand reversal of credit and payment of interest. Plainly, this is a thoughtless provision inserted for reasons extraneous to the purpose of GST laws.

Law provides other remedies for an aggrieved supplier who has not received the payment as per the contract of sale. But the Government uses GST law for coercing prompt payment of sundry creditors, on the pain of recovering the ITC with interest. This provision is clearly de hors the scope of Article 246A of the Constitution of India which empowers both the Parliament and the State Legislatures to levy GST.

Secondly, the assessee cannot defer the payment of GST and use it as working capital. It comes at a very high interest cost.

[The views expressed are strictly personal.]

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