Analysis of the provisions of interest on late payment of GST

After 31st meeting of the GST Council, it has been published on 22nd December, 2018 that the council has principally approved to amend section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e. interest would be leviable only on the amount payable through the electronic cash ledger. This press release has put a question mark on the understanding of the people in general that section 50 of the CGST Act, 2017, as of now, is asking to pay interest on the net amount of tax payable (net of ITC).

Thereafter a standing order has been passed by the Principal Commissioner of Central Tax, Hyderabad on 04/02/2019. The said order inter-alia contained 'Since ITC/Credit in balance in the 'Electronic Credit Ledger' cannot be treated as the Tax paid, unless it is debited in the said credit ledger while filing the return for off-setting the amount in the 'Liability Ledger', the interest liability under Sec. 50 is mandatorily attracted on the entire Tax remained unpaid beyond the due date prescribed'.

It has been thus conveyed by the said standing order that section 50 of the CGST Act, as on now,  stipulates that interest is liable to be paid on the total amount of output tax, irrespective of the amount of input tax credit. If the said opinion prevails, interest is going to be levied on the amount of output, ignoring the amount of adjustable input tax credit, which seems quite illogical.

Let us try to understand the impact of the above with an example:-

Say, in the month of April 2018, 'XYZ' supplies taxable goods of Rs. 99 lakhs to 'A' and charges GST @18% (Rs. 17.82 lacs). XYZ deposits the output tax after adjusting input tax credit if any on 21/05/2018. Later on, 'A' supplies said taxable goods for Rs. 1 Crore to 'B' and charges GST @ 18% (Rs. 18 lacs). 'B' supplies the same to 'C' at the same value i.e. Rs. 1 Crores and charges GST at 18% (18 lacs). 'C' supplies the said goods to 'D' for Rs. 1.02 Crores and charges GST at 18% (18.36 lacs). 'D' supplies the same to 'E' for 1.04 Crores and charges GST at 18% (18.72 lacs). All the four transactions between A-B, B-C, C-D and D-E have been executed in the month of May-2018. Thus the tax liabilities of the four suppliers may be shown as follows:-

Thus the total net tax payable by A,B, C & D to the Government is Rs. 90,000/-. Let us further assume that all the above taxable persons file their returns (3B) on 21/01/2019. The delay is for 9 months. If the interpretation in the aforesaid standing order is correct than the Government will be entitled for interest on the total amount of Rs. 73,08,000/- for 9 months which will be Rs. 9,86,580/-. The said amount of interest will be even more than 1000% of the actual amount of tax payable i.e. 90,000/-. More interestingly, 'B' will also have to pay interest even if his net tax liability is zero. This cannot be the intention of the law makers.

Provisions for Interest under CGST Act:

Section 50 of CGST Act, 2017 mainly deals with interest payable under the Act. First two sub-sections of section 50 contains provisions for payment of interest on delayed payment of taxes. For sake of ready reference, let us go through the test of both the sub-sections which casts liability on the taxable persons to pay interest, if he fails to pay the tax or any part thereof.  

'Section 50(1):- Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, 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 eighteen per cent., as may be notified by the Government on the recommendations of the Council.'

'Section 50(2):- 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.'

Section 50 does not prescribes the amount on which interest is to be levied:-

In light of the provisions under the aforesaid sub-sections, the following questions may be addressed as below:-

Who is liable to pay interest:-

Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, but fails to pay the tax or any part thereof to the Government within the period prescribed is liable to pay interest. [50(1)]

At what rate:-

At such rate not exceeding 18%, as may be notified by the Government on the recommendations of the Council. The Government has notified 18% vide Notification No. 13/2017 – Central Tax dated 28/06/2017. [50(1]

On which amount the interest is to be paid:-

Not specifically mentioned in the section 50. It may be recalled that section 75 of the Finance Act, 1994 was also silent on this question.

For which period:-

For the period for which the tax or any part thereof remains unpaid. [50(1)]

When to pay the interest:

Not mentioned in the section.   However as per rule 61(3), every registered person furnishing the return under sub-rule (1) shall, subject to the provisions of section 49, discharge his liability towards tax, interest, penalty, fees or any other amount payable under the Act or the provisions of this Chapter by debiting the electronic cash ledger or electronic credit ledger and include the details in Part B of the return in FORM GSTR-3.

Whether any notice is required:

No. Interest is to be paid on his own. [50(1)]

Sub sections (1) and (2) of section 50 do not state the value on which interest is to be paid for late payment of taxes/ late filing of returns. This is a substantial omission. In this article, nor I am going to discuss the applicability of the principles of casus omissus, neither will I attempt to raise any question on the effectiveness of the said section in absence of proper mechanism. I most humbly place my views that the interpretation of section 50(1) as made in the aforesaid standing order is not based on the content of said section and at least it should be reconsidered.

I am afraid that Section 50 does not support the standing order which inter-alia contains that the interest liability under Sec. 50 is mandatorily attracted on the entire Tax remained unpaid beyond the due date prescribed.  The section, at least in its literal meaning, does not mandates or prescribes to levy interest on the total amount of output without deducting the available credit of input tax. There cannot be any legal scope to expand the scope of the said section.

Interests were paid on net taxable amount in past also:

In past also, interest has always been levied on the amount of net tax payable by the assessee and the section 50 of CGST Act, 2017 does not confer any specific power to deviate from the same and to levy interest on the amount of output tax. To substantiate the fact regarding levying of interest on amount of net tax payable in earlier laws, it seems worth to refer to the interest related provisions under the VAT Act and under the Finance Act, 1994.

Section 30 of the Assam Value Added Tax Act, 2003, read as 'If any dealer fails to pay the amount of tax due within the time prescribed for its payment under section 29, such dealer shall, in addition to the tax, be liable to pay simple interest, at the rate of one and half per cent, per month on the amount of tax not so paid or on any less amount thereof remaining unpaid during such period, for the period commencing on the day following the date of expiry of the due date to the date of payment or the date of assessment, whichever is earlier. If any dealer fails to pay interest along with return or revised return in accordance with the provisions of this sub-section, such interest shall be levied by the Prescribed Authority'. The section has been undisputedly interpreted that interest is payable on the amount of net tax payable i.e. on output tax net of the input tax credit.

Section 75 of the Finance Act, 1994 contains the provisions for interest on late payment of service tax. The said section reads as 'Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest at such rate not below ten percent. and not exceeding thirty-six per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette] for the period] by which such crediting of the tax or any part thereof is delayed. Provided that in the case of a service provider, whose value of taxable services provided in a financial year does not exceed sixty lakh rupees during any of the financial years covered by the notice or during the last preceding financial year, as the case may be, such rate of interest, shall be reduced by three per cent per annum'. This section has also been undisputedly interpreted that interest is payable on the amount of net tax payable i.e. on output tax net of the input tax/ Cenvat credit.

If the language of the aforesaid two sections are compared with sub-sections (1) and (2) of section 50 of the CGST Act, 2017, it appears that there is no valid reason to deviate from the earlier understanding that interest is leviable on the net amount of tax payable by the assessee.

Levy of interest is compensatory in nature:

In fiscal Statutes, the import of the words -- "tax", "interest", "penalty", etc. are well known They are different concepts. tax is the amount payable as a result of the charging provision. lt is a compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty-- which is penal in character. [Prathibha Processors Vs. UOI (1996) 11 SCC 101 (SC)]

 '..Tax, interest and penalty are three different concepts. Tax becomes payable by an Assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has willfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not penal.' [Associated Cement Co. Ltd. Vs. Commercial Tax Officer, Kota and Others (1981) 048 STC 0466 (SC)]

'The said interest is compensatory in nature in the sense that when the assessee pays tax after it becomes due, the presumption is that the Department has lost the revenue during the interregnum period (the date when the tax became due and the date on which the tax is paid). The assessee enjoys that amount during the said period. It is in this sense that the interest is compensatory in nature and in order to recover the lost revenue, the levy of interest is contemplated by section 120 of the Finance Act, 2000'. [Indodan Industries Ltd. V. State of U.P. and others [2010] 27 VST 1(SC), in reference to the Central Sales Tax Act, 1956]

Interest under section 50 of CGST Act, 2017, which is leviable compulsorily and for which no assessment or notice required is a compensatory levy and the said fact is beyond any dispute in eyes of the aforesaid and many more similar judgments. Accordingly in the world of the Apex Court (supra) interest, being a compensatory levy is to be calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it.

Conclusion:

Section 50 of the CGST Act has been interpreted by the authorities in a way that it casts an obligation to pay interest on the total amount of tax payable without deducting input tax credit therefrom. However, in the opinion of the author, the content of the said section does not support said interpretation. If this interpretation is applied, it will cause undue hardship. People will be liable to pay interest even in cases where input tax credit is in excess of the output tax. Interest has always been treated as a compensatory levy and being so it should be calculated on the actual amount of tax withheld or on the actual amount of tax which was deposited belatedly. I believe that the authorities will reconsider the standing order and will take appropriate decision in the interest of justice.