Interest u/s 50 can be demanded only on the net liability and not on gross liability of GST
Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.
According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
For any law to be effective, it is important that persons should comply with the legal requirements specified in the law. A fear of interests and penalties inculcates timely compliances and adherence to the legal requirements mentioned in the law. It is important to note the both the terms ‘interest’ and ‘penalty’ have not been defined anywhere in the GST law. But from a general meaning, it can be understood that interest is paid for non-compliance to the provisions of the law while payment of penalty arises only in case of intentional non-compliance.
The primary function of the interest charged is to put the injured party as far as possible in the position in which he would have been had the payment of tax been made as intended by the law.
Let us refer to the case of KLT Automotive and Tubular vs Union of India and Others , where contentions were raised revolving around section 50 of the CGST Act, 2017. The petition was filed with the primary contention that interest could be demanded only on the net liability and not on gross liability.
Facts of the Case:
- Petitioner is a limited company engaged in the business of manufacture of automotive components, registered under GST.
- Petitioner stated that it was availing ITC of the taxes charged by the suppliers and remitting the GST on its output supplies after deducting the ITC.
- However, it was admitted by the petitioner that there was some delay in filing the monthly returns in form GSTR-3B and GSTR-1.
- When the petitioner was intimated about the payment of interest on delayed payment of taxes for certain periods, it remitted the interest computed on net tax liability.
- Respondent levied interest of Rs.5,06,06,060 for late payment of GST for the months from July, 2017 to December, 2019. The interest was computed on gross liability.
- Respondent then revised the demand of interest to Rs.7,62,15,267 for late payment of GST for the months from July, 2017 to March, 2020, which was also computed on the gross liability.
Observations of the HC on the Provisions of Section 50 (prior to the amendment)
Section 50 of the CGST Act, 2017 as it stood prior to amendment read as under:
- Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding 18%, as may be notified by the Government on the recommendations of the Council.
- The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.
- A taxable person who makes an undue or excess claim of input tax credit under section 42(10), or undue or excess reduction in output tax liability under section 43(10), shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding 24%, as may be notified by the Government on the recommendations of the Council.
Observations of the HC on the amendment of Section 50
- By Finance (No.2) Act, 2019, section 50 was amended by insertion of a proviso in sub-section (1).
- According to the said proviso, 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 proceeding under section 73 or 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.
- The said amendment was given effect from 01.09.2020 vide notification No.63/2020-Central Tax dated 25.08.2020.
- A press release dated 26.08.2020 was issued by the CBIC on the subject ‘interest on delayed payment of GST’.
- Board clarified that the notification dated 25.08.2020 relating to interest on delayed payment of GST was issued prospectively due to certain technical limitations.
- However, CBIC had assured that no recoveries shall be made for the past period as well by the central and state tax administration in accordance with the decision taken in the 39th meeting of GST Council.
- It was stated that this would ensure full relief to the taxpayers as decided by the GST Council.
Observations of the HC on the Instructions of CBIC
In the written submissions filed on behalf of the respondents, a copy of the administrative instructions of the Board was annexed. It appeared to the HC that the said administrative instructions addressed the grievance of the petitioner. HC examined the administrative instructions dated 18.09.2020. According to the said instructions:
- The provision of section 50 was amended vide section 100 of the Finance (No. 2) Act, 2019 to provide for charging interest on the net cash tax liability.
- The said provision was made effective vide notification No. 63/2020 – Central Tax dated the 25th August, 2020, w.e.f. 01.09.2020.
- The GST Council, in its 39th meeting, recommended interest to be charged on the net cash tax liability w.e.f. 01.07.2017 and accordingly, recommended the amendment of section 50 of the CGST Act retrospectively w.e.f. 01.07.2017.
- The retrospective amendment in the GST laws was to be carried out in due course through suitable legislation.
- Post issuance of notification 63/2020 – Central Tax dated the 25th August, 2020, there were apprehensions raised by taxpayers that the said notification was issued contrary to the Council’s recommendation to charge interest on net cash liability w.e.f. 01.07.2017.
- Consequently, a press release, dated 26.08.2020 was issued to clarify the position. Further, in order to implement the decision of the Council in its true spirit, and at the same time working within the present legal framework, it was decided to address the issue through administrative arrangements, as under:
- For the period 01.07.2017 to 31.08.2020, field formations in respective jurisdiction were instructed to recover interest only on the net cash tax liability (i.e. that portion of the tax that has been paid by debiting the electronic cash ledger or is payable through cash ledger); and
- wherever SCNs were issued on gross tax payable, the same would be kept in Call Book till the retrospective amendment in section 50 of the CGST Act was carried out.
Conclusion by the High Court
- From a perusal of the above, it was seen that amendment to section 50 of the CGST Act, 2017 was introduced by Finance (No.2) Act, 2019 for charging interest on the net cash tax liability.
- The said amendment was made effective prospectively from 01.09.2020 vide the Central Government notification No.63/2020-Central Tax dated 25.08.2020.
- GST Council in its 39th meeting recommended that interest should be charged on the net cash tax liability with effect from 01.07.2017.
- Recommendation was made for making the amendment to section 50 retrospectively with effect from 01.07.2017.
- It was stated that retrospective amendment in the GST laws would be carried out in the due course through suitable legislation.
- After issuance of the notification dated 25.08.2020, views were expressed by tax payers that the said notification is contrary to the recommendation of GST Council to charge interest on the net cash tax liability with effect from 01.07.2017.
- To clarify this position press release was issued on 26.08.2020. However, in order to implement the decision of the GST Council in its true spirit within the present legal framework, the above instructions were issued.
- Firstly, for the period 01.07.2017 to 31.08.2020, field formations have been instructed to recover interest only on the net cash tax liability i.e., that portion of the tax that has been paid by debiting the electronic cash ledger or is payable through cash ledger.
- Secondly, in those cases where show cause notices were issued on gross tax payable, to keep those show cause notices in the call book till retrospective amendment in section 50 of the Central Goods and Service Tax Act, 2017 is carried out.
Therefore, the central issue raised in the writ petition i.e., whether interest under section 50 of the CGST Act, 2017 is to be levied on the gross tax liability or on the next tax liability was answered by the Board in the administrative instructions by categorically stating that the interest would be on the net cash tax liability for the period prior to the amendment i.e., from 01.07.2017 to 31.08.2020.