Analysis of Interest under GST
Introduction:
The Government of India has specified the due dates to pay Goods and Services Tax. The due date to pay GST is different for different types of taxpayers. If one fails to pay GST within the due date, one must pay the interest along with the GST dues for the delay period.
Relevant Legal Provisions under GST:
| Chapter X of the CGST Act: Payment of Tax | |
| Section/Rule | Particulars |
| Section 50 | Interest on delayed payment of tax |
| Rule 88B | Manner of Calculating interest on delayed payment of tax |
Rate of interest – Delayed payment of tax
As per sec 50(1) of the CGST Act, every person liable to pay tax in accordance with the provisions of the GST Act or rules made thereunder, but fails to pay the tax or any part thereof to the government within the period prescribed, shall, on his own, for the period for which the tax or any part thereof remains unpaid, pay interest at such rate, not exceeding 18%, as notified by the Government on the recommendations of the GST Council. The Government vide notification no. 13/2017- central tax and notification no. 6/2017- integrated tax both dated 28.06.2018 has prescribed rate of interest as 18% per annum in this regard.
Manner of computation of interest
Sec 50(2) of the CGST Act states that the interest under sec 50(1) of the CGST Act shall be computed from the day succeeding the day on which such tax was due to be paid. Thus, calculation of interest will be done from the succeeding day of due date of tax payment, till the actual date of payment of tax.
Whether interest is leviable on gross tax liability or net tax liability?
Since the implementation of GST, there has been a debate as to whether interest on delayed payment of GST would be calculated on Gross GST liability or on Net GST liability. Initially, bare interpretation of sec 50 of the CGST Act, gave an impression that taxpayer must pay interest at 18% on gross tax liability.
Departmental clarifications:
Instruction F. No. CBEC 20/16/07/2020-GST dated 10.02.2020 (relevant extract):
This inter-departmental directive issued by the CBIC clarified that the interest is to be paid on the tax liability that is paid belatedly either in cash or through ITC utilization:
Doubts have been raised by field formations, whether the interest has to be paid on the gross tax liability or on the net cash liability. In this regard, the provisions of sect 50 are very clear that interest liability is required to be paid on the tax liability that is paid belatedly, either through cash or through utilization of input tax credit (ITC). In other words, interest is required to be paid on total amount of tax liability as shown in Form GSTR-3B
Notification dated 25.08.2020 appointing 01.09.2020 as the effective date of proviso to sec 50(1) of the CGST Act:
Vide notification no. 63/2020 – central tax dated 25.08.2020, the central government has appointed 01.09.2020 as the date on which the provisions of sec 100 of the Finance (No. 2) Act, 2019), i.e. amendment made in sec 50(1) of the CGST Act by inserting a proviso therein, shall come into force.
Substitution of proviso to sec 50(1) w.e.f. 01.09.2020:
To provide clarity on above issue, a proviso was inserted in sec 50(1) of the CGST Act, vide the Finance (No. 2) Act, 2019 notified vide notification no. 63/2020 – central tax dated 25.08.2020 w.e.f. 01.09.2020, to provide for computation of interest on net tax liability i.e. the amount left after adjusting available input tax credit from gross tax liability.
Some of the Judicial outlook:
1. Interest to be demanded only on ‘net tax liability’ [tax Infrastructure Private Limited v. Union of India [R/Special Civil Application No. 21534 of 2019 DATED 23/03/2021]
2. Interest is payable on the total tax liability including a portion of which is liable to be set-off against the input tax credit: Telangana HC [Megha Engineering & Infrastru Lta. v. Commr.of C.T., Hyderabad [2019 (26) G.S.T.L. 183 (Telangana)]
3. Interest can be levied only on belated ‘cash’ component of tax and not on ‘ITC component
Madras HC in the case of Refex Industries Limited v. The Assistant Commissioner of CGST & Central Excise [Writ Petition No. 23360 & 23361 of 2019 dated 06.01.2020] has held that interest u/s 50 of the CGST Act can be levied only on belated ‘cash’ component of tax and not on ‘ITC’ component. The HC observed as under:
- The use of the word ‘delayed’ in sec 50, connotes a situation of deprival, where the state has been deprived of the funds representing the tax component till such time the return is filed accompanied by the remittance of tax.
- The provision specifically intends to apply to a state of deprival and cannot apply in a situation where the state puds to apply fund in the form of tax credits.
- Thus, the Court held that, the proper application of sec 50 is one where the interest is levied only on the cash payment, which paid late, but not on ITC available all the while with the department to the credit of the assessee.
- Further, the Court observed that proviso inserted in sec 50(1), provides for payment of interest only on that part of the tax liability which has to be paid in cash. It was inserted with the intention to correct the anomaly in the provision as it existed prior to such insertion. Thus, the Court held that the provision is to be read as clarificatory and operative retrospectively.
Interest on Net Tax Liability with retrospective date i.e. 01.07.2017:
With this retrospective substitution of proviso to sec 50(1) vide sec 112 of the Finance Act, 2021 dated 28.03.2021 notified vide notification no. 16/2021– central tax dated 01.06.2021, the issue will now be finally settled
It is now made clear 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 sec 39 (i.e. furnishing of return), except where such return is furnished after commencement of any proceedings under sec 73 (i.e. non-fraud cases) or sec 74 (i.e. fraud cases) in respect of the said period, shall be payable on that portion of the tax that is paid by debiting the electronic cash ledger.
Recently the Madras High Court (‘the Court’) quashed a demand notice issued for recovery of interest and held that interest is not payable if Form GSTR-3B is filed belatedly but, the amount of tax is paid in the Electronic Cash Ledger (‘ECL’) within the time it was due. The
Court also sustained the argument that depositing money into ECL tantamount to payment of tax to the Government.
[Eicher Motors Limited v. the Superintendent of GST and Central Excise]
The judgment provides relief to taxpayers by not imposing interest on delay in filing Form GSTR-3B, if the amount of tax payable is deposited into ECL. This will buoy-up the taxpayers who couldn’t file their Form GSTR-3B on time but, had complied with GST payments in ECL.
Interest implication if past period liability shown in current tax period:
Vide sec 112 of the Finance Act, 2021 dated 28.03.2021 notified vide notification no 16/2021-central tax dated 01.06.2021, proviso to sec 50(3) got substituted. The substituted proviso reads as follows:
“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 payable on that portion of the tax which is paid by debiting the electronic cash ledger.”
It is to be noted that if we show the tax liability of previous tax period in subsequent GSTR 3B, the interest calculator calculates the interest on the gross amount of tax irrespective of the balance lying in e-credit ledger whereas when we discharge the interest liability for the current tax period, interest in calculated at the net tax liability as per proviso to sec 50 (1) of the CGST Act.
It is advisable that the Government should amend the provisions so as to provide interest is leviable on net tax liability to be paid in cash irrespective of fact whether paid for current tax period or past tax period. Also, GSTN should make the corresponding changes on the GST Portal.
New functionality of interest calculator in GSTR-3B Advisory dated 08.01.2022
Introducing Interest calculator
To facilitate taxpayers in doing self-assessment, the new functionality of interest calculator is being released in GSTR-3B. This functionality will assist taxpayers in calculating the interest applicable for delayed filing of returns. Taxpayers will have to verify and discharge the correct interest liability as per law, as payment of interest is a statutory compliance.
Interest computation
The interest computed by the system has been aligned with the Sec-50 of the CGST Act, 2017, as amended. Consequently, interest liability respect of supplies made during the present tax-period and declared in the GSTR-3B for this period will be calculated only on that portion of the tax which is paid by debiting the electronic cash ledger, i.e., tax paid in cash. With respect to the liability pertaining to the previous tax-period(s), and paid in later GSTR-3B, the interest will be computed for the entire liability, whether paid by debiting the electronic cash ledger or electronic credit ledger.
Judicial outlook
- Interest is leviable despite the availability of credit in cash/credit ledgers if no payment was actually made in GST.
- Interest on delay in filing of GSTR-3B to be paid even if tax was already deposited in e-cash ledger
Jharkhand HC in RSB Transmissions (India) Ltd. v. Union of India [Writ Petition (Tax) No. 23/2022 dated 18.10.2022]
Whether interest is leviable on credit availed but not utilized?
As seen supra that, primarily and broadly, sec 50 of the CGST Act provides for payment of interest in following two circumstances only:
- Where a person liable to pay tax, fails to pay the same [sec 50(1)];
- Where a person makes an undue or excess claim of input tax credit under the provisions relating to matching and mis-matching of input tax credit [sec 50(3)]
Thus, prima facie, for levying interest, one has to fall under either of the above cases, discussed as under along with other provisions w.r.t. ITC availed but not utilized:
Implication of interest on failure to pay the tax u/s 50(1)
Sec 50(1) of the CGST Act covers all cases where there is a shortfall in payment of tax. Thus, it may be inferred that, sec 50(1), may, inter alia, cover those cases where such shortfall of tax is on account of payment of tax using irregularly availed ITC. In other words, mere availment of ITC (though irregular), without utilization towards payment of tax, will not fall within the scope of this provision as interest obligation under sec 50(1) would get triggered only due to failure to pay the tax.
Implication of interest on undue or excess claim of ITC u/s 50(3)
Sec 50(3) deals with undue or excess claim of ITC due to matching-mis matching of returns In other words, this provision would not cover a scenario wherein an ineligible/ irregular ITC has been availed by an assessee for reasons other than that of excess availment due to mis-match in supplier-recipient returns. Further, it may not be an exaggeration to argue that even in respect of actual mismatch cases also, the provision of sec 50(3) is itself not operational, in the absence of the non- availability of envisaged GST returns and corresponding system of matching – mis matching since date.
Retrospective amendment w.e.f. 01.07.2017 has been made in sec 50(3) of CGST Act,2017 by the Finance Act, 2022 notified vide notification no. 09/2022-Central Tax dated 05.07.2022 to provide that interest is required to be paid on the wrongly availed ITC only when the same has been availed and utilized.
Rate of Interest on utilization of wrongly availed GST ITC:
Further, notification no. 13/2017 central tax, notification no. 6/2017 – integrated tax, notification no. 10/2017 – union territory tax, all dated 28.06.2017, are amended retrospectively w.e.f. 01.07.2017 vide sec 116 of the Finance Act, 2022 respectively, to notify the rate of interest on delayed payment of CGST, IGST & UTGST from 24% p.a. to 18% p.a. under sec 50(3) of the CGST Act read with sec 20 of the IGST Act & sec 21 of the UTGST Act.
Manner of calculating interest on delayed payment of tax
A new rule 88B is inserted to the CGST Rules vide notification no. 14/2022-central tax dated 05.07.2022 to provide the manner of calculation of interest under sec 50 of CGST Act. The said rule reads as follows:
| Rule | Cases | Period for which Interest is payable | Amount on which interest liability has to be computed |
| Rule 88B(1) | If tax has been belated ly paid through credit balance on account of delayed filing of return, before commencement of proceedings under Section 73 or 74 of the CGST Act [proviso TO SEC 50(1)] | For the period of delay in filing the said return be yond the due date up to date of filing GSTR-3B | Net tax liability, Leamount paid by debiting the electroniccash ledger |
| Rule 88B(2) | In all other cases where interest is payable on delay in payment of tax covered by sec 50(1) viz.Payment of tax after commencement of proceedings under Section 73 or 74 of the CGST Act | From the date on which such tax was due to be paid till the date such tax is paid | Gross Tax liability |
| Liability of past peri- od shown in current tax Period | |||
| Rule 88B(3) | Where interest is pay- able on the amounts of ITC wrongly availed and utilized covered by sec 50(3) | from the date of utilization of such wrongly availed input tax credit till the date of reversal of such credit | Amount of input tax credit wrongly availed and utilised |
Judicial outlook
- Interest liability cannot be determined without initiating any adjudication proceeding
- SCN is must for demand of Interest in GST Law:
In Jharkhand HC in the matter of Mahadeo Construction Co., Palamau v. Union of India and others [W.P. (T) No.3517 Mahadeo Construction has held that issuance of SCN/ initiation of proceedings und 2019 dated 21.04.2020 Act is a pre-requisite or determination of interest liability under sec 50 of the CGST Act.
We have seen different time limits for payment of tax for different types of taxes and different types of assesses in the pre-GST indirect tax regime. GST regime eases the payment process by providing uniform procedure for payment of tax for all the assesses and for both supply of goods or services.
