Introduction
Under taxation, levy plays a vital role which requires meticulous observation and analysis of a transaction in line with statue and whether it falls in taxability bracket. In the GST era, interest implication can be for delay in discharge of taxes, short discharge of taxes, wrong availment of credit, and so on. This article provides brief discussion on what is the exact terminology of interest, scope of levy, analysis of section 50 read with section73/74 and interpretation issues of interest under GST.
Contents
1. What is interest? Whether it is penal or compensatory in nature?. 1
2. When does the levy of interest occurs? If levy exists whether it is automatic & mandatory?. 2
3. What are relevant provisions under GST for levy of interest?. 3
5. Interest implication on demand notice served under section 73/74 of CGST Act, 2017. 6
6. Whether interest under section 50 can be demanded through DRC-01?. 7
7. Interest applicability in case of retrospective amendments made under GST. 8
- Although “interest” has not been defined in GST law or in erstwhile laws, there are various case laws which holds good to the meaning of “interest”. It was held in Pratibha processors vs. Union of India, AIR 1997 SC 138 that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty which is penal in character.
- The word “interest” occurring in section 41(2) of Income Tax Act means compensation for extending the time for payment of tax due. [Consolidated Coffee Ltd vs. Agricultural Income Tax Officer, (2001)1 SCC 278, Para 6; Section 43 of Income Tax Act 1941]
- Article 265 of the constitution states that “no tax shall be levied or collected except by authority of law.” The term “authority of law” means that tax proposed to be levied must be within the legislative competence of the legislature imposing tax. There are three stages of imposition of tax viz., there is declaration of liability, that is the part of statue which determines what person in respect of what activities are liable. Next is assessment. - Assessment particularizes the exact sum which is person is liable to pay. Lastly, method of recovery, if the person taxed does not voluntarily pay.
- Hence it was held in Delta Paper Mills Ltd vs. Collector of central excise – 1995(77) ELT 544 (AP) that there is no provision for levy of interest under Central Excise Act and in the absence of specific statutory provision empowering the authorities to levy interest and demand of interest is in violation of Article 265 of the constitution. It was also held that providing for payment of interest on delayed payment of tax is a method usually adopted in fiscal legislation to ensure that the amount of tax which is due is paid by the prescribed time and provisions in that behalf form part of machinery collection of tax.
- Accordingly, levy of interest is automatic and is intended to compensate the revenue for remittance of tax belatedly and beyond the time frames permitted under law.
- The plain meaning of word mandatory is "required by law or mandate; compulsory. The erstwhile law as well as the present indirect tax enactment provides for interest on delay in payment. Also, in the case of M/s. Maithan Steel & Power Ltd. v. Commissioner of central excise 2016 (344) E.L.T. 792 (Sett. Comm.) it was held that once duty liability has arisen, payment of interest becomes mandatory from due date as per section 11AB and 11AA of central Excise Act,1944.
- Hence, levy of interest is automatic and mandatory.
- Notification no. 13/2017- Central tax dated 28/06/2017 read with Section 50(1) of CGST Act, 2017 provides that interest shall be liable at 18% p.a for delay in payment of tax due to non-filing of return. Relevant extract of provisions: -
“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 recommendations of the council.”
- Proviso to section 50(1) has been inserted vide Finance (No.2) Act 2019 through notification no.63/2020-central tax dated 25/08/2020 makes effective interest on net liability concept. Relevant extract: -
“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.” (In terms of section 112 of Finance Act 2021, the word “shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger” has been substituted.)
Upon reading the above provision, care has to be taken on the words “supplies made during a tax period and declared in the return for the said period”. This sentence specifically excludes supplies pertaining to a tax period which is disclosed in other than said tax period (GSTR-3B). Refer below mentioned illustration for better understanding:
Scenario 1: Outward supplies for the period Dec’19 shown in GSTR-3B of Dec’19 where the same is filed on Feb’20 - Interest to be calculated on net liability basis.
Scenario 2: Outward supplies pertaining to Dec’19 shown in GSTR-3B of Feb’20 - Interest to be calculated on gross liability basis, although the same could be disputed and could be calculated on net liability basis.
Recent update: Notification no.16/2021 – central tax dated 01/06/2021 gave effect to Section 112 of Finance Act 2021 which brought in retrospective amendment to proviso to section 50 w.e.f 01-07-2017 on interest applicability based on net cash liability.
This was a much-awaited notification for claiming the refunds of interest paid on gross liability as net liability concept is given effect retrospectively.
- Section 50(2) provides for manner of computation of interest as may be prescribed by Government. However, the same has not been addressed in CGST Rules. Generally, the period of interest shall be the date following due date of payment to the actual date of payment of tax. There is also an alternative view which could be aggressive and highly disputable by department that as no method is prescribed, merely providing rate of interest would not suffice demand of interest.
- Notification no. 13/2017- Central tax dated 28/06/2017 read with Section 50(3) of CGST Act, 2017 provides that interest shall be liable at 24% per annum in case of undue or excess claim of ITC through GSTR-2 or undue or excess reduction in output tax liability through GSTR-1A. However, due to deferment GSTR-2 and GSTR-3, section 50(3) may not become operational to demand interest on ineligible credit availed.
- Many experts are of the view that literal meaning of section 50(1) i.e., failure to pay tax can’t be read for reversal of credit. However, the same may not be logical and payment of interest can be suggested only if credit has been utilized.
- Unlike central excise or service tax law, where interest was to be paid only when CENVAT credit was availed and utilized incorrectly. In GST regime, availing incorrect input tax credit (as per section 73/74 of CGST Act) would be sufficient to attract provision seeking payment of interest liability.
- However, based on a landmark judgement provided by Patna High Court in M/s. Commercial Steel Engineering Vs State of Bihar 2019 (28) G.S.T.L. 579 (Pat.) provides that provision under section 73 is self-eloquent and it is only if such availment is for reducing a tax liability that its vest jurisdiction in the assessing authority to recover tax along with interest under section 50. Hence, in cases of excess input tax credit wrongly availed and not utilized but still lying-in electronic credit ledger might not attract interest liability.
- Undue or excess claim of ITC shall not attract section 50(3) of CGST Act since the said provision has direct nexus to section 42(10) i.e., matching, reversal and reclaim of ITC through FORM GSTR-2 which was suspended since the inception of GST. Relevant extract of provision is as follows: -
“Section 42(10) - The amount reduced from the output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the recipient in his return for the month in which such contravention takes place and such recipient shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.”
“Rule 71 of CGST Rules - Any discrepancy in the claim of input tax credit in respect of any tax period, specified in sub-section (3) of section 42 and the details of output tax liable to be added under sub-section (5) of the said section on account of continuation of such discrepancy, shall be made available to the recipient making such claim electronically in FORM GST MIS-1 and to the supplier electronically in FORM GST MIS-2 through the common portal on or before the last date of the month in which the matching has been carried out.”
- Hence, based on the above provisions it could be said that interest on reversal of ITC shall be exigible at 18% p.a and not at 24% p.a considering section 50(1) as a missionary provision.
- However, department may contend interest at 24% p.a. merely by reading the word “undue or excess claim of ITC” as mentioned in section 50(3) without linking to provision of section 42(10). Practically seen, many notices from GST Department demanding 24% interest.
- Section 73 of CGST Act provides that in case of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful- misstatement or suppression of facts, proper officer shall serve show cause notice on assessee for payment of such amount along with interest under section 50.
- Section 74 of CGST Act,2017 is applicable where proposed demand of tax along with interest under section 50 is due to fraud or any willful- misstatement or suppression of facts.
- Section 73/74 of CGST Act is a demand and recovery provision and not a levy. Hence, it is a mechanical provision for collection of tax i.e., second part of levy process.
- Also, Karnataka High Court in the case of UoI & Ors Vs Infra Projects Pvt Ltd 2019 (28) G.S.T.L. 3 (Kar.) held that show case notice is required before making demand of interest under section 50 in view of principle of natural justice.
- Whether “erroneous refund” can attract interest under section 50(1) for the purpose of section 73/74 of CGST Act?
- Section 50(1) specifically provides for interest in case of tax not paid or short paid.
- However, application of interest under section 50(1) for erroneous refund would be questionable as the legality of provision i.e., specifically provides for tax paid or short paid. Can the word “erroneous refund” be replaced with word “tax not paid or short paid” is still an interpretational issue which can be challenged.
- Also, based on section 73/74 of CGST Act, it’s not specific as to whether interest under section 50(1) or 50(3) of CGST Act would be demanded. Based on the above analysis, interest to be attracted would be 18% as per section 50(1) of CGST Act.
- However, presently many demand notices are served on the assessee in case of excess or ineligible ITC availed specifies interest to be paid on such undue or excess claim of ITC at 24% p.a. It is suggested for the assessee to seek legal opinion on the same and pay interest at 18% p.a. to avoid unnecessary cash flow especially if the tax liability is huge.
- Upon plain reading of section 73/74 of CGST Act, notice would be issued in case “tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized” and which might not include notice issued merely demanding interest i.e., notice has to be issued only in case where tax is not paid and interest only to the extent tax not paid can be demanded through DRC-01.
- Based on above interpretation, it appears that interest cannot be demanded under section 73/74 say if tax is paid voluntarily through DRC-03 or so.
- Recently, Hon’ble Gujarat High court held in the case of M/s. Rajkamal Builder Infrastructure Private Limited Vs Union of India [2021-TIOL-745-HC-AHM-GST] that: -
- Rule 142 (1)(a) of CGST Rules provides that, proper officer shall issue notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-01.
- Hence, DRC-01 could not be issued for the purpose of recovery of amount towards interest on delay payment of tax as there is no reference made to any notice under section 50.
- However, as per section 75(12) of CGST Act provides that,
“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.”
Rule 142(5) of CGST Rules provides that
“A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 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.”
- Firstly, section 79 is with respect to recovery of tax. Secondly, Rule 142 shall be treated as notice of recovery and in such case, interest can be recovered through DRC-07.
- However practically, in case of interest demand under section 50, proper officers are still issuing notices under section 73/74 seeking payment of tax as well as interest although tax has been paid. This is mainly because interest alone cannot be demanded under section 73/74 through DRC-01.
- From the date of inception of GST, many amendments have been made giving prospective as well as retrospective effect considering the benefit of both revenue and assessee.
- Amendments to provision having retrospective effect, might also have an adverse impact i.e., tax liability could be demanded retrospectively which would demerit the assessee and benefit the revenue. However, can the revenue demand interest for such retrospective tax liability arising due to amendment in provisions?
- A Landmark Judgement of Supreme Court of India in Star India (P) Ltd vs. Commissioner of central excise, Mumbai & Goa [2005-TIOL-163-SC-ST-LB] where it was held that: -
- It is permissible for the Legislature to retrospectively legislate; such retrospectivity is normally not permissible to create an offence retrospectively.
- It is clear from the Explanation to the validation section, which says that no act or acts on the part of any person shall be punishable as an offence which would have been so punishable if the section had not come into force.
- The interest is payable for delayed payment as a quasi-punishment. Such liability created retrospectively could not entail punishment for payment of interest with retrospective effect.
- Under GST, one such case would be amendment to section 7 of CGST Act has been brought through section 108 of Finance Act 2021 bearing retrospective effect (from 1st July) (not yet notified) i.e.,
- (aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
Also, an explanation has been inserted stating that person and its members shall be deemed to be two separate persons and activities undertaken between such person and other would be supply.
- Therefore, once the provision becomes notified, supplies made by clubs, association to its member would attract tax liability. In such case, chances of demanding interest by department would be a pathway for collection of revenue. Considering many erstwhile judgments, it is clear that interest in this respect would not be attracted and would be litigable in court of law.
Conclusion
Presently, interest at 18% would be applicable for late disclosure and payment of tax, excess ITC claimed and utilized, RCM liability, etc. Although interest under GST provides clarity to an extent. However, based on in-depth analysis and due to certain provisions not being effective (GSTR-2/GSTR1A), there is still an open issue which might be disputable by revenue department and having various source for litigation.
(This article has been prepared by CA Varsha Vasante Gowda (Assistant Manager) and special thanks to CA Rajesh Maddi (Partner, Hiregange & Associates) and CA Spudarjunan (Partner Designate, Hiregange & Associates) for vetting this article and providing valuable suggestions.) For any queries or feedback write to [email protected]
The above article has been published in taxsutra.com
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