Whether interest liability as per Section 50 of CGST Act., Goods and Services Tax - GST

[samiuddin ansari]

The CGST Range officer, while scrutiny of the GSTR-B returns for the period July-17 to Dec-2018 have observed and stated that my friend's firm has not discharged the interest liability on gross output liability, but paid on net output liability for the period from July, 2017 to Sept., 2017 i.e. for three months. We solicit your expert comment on such query as payment of interest liability is correct or otherwise with notification, clarification or council clarification supported with rulings thereon, if any. Since no such explanation has been provided as to the manner of discharge the liability of interest on outstanding output liability.

Posts / Replies

[KASTURI SETHI]

Still notification is awaited.

[Ganeshan Kalyani]

Yes the Notification is not yet published by CBIC.

[SHARAD ANADA]

Arguments in support of charging of interest on output tax without adjustment of input tax credit under the law

• Section 16(2)(d) says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s. 39.
• Section 49(2) says that the input tax credit as self assessed in the return of a registered person shall be credited to his electronic credit ledger.
• Section 49(3) says that the amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fee, etc. Similarly, section 49(4) says that the amount available in the electronic credit ledger may be used for making any payment towards output tax only.
• Rule 61(3) says that tax liability shall be discharged by debiting the cash ledger or credit ledger. It is argued that one cannot utilize the input tax credit for payment of output tax without furnishing return u/s. 39. The date of furnishing of return u/s. 39 shall be deemed to be the date of payment of tax. Output tax liability is discharged by debiting the cash ledger and/or credit ledger and reverse charge tax liability is discharged by debiting cash ledger only. Accordingly, if one makes delay in furnishing of return u/s. 39, then his entire tax liability (i.e., gross value of output tax and reverse charge tax liability) remain unpaid till the date of furnishing of return u/s. 39. Therefore, interest should be charged on the entire output tax liability without making any adjustment of the input tax credit.

Argument in support of charging of interest on net output tax after adjustment of input tax credit even under the law :

1 It must be said here that input tax credit concept is not a new concept which was brought into the new GST regime for the 1 time. In the Finance Bill 1986-87, MODVAT scheme was introduced so as to extend the then existing system of proforma credit to all excisable commodities with exception of a few sectors. The then Finance Minister in paragraph 114 of the Budget Speech 1986-87 said, "Introduction of MODVAT will decrease the cost of the final product considerably through the availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs". This MODVAT scheme was later on replaced with CENVAT Credit Rules and input tax credit was being allowed while determining excise as well as service tax liability. Input tax credit concept was also introduced in the taxation of sale of goods during the year 2005 with introduction of VAT.

2 Under excise, service tax and VAT regime a dealer was also liable to pay interest on delayed payment of tax, but the interest was calculated on the net tax liability after set off of input tax credit. This was so because the objective was to ensure availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs.

3 Under GST regime, the objective of input tax credit remains the same. However, because of some unintentional drafting error in the law, a situation has cropped up wherein the dealer will have to pay interest on the gross amount of output tax liability without any adjustment of input tax if he makes any delay in filing of return u/s. 39. Thus, the objectives of instant availability of input tax credit and the consequential reduction of interest costs are to some extent lost because of the drafting error.

4 Another important aspect is unjust enrichment. The input tax credit is available to the buying dealer only if the seller has paid the tax. Thus, the buying dealer is claiming a credit of tax which has already been received by the government. Still, the government has provided that if the buying dealer makes any delay in submission of return u/s. 39 then benefit of input tax credit will not be available till the date of submission of return. It is well-settled principle of taxation law that interest is compensatory in nature. If the government is trying to levy interest on any amount which it has already received then this payment will not be compensatory in nature but will be in the nature of penalty. It is pertinent to mention here that for delayed filing of return u/s. 39 a dealer is already liable to pay late fee u/s. 47 and penalty u/s. 125. Now, you are also making him liable to pay interest for the same default. Is it not a case of unjust enrichment and that two by a State?

5 There in fact is no dispute with the provision of section 16(2) (d) which says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s. 39. But that section nowhere explicitly says that the date of submission of return will be deemed as the date of availability of input tax credit to the buying dealer.

6 It has been held in State of Tamilnadu v. M.K. Kandaswamy [1975] 36 STC 191,198 (SC) =  1975 (7) TMI 123 - SUPREME COURT OF INDIA that in interpreting a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed.

7 It has also been held in Calcutta Jute Manufacturing Co. v. CTO 1998 taxmann.com 1652 (SC) =  1997 (7) TMI 118 - SUPREME COURT OF INDIA that a court should not adopt a construction which would upset or even impair the purpose in introducing a particular provision in the statute.

8 It has further been held by the Apex Court in Madras Port Trust v. Hymanshu International 1979 taxmann.com 50 =  1979 (1) TMI 105 - SUPREME COURT OF INDIA that "It is high time that government and public authorities adopt the practice of not relying upon technical pleas for the purpose of defeating legitimate claims of citizens and do what is fair and just to the citizens".

9 Delhi High Court in the case of CIT v. Mitsubishi Corpn. [2008] 172 Taxman 13/306 ITR 260 (Delhi) =  2008 (3) TMI 18 - HIGH COURT OF DELHI has held that "The State should not raise technical pleas to defeat a just claim. The State cannot recover or hold back any tax except in accordance with law for otherwise it would be unjustly enriching itself, which is impermissible."

10 Hon'ble Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) =  1987 (2) TMI 61 - SUPREME COURT had held, "When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred".

11 Input tax credit has been introduced to decrease the cost of the final product considerably through the availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs.

12 The very purpose of input tax credit will be defeated if interest is charged on gross value of output tax without offsetting the input tax credit and, therefore, this interpretation should be eschewed keeping in view the ratios of the aforesaid judgments of the Hon'ble Apex Court and High Court.

GST Council has shown enough maturity in accepting that interest should be charged on net tax liability after adjusting the input tax credit. Now the onus is on the government to act fast and make necessary modifications in the law without further delay as more than two months have already elapsed from the date of the decision of the GST council in this regard.

[Ganeshan Kalyani]

It is logical also to expect the gov't to relieve the tax payer from paying interest on the gross tax liability when there is input tax credit available in the electronic credit ledger. It is unfair on the part of the revenue by charging interest on the tax which it had already realised from the supplier. A notification is expected .

[SHARAD ANADA]

Levy of interest - Delay in Filing of return in GSTR-3B Form - The claim of the revenue for interest on the ITC portion of the tax confirmed

Refer 2019 (4) TMI 1319 - TELANGANA AND ANDHRA PRADESH HIGH COURT

M/S. MEGHA ENGINEERING AND INFRASTRUCTURES LTD. VERSUS THE COMMISSIONER OF CENTRAL TAX, HYDERABAD, THE ASSISTANT COMMISSIONER OF CENTRAL TAX, KUKATPALLY AND THE SUPERINTENDENT, O/O THE SUPERINTENDENT OF CENTRAL TAX, HYDERABAD