Pay Interest on gross liability, if you delay return filing rules Telangana HC

[Abhishek Sethi]

The GST law was implemented couple of years back and since then Government has made multiple and commending efforts to streamline/clarify various issues/challenges faced by the taxpayers.

Considering the magnitude of change in compliance regime, the proposed invoice level credit matching system was replaced by a summary return GSTR 3B, to be filed on monthly basis summarizing the outward/inward supplies and corresponding tax liability/credits of a taxpayer, similar to earlier Indirect tax laws. The said system of filing GSTR 3B along with GSTR 1 (outward supplies return) has been operational since implementation of GST to date and other returns GSTR 2 & GSTR 3 have been deferred.  

Further, considering system challenges and difficulty faced by taxpayers in early stages, which invariably resulted in late filing of returns by many taxpayers, the Government repeatedly extended deadlines for filing returns, claiming credits etc. including waiver of late fees for filing belated returns. In various cases, even though taxpayers deposited GST liability timely in cash ledger, the returns were still filed belatedly for various reasons including system challenges. 

The GST law being a fiscal statute, similar to other tax laws, contains a provision for levy of interest (Section 50 of the CGST Act, 2017), providing for compensation to the government for delay in remitting the tax dues. 

 

Matter before Hon’ble Telangana High Court

Recently, a matter came up before the Hon’ble Telangana High Court regarding computation mechanics of the interest as provided for in Section 50 of the CGST Act, 2017.

Issue

The issue raised before the Hon’ble Court was whether interest is payable only on the net tax liability (to be deposited in cash) or whether interest is payable on the total tax liability including a portion of which is liable to be set-off against Input tax credit?

Legal Provisions

The provision of Section 50(1) of CGST Act, 2017 is reproduced below:-

50. (1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, 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.

Apart from aforesaid, court referred provisions of Section 41 (providing for ITC claim and provisional acceptance) and Section 49 (Payment of tax):-

“41. Claim of input tax credit and provisional acceptance thereof

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as selfassessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section.”

…

 

49. Payment of tax, interest, penalty and other amounts-

…

(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41, to be maintained in such manner as may be prescribed.

…

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act, 2017 (Act No.13 of 2017) in such manner and subject to such conditions and within such time as may be prescribed.

…

Observations of the Hon’ble High Court

After considering submissions made by both sides, the Hon’ble Court made following observations: -

• GST Input tax credit (ITC) is available to a registered taxpayer only upon filing of return as prescribed under the law namely Section 39 of CGST Act, 2017;
• ITC becomes available in electronic credit ledger only upon filing of return and that too on provisional basis;
• Only after credit becomes available by filing return; the credit can be used for payment of taxes even though by virtue of book entries (though there is no cash deposit to government in such cases)

Considering the aforesaid, the Hon’ble Court held that ITC for payment becomes available only upon filing return & till such time of filing return, entire tax liability remains unpaid, on which interest is payable under Section 50(1) of CGST Act, 2017

The Hon’ble High Court also negated to rely upon proposal of GST Council’s recommendation to amend interest provision to suitably amend aforesaid provision, as the same has not been implemented.

Our view

The aforesaid order of the Hon’ble High Court poses a unique challenge for taxpayer community at large, given there has been various cases wherein taxpayers have filed belated returns (with or without late fee as applicable), including cases wherein cash deposits were made well in time. 

Though the Hon’ble High Court has quoted & relied upon the provisions of the GST law, in our humble view, it appears that the Hon’ble High Court has narrowly applied the interest provisions without considering the scheme of law as a whole and established legal principles.

It is imperative that the aforesaid ruling shall be challenged by the taxpayer’s community on various grounds inter alia following: - 

-          One of the established legal principle is compensatory nature of interest, which has not been discussed in the judgment at all. It has always been maintained that interest provisions are put in a fiscal statute to as a deterrent to discourage taxpayers from delay in payment of taxes. GST law, being a fiscal law,

-          The word ‘unpaid’ in the provision is preceded by words ‘the tax or any part thereof’, which itself implies that there may be a situation wherein partial tax payment is made and partial tax payment is unpaid. However, the judgment itself notes that there is no provision of filing a return wherein return may be filed with partial payment of taxes. If such is the scenario, then the phrase the tax or any part thereof appears to be redundant, following the Hon’ble High Court ratio.

-          It is established principle that substantial rights cannot be denied because of procedural lapses. The judgment itself notices that credit of tax paid on goods/services is always available but later disallows the set off of the same because of mere delay in filing returns. The judgment also acknowledges the fact that such submission is merely paper entry.

-          The Hon’ble Court has completely ignored the provisions of Section 42 of CGST Act, 2017 and ignored the fact that GSTR 2A available on portal has become available which shows invoice level credit to a recipient taxpayer based on information submitted by supplier taxpayer, for the very same month in which invoice has been received by the supplier taxpayer – thereby the argument of provisional acceptance is ill-founded and incomplete, given the non-operationality of GSTR matching system detailed out under GST law.

-          The expression unpaid as used under the previous indirect tax laws was always meant and understood equivalent to amount unpaid to exchequer.

-          The word ‘shall’ has always been interpreted by Courts to mean discretionary or mandatory basis the impact of construing the said provision one way or the other. In instant case, the mandatory application of word ‘shall’ to uphold levy of interest on full liability including ITC casts burden on taxpayer, without any corresponding delay in tax deposit to exchequer & enriches state at the expense of taxpayer, contrary to principles of good tax law.

Further, on another note, the comparison made by the Hon’ble Court by equating bank account of a person to electronic credit ledger of a taxpayer appears to be ill-founded as the Govt. takes into account cash deposits into electronic cash ledgers for purposes of monthly collection numbers, which have been issued on month on month basis.  

Additionally, it is imperative that GST Council should immediately take corrective steps to amend interest provision (and hopefully retrospectively) to nullify the impact of aforesaid ruling & ensure ill-effects of aforesaid ruling are avoided before taxpayers are served notices in such matter, which could seriously impact India’s ease of doing business image.

Discussions to this article

[Nazma Rizvi]

What If the 90 % of the output tax liability has been deposited in cash ledger well before the due date of filing 3B .

Whether the interest would be applied on the remaining 10% pending filing of 3B due to ITC or on Full Value of the Output Tax Liability.

[KASTURI SETHI]

Then interest will be applicable on the balance amount of 10%. Govt. is concerned with the debit entry. Unless or until it is debited, tax will not be credited into the kitty of Govt. Any assessee may have one crore in Electronic Credit Ledger, if liability it is not offset by way of debit entry and credited into Govt. account, interest will be chargeable on the gross liability and NOT net liability of cash only.

[KASTURI SETHI]

The element of 'discretionary' is not present in the word,'Shall'. 'Shall' represents mandatory nature.

[ANIL ANIKHINDI]

As per the Hon'ble court's decision, If my outward supply GST is say 100, my ITC is say 60, then my liability comes to 40. If I pay 40 within due date then no interest. If I pay 90% of 40 i.e. 36, then I will have to pay interest on 64 (i.e. 100-36=64) for delayed filing of return.

[KASTURI SETHI]

Sir,

60% liability must also be debited from Electronic Credit Ledger within stipulated period. If not debited, it lies with the registered person/assessee's account and not not with Govt.'s account. Duty paid through Credit Account or in cash both are at par. Cenvatable invoices are equal to cheques. This is the dispute going on. That is why no notification was issued after approval by the GST Council on the issue. Anyhow, soon ball will be in the Hon'ble Supreme Court. These are my views.

[ANIL ANIKHINDI]

Agreed, Thanks.