Section 50 of the CGST Act, 2017 which is also replicated in SGST Acts, contains the provision for levy of interest on delay or non-payment of GST. In this regard, the Quantum of interest to be levied was under dispute from first day of introduction of GST. The dispute was whether GST will be charged before adjusting ITC (on Gross Liability) or after adjusting ITC (Net Liability).
Strictly reading the current provision, it appears that interest on delayed payment of tax has to be paid on the gross tax liability and not on net tax liability (cash portion) which causes much hardship to the taxpayers who have not filed their returns on time and are having significant tax credits.
The tax payers on the above issue approached the High Courts for relief and have been rewarded by contradictory judgements. Meanwhile the CBIC appreciated the tax payers hardship and suggested the GST Council to amend the GST Act(s) in order to mandate that interest will be applicable only on net tax liability and not on gross tax liability.
In order to resolve the above issue, amendment was carried out in Section 50 of CGST Act,2017 by Section 100 of Finance (No. 2), Act 2019. By such amendment, proviso was inserted to section 50 which prescribes that interest shall be charged on that portion of tax that is paid by debiting the electronic cash ledger.
Notification for enforcing the provisions of Section 100 of Finance (No. 2) Act, 2019 was issued vide Notification No. 63/ 2020-Central Tax dated 25.08.2020 wherein it has been stated that provisions of Section 100 will be effective from 1st September 2020.
This had led to another debate i.e. whether interest will be required to be paid on gross tax liability basis for the period upto 30.08.2020. Further the Notification was seen as fraud on tax payers as earlier GST Council / Governemnt had declared that interest will be applicable on net tax liability retrospectively from 1st July,2017.
However later on vide Section 112 of the Finance Act, 2021 the proviso to Section 50(1) of the CGST Act, 2017 was substituted in order to provide that interest will be applicable on net tax liability retrospectively from 1st July, 2017. However the substituted proviso has not yet been enforced.
GST Council in its 43rd Meeting held yesterday has inter-alia decided that Retrospective amendment in section 50 of the CGST Act with effect from 01.07.2017, providing for payment of interest on net cash basis, to be notified at the earliest.
For ready reference of our readers the chronology of events / announcements / judicial pronouncements in regard to levy of interest on gross / net tax liability is given below:
COMPLETE STORY SO FAR…
31st GST Council Meeting held on 22nd December, 2018 : Agenda Item 7(xx) for carrying out amendment in GST Act for charging interest on net tax liability
Proposal for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability was put as per following paras reproduced below:
6. The issue was deliberated by the Law Committee in its meeting held on 15.12.2018. The Committee observed that the proposal to charge interest only on the net liability of the taxpayer, after taking into account the admissible credit, may be accepted in principle. Accordingly, the interest would be charged on the delayed payment of the amount payable through the electronic cash ledger. However, where invoices/debit notes have been uploaded in statements pertaining to the period subsequent to the period in which they should have been uploaded, the interest shall be calculated on the amount of tax calculated on the taxable value from the date on which the tax on such invoices was due. This would require amendment to the Law.
7. Accordingly, in-principle approval of the GST Council is sought for carrying out the amendment in CGST/SGST Act as per the proposal contained in para 6 above. Law Committee may be directed to frame suitable amendments in the law. Similar amendments would be required in the respective SGST Acts also.
Minutes of 31st GST Council Meeting: Officers were in agreement and Council agreed to approve the issue of levy of interest on net tax liability
Agenda Item 7: Issues recommended by the Law Committee for the consideration of the GST Council
16. Introducing this Agenda item, the Secretary informed that the issues under this Agenda item were discussed in detail in the Officers meeting held on 21 December 2018 and a presentation was also made (attached as Annexure 4). He informed that except for six issues, the officers were in agreement with the other proposals under this Agenda item. He stated that if the Council agreed then except the six issues, the Council may approve the rest of the proposals. The Council agreed to this proposal. He invited Commissioner (GST Policy Wing), CBIC to present five issues and Joint Secretary, DoR, to present one issue for the consideration of the Council.
[Agenda item 7(xx) was one of the issues where the officers were in agreement and Council
agreed to approve such agreed issues]
Annexure 4 (of the Minutes) –
Agenda No. 7 (xx) (1/2) Proposal for amendment of Section 50 of CGST Act to allow
payment of interest on net cash liability
• Law permits furnishing of a return without payment of full tax as self-assessed as per the
said return but the said return would be regarded as an invalid return
• No such facility has been yet made available on the common portal. This inflexibility of the
system Increases the interest burden
• GST only on value addition
Agenda No. 7 (xx) (2/2) Proposal for amendment of Section 50 of CGST Act, 2017 to allow
payment of interest on net cash liability – Accordingly, in principle approval for amendment
in law (as the proposed changes require amendment to CGST as well as SGST Acts) is sought
so as to provide that:
- interest should be charged only on the net liability of the taxpayer, after taking into
account the admissible credit, i.e. the amount payable through electronic cash ledger - interest would be charged on tax calculated on taxable value where invoices or debit
notes are uploaded late.
Press Release dated 22.12.2018 communicating the in-Principle approval given for Amendment in GST Acts during 31st Meeting of the GST Council December 22, 2018
2. Amendment of 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.
The above recommendations of the Council will be made effective only after the necessary
amendments in the GST Acts are carried out.
Telangana High Court: Writ against levy of interest on gross liability dismissed
The Telangana High Court in this judgment delivered on 18.04.2019 in the case of Megha Engineering & Infrastructure Ltd (Writ Petition No. 44517 of 2018) dismissed the writ filed against levy of interest on gross tax liability stating that no claim of ITC can be made unless the returns are filed.
Amendment in Section 50 by the Finance (No.2) Act, 2019 notified on 1st August,2019
As per Section 100 of the Finance (No.2) Act, 2019 in section 50 of the CCGST Act, in sub-section (1), the following proviso was inserted, namely:––
“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.”.
It may be noted here that as per Section 1(2)(b) of the Finance Act,2020, sections 92 to 112 and section 114 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. Accordingly the above proviso was not operative despite promulation of Finance Act,2019.
Madras High Court : Interest will be applicable on net tax liability retrospectively
Madras High Court in its judgment delivered on 06.01.2020, in the case of Refex Industries Limited (Writ Petition No. 23360 and 23361 of 2019 & Misc Petition Nos. 23106 and 23108 of 2019) held that interest is applicable only on net cash liability retrospectively stating that amendment made to Section 50 is clarificatory.
CBIC Twitter dated 15.02.2020: Amendment in GST Acts to be made on prospective basis for levy of interest on net liability
The GST laws , as of now, permit interest calculation on delayed GST payment on the basis of gross tax liability. The position has been upheld in the Telangana High Court’s decision dated 18.04.2019 in spite of this position and Telanga’s High Court order , the Central Government and several State Governments, on the recommendation of GST Council, amended their respective CGST / SGST Acts to charge interest on delayed GST payment on the basis of net tax liability. Such amendment will be made prospectively. The States of Telangana and West Bengal are in the process of amending their State GST Acts. After the process of amendment is complete, the changed provisions can be put into operation for the entire Country.
Press Release – 14.03.2020 (Law and Procedure related changes): Recommendation of GST Council that GST Acts will be amended retrospectively to levy interest on net tax liability.
The GST Council, in its 39th meeting held on 14.03.2020, interalia made various recommendation as part of measures for trade facilitation which included the recommendation that Interest for delay in payment of GST to be charged on the net cash tax liability w.e.f. 01.07.2017 (Law to be amended retrospectively).
It may be noted here that agenda and minutes of 39th GST Council meeting held on 14.03.2020 is not yet available in the public domain.
Issue of Notification No. 63/2020-Central Tax dated 25th August,2020
As per Notification 63/2020-Central Tax dated 25.08.2020 , Section 100 of the Finance (No.2) Act,2019 has been made effective from 01.09.2020. Accordingly interest on delayed payment pertaining to period after 01.09.2020 shall be levied on the net tax liability (cash portion).
Retrospective amendment to proviso to Section 50(1) by Finance Act, 2021
Section 112 of the Finance Act, 2021 substituted the proviso to Section 50(1) of the CGST Act, 2017 with effect from the 1st day of July 2017. The amended proviso is reproduced below:
“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.”.
Thus above proviso made it clear that interest will only be applicable on net tax liability , that too from 1st July, 2017. However the issue was that above substituted proviso was not enforced.
Decision of GST Council to enforce amendment
The GST Council in its 43rd Meeting held yesterday has inter alia decided that that Retrospective amendment in section 50 of the CGST Act with effect from 01.07.2017, providing for payment of interest on net cash basis, to be notified at the earliest.
With notification as above, the dispute regarding applicability on interest on gross or net liability will evaporate for ever.
Also Read: GST Audit to be abolished from FY 2020-21
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CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.
