Understanding legal background: Section 50 of the CGST Act talks about when you should pay interest and what rate it should be paid. So section 50 said, interest has to be paid at 18% in cases where you delay paying tax to the government. That means if you cause a delay in filing your return, you end up paying interest. But the moot question that came was whether this interest has to be paid on Gross liability or net liability paid in cash.
How this provision started?
Pre GST (i.e.) in the Cenvat regime or the central excise regime, interest for delayed payment of tax was applicable only on the net tax liability. But suddenly transitioning into GST section 50 was not explicitly speaking on what value this interest has to be computed – whether on gross or not net. Now once there is a legal ambiguity, the governments wants what it wants and the industry wants what it wants and thus started the tumultuous journey of interest provision.
The Telangana High Court in in response to the writ petition filed by M/s Megha Engineering Infrastructure Limited on the same question said “Nothing doing, pay interest on full liability even if the liability is paid through ITC utilization”. This triggered the revenue department officials and notices were issued compelling the assesses to pay interest on gross GST liability even if the same is almost fully paid through utilization of input tax credit and negligible cash outflow.
However, the Finance Ministry catered to the needs to the industry by proposing to amend this section 50. The proposal was in the finance act no. 02 of 2019 in which section 100 was inserted to amend section 50 of the CGST Act. The amended was by way of adding a provisio:
"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 levied on that portion of the tax that is paid by debiting the electronic cash ledger"
The amendment made sure that interest be paid only on the net tax liabil notification 63/2020 ity (i.e.) the liability remitted through electronic cash ledger and not on the gross GST liability.
However, the government never ever notified a date for the applicability of this amendment. The intent to amend is there-à the amendment is also thereà but it’s not effective.
And then came the Madras High Court Judgement in case of reflex industries which said to pay interest only on the net liability. It held that interest is purely compensatory in nature so it has to be paid only on that portion of the tax that the government was deprived off which is essentially the net tax liability.
Yet, Amendment in section 50 was not notified. Then Covid-19 happened to the world. The 39th GST council meeting held in March-2020 emphasized to the government that section 50 has to be amended and that too retrospectively.
And so after 12 months of finance act no 2019 and after 6 months of council meeting decision, on August 25th 2020, the CBIC issued notification 63/2020 which gave an effective date for the amendment in section 50 as 01st September 2020. This was a bitter sweet moment. why there is no retrospective amendment? Does this mean the revenue department has powers to go back 3 years in time and ask assesses to pay up interest for delays of the past 3 years.?
The night of August 25th 2020 was more anxious than the journey of interest provision over the past two years
There was huge massive outburst on this on all social media platforms. Tagging #CBIC, tagging #GSTcouncil handles what not.
So on August 26th 2020 the very next day CBIC issued a press release stating that the interest provision amendment would be considered as retrospective and effective from 01 July 2017 only. But however, the notification could not be given a retrospective verbatim due to technical reasons.
As on today, amendment in sec 50 has been notified. There is no need to pay interest on gross liability. Interest for delayed payment of tax is applicable only on the net liability paid in cash.
However, 2 key take aways remain that if there is any reverse charge liability – and the same has been delayed – interest would get attracted on the entire RCM payment since RCM is always in cash without ITC set off.
Second key take away is that this relief is not applicable in case of any demand and recovery proceedings initiated under 73 or section 74. Which means if you are coughing up the GST liabilities pursuant to any litigation / adjudication as the case may be – then interest has to be paid on the total demand even if the same is paid through ITC set off sec 50