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 Quantum of interest to be levied is under dispute from first day of introduction of GST. Dispute is whether GST will be charged before adjusting ITC (on Gross Liability) or after adjusting ITC (Net Liability). Strictly reading the 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 tax payers 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. However, notification for enforcing the above amendment was not issued due to which the proviso to Section 50 was not effective.
However the much awaited Notification for enforcing the provisions of Section 100 of Finance (No. 2) Act, 2019 has now been 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 has 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 is also being 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.
In this regard before deliberating further, in our view we should go through the history of events / announcements / judicial pronouncements in regard to levy of interest in order to appreciate the position.
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).
OUR COMMENTS:
After going through the story so far, as deliberated above, it appears that although the GST Council has principally agreed for levy of interest on net tax liability but such agreement was not with retrospective effect. This fact is corroborated from the fact that it was announced vide press release dated 22.12.2018, that Section 50 will be amended and recommendations of Council will be made effective only after necessary amendments in GST Acts.
In consonance to above, proviso was inserted in Section 50 of the CGST Act,2017 vide Section 100 of the Finance (No.2) Act,2019. Further 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. Thus applying the above proviso on retrospective effect was never the legislative intention and rather it was given a prospective effect by the legislature that too from the appointed date as declared in the Notification to be issued in this regard. The appointed date has now been fixed as 01.09.2020 vide Notification No. 63/2020-Central Tax dated 25.08.2020.
Thus interest on delayed payment pertaining to period after 01.09.2020 shall be levied on on the net tax liability (cash portion). However it appears that as per prevailing laws the interest for period till 30.08.2020 is payable on gross tax liability basis.
Now coming to the press release dated 14.03.2020 wherein it was intimated that GST Council, in its 39th meeting held on 14.03.2020, has made 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).
In this regard in our view, as the amendment in Section 50 was made much before the decision of GST Council to amend law retrospectively and accordingly it was not currently possible to notify proviso to Section 50 retrospectively from 01.07.2017 as only Parliament is empowered to do it. We believe that Government would amend Section 50 retrospectively from 01.07.2017 at time of next budget honouring the GST Council decision in its meeting dated 14.03.2020.
In our view a advisory / clarification from CBIC that retrospective amendment is yet to come should be issued to avoid unnecessary departmental action for past period of recovery of interest on gross tax liability.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
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