INTEREST ON BELATED PAYMENT OF TAX NOT LEVIABLE WHEN SUFFICIENT BALANCE OF INPUT TAX CREDIT IS AVAILABLE

[Mr. M. GOVINDARAJAN]

Payment of tax

The GST laws provide for the payment of tax by means of central tax, State tax, integrated tax or Cess within the prescribed time limit as prescribed in the law.  Section 49(1) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides that every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed.   Section 41(3) of the Act provides that the amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the provisions of this Act or the rules made there under in such manner and subject to such conditions and within such time as may be prescribed.

Input tax credit

Section 16(1) of the Act provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Section 41 of the Act provides that 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 self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.   The said credit shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section.  Section 43A of the Act provides the procedure for filing return and availing input tax credit.

Section 49(2) of the Act provides that 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 or section 43A, to be maintained in such manner as may be prescribed.  Section 49(4) of the Act provides that 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 in such manner and subject to such conditions and within such time as may be prescribed.

Interest on delayed payment of tax

Section 50(1) of the Act provides that 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 18% as may be notified by the Government on the recommendations of the Council.  Section 50(2) of the Act provides that the interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

Interest on net payment

The proviso to section 50(1) provides 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 said proviso has been inserted in the Act with effect from 01.08.2019. 

In ‘M/S. REFEX INDUSTRIES LIMITED, M/S. SHERISHA TECHNOLOGIES PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF CGST & CENTRAL EXCISE, THE SUPERINTENDENT OF CENTRAL TAX, BANK MANAGAR, BANK MANAGAR, ICICI BANK’ -2020 (2) TMI 794 - MADRAS HIGH COURT, the petitioners filed two writ petitions before the High Court.  The petitioners have filed returns of income belatedly for the period 2017-18 for the months from July 2017 to March 2018.  The interest to be payable by the two petitioners are ₹ 11,65,982 and ₹ 23,62,7436.

The Revenue issued demand notices to the banks of the petitioners directing the banks to recover the arrears of interest from the balance in the accounts of the petitioners.  Against the said orders the petitioners filed the present writ petitions vide No. WP 23360/2019 and WP 23361/2019 before the High Court.

The petitioners submitted the following before the High Court-

• They had sufficient Input Tax Credit available with the Department and thus interest could be demanded, if at all, only on the cash component of the tax remitted belatedly. 
• The following are the details of payment made by the petitioners-

Writ petition No.	Tax payable (in Rs.)	Paid by Cash (in Rs.)	Payment adjusted through ITC
WP 23360/2019	3,94,49,225	19,55,634	3,74,93,591
WP 23361/2019	2,74,71,771	12,19,151	2,62,52,620

• In WP 15978/2019 filed by the petitioner, the High Court directed the petitioner therein to remit the admitted tax, being tax on the cash component of the demand belatedly paid and the Department to dispose the representation of the petitioner in that case to the effect that there would be no liability to interest in regard to the ITC available with the Department.
• Section 50 that provides for levy of interest on belated payments would apply only to payments of tax by cash, belatedly, and would not stand triggered in the case of available ITC, since such ITC represents credit due to an assessee by the Department held as such.

The High Court analyzed the provisions of section 50.  The High Court observed that the said Section provides for interest on belated payment of tax and as held by the third Judge, such levy is 'automatic', and is intended to compensate the revenue for the remittance of tax belatedly and beyond the time frames permitted under law. The interest recoverable under section 50 is compensatory to the Government for the belated payment of tax and it is mandatory.

The High Court observed that appeal was filed against the order in WP 15978/2019.  The two  Judges expressed divergent views.   One Judge dismissed the Writ Appeals, whereas the second Judge was of the view that the legal issue on the leviability of interest called for a deeper consideration than had been extended by the learned single Judge at the stage of admission and such summary dismissal required revisiting.   The matter was thus referred to a Third Judge, who by his order delivered on 19.12.2019, held that Writ Appeals of the Revenue were not warranted, since the single Judge had not in the original instance determined the legal issue in a manner detrimental to the Revenue, but only remitted the matter back to the Assessing Officer to determine the quantum of liability.

The issue taken by the High Court is as to whether credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’.  The use of the word ‘delayed’ connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax. The availability of input tax credit runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. In the view of the High Court, the proper application of Section 50 is one where interest is levied on a belated cash payment but not on input tax credit available all the while with the Department to the credit of the assessee. The latter being available with the Department is neither belated nor delayed.

The High Court further observed that the availment and utilization of input tax credit are two separate events. Both are subject to the satisfaction of statutory conditions and it is always possible for an Officer to reverse the claim (of availment or utilization) if they are found untenable or not in line with the statutory prescription. Credit will be valid till such time it is invalidated by recourse to the mechanisms provided under the Statute and Rules.

The High Court allowed the petitions and set aside the order of claiming interest on the amount including adjusted through input tax credit available in the electronic credit ledger of the petitioners.

Discussions to this article

[Raghavendra Rao]

Is this article relevant in the light of this press note?

The Central Board of Indirect Taxes & Customs (CBIC) clarified that the Notification No. 63/2020-Central Tax dated 25^th August 2020 relating to interest on delayed payment of GST has been issued prospectively due to certain technical limitations. However, it has assured that no recoveries shall be made for the past period as well by the Central and State tax administration in accordance with the decision taken in the 39^th Meeting of GST Council. This will ensure full relief to the taxpayers as decided by the GST Council.