INTEREST UNDER GST: An Interesting Interest

[Kunu Padhi]

Introduction

Which side of the interest equation are you on! Paying or Receiving ? Interest is only interesting when you’re on receiving end. But is it really that interesting when a statute impose the same on you? Nearly all the tax systems have some form of interest in self-assessment regimes. Interest payable on any late payment or under-payment of tax seeks to protect the present value of the tax amount to the government exchequer. Interest is therefore not a penalty or punishment at all, rather it is normal accretion on capital.

Objective of Statutory Interest:

Mr. Christophe J Waerzeggers, Mr. Cory Hillier and Mr. Irving Aw, in their Book ‘Designing Interest and Tax Penalty Regimes’ published by International Monetary Fund (IMF) have narrated that the primary objective of an interest regime is to protect the present value of tax revenues by compensating the government for the deprivation of use of tax amounts that are not paid on time. Interest should therefore accrue automatically from the time the liability arises, without the need for an assessment and regardless of any extension in time given by the tax authority for payment under any instalment scheme. Because interest is compensatory in nature, it is generally not appropriate to remit or reduce any interest accrued except in limited circumstances, where the reason for the late payment is beyond the control of the taxpayer (such as pandemic situation like corona, natural disasters, or technology failure).

It is a common international practice that rate of interest for underpayment or late payment of taxes is higher than commercial lending rates. At a minimum, the rate of interest that is charged on an under-payment or late payment needs to compensate the government budget for the lost time value of the money; had the payment been made on the relevant due date. While the interest rate should not be set so low so as to encourage taxpayers to use the government as a lending institution (for instance by using tax arrears as alternative form of finance), the rate should also not be set so high so as to be punitive like penalty. Many countries therefore try to approximate market interest rates by adopting an interest rate based on the central bank lending rate or an index of commercial lending rates and by adding some fixed percentage points to that rate. The interest rate should also be adjusted periodically (such as monthly or quarterly) to reflect market developments, but not so frequently as to complicate administration. For example, Australia imposes a general interest charge on outstanding tax assessments at the bank bill rate plus 7 percent, with a lower uplift factor of 3 percent applying in the period before a reassessment is made by the tax authority on daily compounding basis. A compounding daily basis might be regarded as theoretically the most appropriate to compensate for the lost time value of money, but it is more complex. If the interest rate was set at or below commercial lending rates, taxpayers would be more likely to pay other creditors before they pay their taxes, since taxpayers would prefer to pay debts to their financial creditors to avoid breaching covenants or denial of credit, and to their suppliers to ensure continued availability of stock or services.

 On the other hand, overpaid taxes are often refunded with an interest rate at or below ordinary commercial lending rates. While at first glance it may appear inequitable for a higher interest rate to apply to underpayments of tax than to overpayments, there are sound policy reasons for the distinction. Taxpayers should not be rewarded with higher than commercial rates of interest for overpayments, as the commercial rate is a proper estimation of their loss. Moreover, if interest on overpayments exceeds the commercial rate, taxpayers will choose overpayment as a favourable form of investment at the detriment of the revenue. Also, government is generally assumed to be of better credit standing than the standard debtor, which justifies a lower interest rate.

Interest under GST Act:

Let’s analyse the provision related to interest under GST Act & interpretation by Hon’ble Courts in India. Sub-section (1) of Section 50 of the CGST Act deals with interest on belated payment of tax or late filing of return whereas sub-section (3) of the said section deals with interest on undue or excess claim of ITC. The present analysis revolves around the interest mentioned at sub-section (1) of Section 50 of CGST Act. The same is reproduced below for clarity: -

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.

                                                              [emphasis supplied]

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.

Central Government vide Notification No. 13/2017-Central Tax dated 28.06.2017 notified such rate at 18%. By virtue of provisions contained therein, a burden is cast on the taxpayer, who is liable to pay the tax, but failed to pay the same within the stipulated date, to pay interest @ 18% per annum. The liability to pay interest under Section 50 (1) is a statutory obligation, which the taxpayer is obligated to comply with “on his own” accord as it arises automatically.

Is interest automatic under GST Law? & communication is not warranted?

 In international practice, it is not uncommon for the law to provide for interest to accrue on an automatic basis. While deciding the nature of levy, Hon’ble Supreme Court and Hon’ble High Courts of India in a plethora of judgments have held that interest in an automatic levy on underpayment or late payment. The law may also provide for the tax authority to make a formal communication of the amount of interest that has accrued up to a certain point in time for the purpose of notifying the taxpayer or to facilitate recovery (Para-29 of the order of Hon’ble Madras High Court in the case of THE ASSISTANT COMMISSIONER OF CGST & CENTRAL EXCISE, THE COMMISSIONER OF CGST & CENTRAL EXCISE, THE SUPERINTENDENT OF CENTRAL TAXES VERSUS M/S. DAEJUNG MOPARTS PVT LTD., INDIAN OVERSEAS BANK - 2020 (2) TMI 668 - MADRAS HIGH COURT traced upon such communication after arithmetical exercise). But, the matter of concerned is whether GST law provides for such a communication/intimation/notice or not? For analysing the said condition, it is necessary to go through provisions u/s. 75 (12) of CGST Act & Rule 142 of CGST Rules.

Section 75(12) of CGST Act reads as under:-

(12) Notwithstanding anything contained in section 73 or section 74, where any amount of self-assessed tax in accordance with a return furnished under section 39 remains unpaid, either wholly or partly, or any amount of interest payable on such tax remains unpaid, the same shall be recovered under the provisions of section 79.

 [emphasis supplied]

So, the provision u/s. 75(12) make it abundantly clear that any amount of interest payable on late payment remains unpaid, the same shall be recovered under the provisions of section 79 of CGST Act. Hence, similar to other international taxing statute, can we consider such a communication should not be a pre-condition to the interest becoming payable? The answer to this question is both ‘yes’ and ‘no’. Yes, because the taxpayer is required to pay the interest suo motto as per provision of the Act. No, because, if the taxpayer hasn’t paid the interest on his own accord, there should be a communication/intimation/notice for payment of interest before invoking recovery proceeding. Here comes the role of Rule 142 of CGST Rules, which indirectly speaks about such communication/intimation/notice.  Let’s go through the relevant sub-rule of Rule 142 of CGST Rules:-

142 (1) The proper officer shall serve, along with the

(a) notice under sub-section (1) of section 73 or sub-section (1) of section 74 or sub- section (2) of section 76, a summary thereof electronically in FORM GST DRC-01,

…….

(5) A summary of the order issued under sub-section (9) of section 73 or sub-section (9) of section 74 or sub-section (12) of section 75 or sub-section (3) of section 76  or section 125 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty payable by the person chargeable with tax.

(6) The order referred to in sub-rule (5) shall be treated as the notice for recovery.

...

           [emphasis supplied]

Interest provisions are related to section 50 and section 75 (12) of the CGST Act, however both the provisions do not find place in Rule 142 (1), which indicates that FORM GST DRC-01 is not applicable for instant proceeding. But in sub-rule (5) of said rule, there’s mention of Section 75 (12) of CGST Act. So, it can be safely concluded that FORM GST DRC-07 mentioned in the said sub-rule is related to the instant proceeding. Further, sub-rule (6) says, DRC-07 shall be treated as notice for recovery. So, in the instant proceeding DRC-07 shall be treated as an intimation/communication/notice for recovery. The above view has also been interpreted in the Court of Law. [Judgment dated 23.03.2021 of Hon’ble Gujurat High Court at Ahemadabad in Special Civil  Application No. 21534 of 2019 in the case of M/S RAJKAMAL BUILDER INFRASTRUCTURE PRIVATE LIMITED THROUGH DIRECTOR MAHENDRA H PATEL VERSUS UNION OF INDIA - 2019 (12) TMI 415 - GUJARAT HIGH COURT]. But it’s pertinent to mention here that the said FORM GST DRC-07 shall be treated as notice for recovery per se for this limited purpose (but not as an order) as per sub-rule (6) of Rule 142 in particular and Rule 142 of CGST Rule in general. With utmost respect to the judgment of Hon’ble Jharkhand High Court in W.P. (T) No 3517 OF 2019 in MAHADEO CONSTRUCTION CO. VERSUS THE UNION OF INDIA, ASSISTANT COMMISSIONER, CENTRAL GOODS & SERVICES TAX AND CENTRAL EXCISE, SUPERINTENDENT, CENTRAL GOODS & SERVICES TAX AND CENTRAL EXCISE - 2020 (4) TMI 666 - JHARKHAND HIGH COURT & W.P. (T) No 1786 of 2019 in GODAVARI COMMODITIES LTD., RANCHI. VERSUS THE UNION OF INDIA THROUGH THE COMMISSIONER, CENTRAL GOODS & SERVICES TAX, RANCHI, DEPUTY COMMISSIONER, SUPERINTENDENT, CENTRAL GOODS & SERVICES TAX RANGE-1 - 2019 (12) TMI 275 - JHARKHAND HIGH COURT, for the above mentioned provision of GST law, the writer begs to differ the view that the department has to mandatorily go through the process of adjudication u/s. 73 or 74 in the event assessee disputes the leviability of interest.

Is instalment provision under section 80 of CGST is applicable against the intimation made in DRC-07 for payment of  interest?

According to IMF Tax Law Technical Note 2019/001, Best Practice Design Features for Interest Regime,  International Monetary fund, such installment practice is not advisable because interest on underpayments is designed to compensate the government budget for the lost time value of money, it is generally not appropriate to allow such further loss as there is no such compounding interest (interest on interest) in taxation law. Let’s analyze the installment provision u/s. 80 of the CGST Act, which mandates: -         

80. On an application filed by a taxable person, the Commissioner may, for reasons to be recorded in writing, extend the time for payment or allow payment of any amount due under this Act, other than the amount due as per the liability self-assessed in any return, by such person in monthly instalments not exceeding twenty four, subject to payment of interest under section 50 and subject to such conditions and limitations as may be prescribed:

[emphasis supplied]

Thus the aforesaid provision make it abundantly clear that the Commissioner may allow payment up to 24 instalments with a mandatory condition of payment of interest (subject to such other condition & limitation as may be prescribed) for any amount due other than the self-assessed in any return. As far as instalment in interest is concerned, it’s not possible to allow instalments by the Commissioner as the interest is self-assessed in the return. Moreover interest can’t be charged on interest (compounding interest in not permissible in GST Law), which is an essential condition for allowing instalments by the Commissioner u/s. 80 of CGST Act. In a recent case, Hon’ble High Court of Orissa in W.P. (C) No.10335 of 2022 in case of ‘P.K. Iron Ores Pvt. Ltd. Vs. Commissioner of State Tax & another’ upheld the rejection order of Hon’ble Commissioner of State Tax, Odisha. The bench comprising of Justice Jaswinder Sing and M.S. Raman vide order dated 06.05.2022 analysed the provisions related to interest & self-assessment & payment of tax in details along with interpretation of the same by various courts of India [28 judgment excluding internal citation within the cited judgment] relating to interest in general, legal interest and it’s automatic levy & compensatory nature of interest and come to conclusion that the Commissioner of State Tax (CT & GST), Odisha is justified in rejecting the prayer of the petitioner to deposit the interest in instalments and dismissed the writ petition. 

In view of the above provision of the GST law, order of Hon’ble Commissioner of State Tax, Odisha and recent judgment of Hon’ble High Court of Orissa (supra), provision for instalment u/s. 80 of CGST Act is not applicable against the intimation/notice made in DRC-07 for payment of unpaid interest.

Is Appeal under section 107 applicable against the intimation made in DRC-07 for payment of  interest?

A right to appeal is a statutory right or in a way can be said that a creature of statute. The said right is governed by the terms of the statute creating it. It is not an inherent right and can’t be availed until and unless it is provided in the statute itself. It’s nature, character and extend will have to be determined and controlled by the relevant provisions creating the right. It is a settled law that in a taxing statute, one has to look merely at what is clearly said. There is no room for intendment. Section 107 of CGST Act deals with appeal. The relevant portion of the said provision is extracted below for better appreciation:-

107 (1) Any person aggrieved by any decision or order passed under this Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act by an adjudicating authority may appeal to such Appellate Authority as may be prescribed within three months from the date on which the said decision or order is communicated to such person.

…

(5) Every appeal under this section shall be in such form and shall be verified in such manner as may be prescribed.

(6) No appeal shall be filed under sub-section (1), unless the appellant has paid-

(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and

(b) a sum equal to ten per cent. of the remaining amount of tax in dispute arising from the said order, in relation to which the appeal has been filed.

(7) Where the appellant has paid the amount under sub-section (6), the recovery proceedings for the balance amount shall be deemed to be stayed.

 [Emphasis supplied]

On conjoint reading of sub-section (1), clause (a) & (b) of sub-section (6) of Section 107 of CGST Act, it is apparent that the taxpayer can file appeal against any order on payment of tax, interest, fine, fee and penalty arising from the order as it is admitted in full and 10% of remaining amount of tax in dispute arising from the said order. So, the appeal can be filed against any order and not against any communication/intimation/notice for recovery. Hence, the provision u/s. 107 of the CGST Act is not applicable in the instant case. However, in some cases, Hon’ble High Courts have directed to file appeal against interest demand. But in those cases, the proper officer has wrongly passed the adjudication order u/s. 73 of the CGST Act to make an interest demand without analysing the said provision and Rule 142 of CGST Rules.  

Any other statutory remedy?

 It may so happen that while computing the interest, the proper officer might have calculated the interest amount higher than the actual amount for various reasons (like not taking into account admitted interest disclosed in the returns, or not taking into consideration of the extended date of filing of return notified from time to time, or not taking into account the payment of interest in DRC-03 or charging interest rate @ 18% instead of 9% for the relevant tax period as covered under the Notification No. 51/2020-Central Tax dated 24.06.2020 or any other reason). In such a situation, the taxpayer may end up with a notice for recovery containing higher amount of interest, if no statutory remedy is available under the GST Act. Hence, in order to overcome this kind of issues; it is necessary to figure out whether any statutory remedy available in the GST Act or not? Moving further, let’s analyse, the provision u/s. 161 of the CGST Act, which stipulates: -

161. Without prejudice to the provisions of section 160, and notwithstanding anything contained in any other provisions of this Act, any authority, who has passed or issued any decision or order or notice or certificate or any other document, may rectify any error which is apparent on the face of record in such decision or order or notice or certificate or any other document, either on its own motion or where such error is brought to its notice by any officer appointed under this Act or an officer appointed under the State Goods and Services Tax Act or an officer appointed under the Union Territory Goods and Services Tax Act or by the affected person within a period of three months from the date of issue of such decision or order or notice or certificate or any other document, as the case may be:

[Emphasis supplied]

On plain reading of the highlighted portion of the provision u/s. 161, it can be safely concluded that rectification of the notice is possible u/s. 161 of the CGST Act. So, the taxpayers as the affected person can apply for rectification of the notice for recovery within a period of three months from the date of issue of such notice.

Conclusion

While designing an interest regime, sufficient consideration should also be given to ensure that taxpayers’ interests are adequately protected. International good practices in relation to the protection of taxpayers’ interests include clarity in the computation of interest payable, informing taxpayers that interest has accrued and continues to accrue on the outstanding tax debt (although the accrual of interest should be automatic and is independent of such notification to taxpayer), as well as a corresponding right to be compensated if there is overpayment of tax and a tool for calculation of interest. To facilitate taxpayer, an interest calculator in return (GSTR-3B) has been deployed in the GST common portal lately in the month of Jan-2022 only. This functionality is facilitating & assisting the taxpayers to estimate their interest liabilities accurately in doing self-assessment. This functionality is arriving at the system computed interest on the basis of the tax liability values declared by the taxpayers, along with the details about the period to which it pertains. The interest applicable for a tax period (if any) is being computed after filing of the said return (GSTR-3B) and is being auto-populated in the Table-5.1 of the GSTR-3B of the next tax-period. This type of facility should have been brought earlier for computing interest for belated payment of tax but nevertheless the said functionality continues to be a welcoming change for the taxpayers.  

Discussions to this article

[CA.Tarun Agarwalla]

Dear Sir, it is really nice to have a article on most litigative area.