Interest on net tax liability

[Kashish Gupta]

The Central Government has issued trade facilitative Notifications 16/2021-CT to 21/2021-CT dated 01.06.2021 in order to provide relief to the industry from the hardships faced on account of epidemic caused by second wave of COVID-19 disease. In this article, a comprehensive discussion has been made on NN 16/2021-CT which seeks to notify the proviso to section 50(1) making the law related to recovery of interest, on delayed payment of tax, on the component of tax paid in through electronic cash ledger, with retrospective effect from 01.07.2017.

Existing law

1. Section 50 of CGST Act provides for payment of interest on delayed payment of tax. It was observed that department is proceeding against the taxpayers to collect interest on gross amount of tax i.e. without allowing any deduction towards input tax credit utilised for the payment of such tax.

Representation made in 31^st GST Council Meeting to levy interest on net tax liability

2. This matter was put up as agenda item number 7(xx) in 31^st GST Council Meeting held on 22^nd December 2018 wherein the representation was made to levy interest only on net tax liability i.e. the liability paid from the balance lying in electronic cash ledger. The issues highlighted / grounds for making such representation are as under:

1. the issue related to increase in interest liability due to hiccups in the return filing functionality was impressed in following words, -

“3. ………………. although the law permits part payment of tax but no such facility has been yet made available on the common portal. This being the case, a registered person cannot even avail his eligible ITC as he cannot furnish his return unless he is in a position to deposit his entire tax liability as self-assessed by him. This inflexibility of the system increases the interest burden.”

2. On the basis of object of the Act, the interest shall be applicable on tax liability paid from balance lying in electronic cash ledger. The relevant portion of representation reads as under, -

“4. ………………………. the registered person effectively pays tax only on the value addition made by him. If this concept is applied for interest payable, then, it appears that the interest should also be charged on the tax payable on the value addition only, i.e. the amount of tax which is required to be paid through electronic cash ledger.”

3. On the basis of representation, the law Committee gave consent to the proposal wherein the representation itself was made with a caveat that if invoices/debit notes are furnished in the return for a tax period subsequent to a tax period in which these should have been, then the benefit of reduced tax liability shall not be available. The relevant para reads as under, -

“6. ……………………. 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.”

4. This representation was approved by the GST Council in its 31^st meeting.

Further decisions/approvals in 35^th GST Council Meeting

5. In 35^th GST Council Meeting held on 21^st June 2019, the amendment was further approved without any modification and it was recommended to amend section 50(1) and incorporate a proviso thereto.

Amendment made vide Finance Act 2019

6. On 05^th July 2019, above-mentioned amendment was proposed in clause 99 of Finance Bill, 2019 which was enacted in form of section 100 of Finance Act 2019 on 01^st August 2019. Central Government amended section 50 of the CGST Act to insert a proviso allowing payment of interest on liability paid in cash. Said proviso read as under:

“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.”.

An issue of Retrospective operation

7. On 06^th January 2020, Hon’ble Madras High Court in the case of 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] held that above proviso shall have retrospective effect w.e.f. 01.07.2017. The relevant para reads as under:

“15. The above proviso, as per which interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 01.08.2019, but clearly seeks to correct an anomaly in the provision as it existed prior to such insertion. It should thus, in my view, be read as clarificatory and operative retrospectively.”

8. In the 39^th GST Council Meeting dated 14^th March 2020, the issue of retrospective or prospective application of the proviso was deliberated wherein GST Council recommended to give retrospective effect to this provision. The relevant portion read as under, -

“13.3 …………………….. He requested all the States that the respective State laws  should be amended to charge interest on net basis with retrospective effect and till then the recovery shall also be on net basis. The Council recommended that interest should be calculated on net basis and the amendment should be done retrospectively.”

9. One important point notable from above minutes is that Government has been directed to issue notices for recovery on interest only on net tax liability w.e.f. 14^th March 2020.

Notifying effective date of amendment made vide Finance Act, 2019

10. Vide NN 63/2020-CT dated 25^th August, 2020, effective date of above amendment was notified as 01^st September 2020. Accordingly, a press release dated 26^th August 2020 was also issued to clarify the position.

Doubts over Show Cause Notices already issued asking for recovery of interest on Gross Tax Liability

11. On 18^th September 2020, administrative instructions were issued by the Government of India, Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs (GST policy) wherein it was directed to recover interest only on the net tax liability and to keep the already issued show cause notices in call book till retrospective amendment in section 50 of CGST Act is carried out.
12. On 08^th October 2020, taking a note of the above administrative instructions, a writ petition was disposed of by Hon’ble Bombay High Court in the matter of ROYAL CHAINS PRIVATE LIMITED VERSUS UNION OF INDIA AND OTHERS [2020 (10) TMI 467 - BOMBAY HIGH COURT].
13. Therefore, a need to give statutory effect to the retrospective operation of proviso to section 50 of CGST Act had arisen.

Amendment

14. On 01^st February 2021, retrospective amendment was proposed w.r.e.f. 01.07.2017 in clause 103 of Finance Bill, 2021 which was enacted in form of section 112 of Finance Act 2021 on 28^th March 2021. Central Government amended section 50 of the CGST Act to insert a proviso allowing payment of interest on liability paid in cash. Said proviso read as under:

“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.”.

15. In 43^rd GST Council Meeting held on 28^th May 2021, it was decided to notify the above amendment at the earliest.
16. Accordingly, vide NN 16/2021 CT dated 01.06.2021, aforesaid retrospective amendment has been notified.

Conclusion

• Now, the SCNs issued asking to recover interest on gross tax liability would be quashed by the jurisdictional authorities and litigation on this matter would come to an end.
• It is notable that the benefit on interest on net tax liability is available only if the disclosures are made the return filed for same tax period. In case the disclosure is made in the return filed for subsequent tax period, then the proviso is not applicable.

Note: The above views are without prejudice to the views being taken by second school of law which says interest is always applicable on net tax liability as the word “tax” is mentioned in section 50(1) instead of “output tax”.

 

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CA. Kashish Gupta 

Managing Partner, Paksh Legal

85108-06440, [email protected]

www.pakshlegal.in