In the ever-evolving landscape of GST, the imposition of interest has become a hotly debated issue, with a surge in notices due to discrepancies in returns filed by taxable individuals. What makes this more intriguing is that, in many cases, the interest component outweighs the tax amount specified in the notice.
Understanding this complex scenario is crucial, especially since the interest calculation involves a meticulous arithmetic exercise. The crux of the matter lies in determining the principal amount of default, on which the interest rate is applied during the default period.
Sections 73 and 74 of the CGST Act, 2017 play a pivotal role in addressing non-fraud and fraud cases related to tax payment. However, it’s essential to note that these sections draw reference from Section 50, which forms the backbone of various legal provisions in the CGST Act.
From Sections 16 to 67, multiple sections correlate with Section 50, creating a web of interconnections. A recurring challenge has been whether interest under Section 50 should apply solely to the belated ‘cash’ component of tax, excluding the ‘ITC’ component. Judicial authorities have consistently emphasized this principle in several rulings.
The Hon’ble Madras High Court, in the Tol. Kumaran Filaments case, quoted an observation noting that when credit was available, the department cannot act like Shylock demanding a ‘pound of flesh.’
Recognizing the need for reform, the 31st GST Council meeting in 2018 approved amendments to Section 50. The subsequent amendments, as per the 35th GST Council meeting in 2019, aimed to impose interest on the ‘net tax liability,’ factoring in admissible input tax credit. The 39th GST Council meeting in 2020 recommended retrospective imposition of interest on net tax liability.
However, despite these changes, recent notices from tax authorities have been demanding interest on the ITC component, contrary to the retrospective amendments in Clause 112 of the Finance Act, 2021. This discrepancy, often stemming from misinterpretations of Section 50 and Rule 88B, leads to unjustifiable interest demands, causing hardship to taxable individuals.
In light of this, taxable persons are advised to vehemently contest any illegal interest demands specified in recently issued show cause notices. The battle against such claims not only safeguards their working capital but also challenges arbitrary interpretations that can lead to unnecessary tax litigation.
Unlock the complexities, stay informed, and ensure a fair playing field in the intricate realm of GST interest matters.
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