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The interest levied under the tax laws is primarily compensatory in nature i.e. imposed to compensate the Government for loss suffered due to deferred payment of taxes by a taxpayer. Litigation related to interest among other issues mainly hovers around its applicability, period, tax amount or rate.
The GST conundrum on interest has a backstory that needs to be understood. The article seeks to explain the background, the recent developments and outline the future impact on the subject. The primary debate relates to section 50(1) of the Central Goods and Services Tax Act, 2017 (CGST Act). The said section provides for levy of interest where tax has not been paid (either in full or part) by the registered person.
The law provides as under:
• A taxpayer needs to compute his gross tax liability for a relevant tax period on all his supplies.
• The gross GST liability can be discharged by utilizing input tax credit (ITC) in respect of GST paid on eligible procurements. Utilisation of ITC for payment of tax entails two steps : firstly, availment of credit and thereafter, utilisation of the availed credit for making tax payment.
• The net GST liability after adjusting ITC needs to be paid in cash. This involves first depositing money in a separate taxpayer’s sub-account called the electronic cash ledger and thereafter, transferring the cash so deposited to the relevant government account.
All these steps are taken by making relevant entries in the monthly tax return on the Government portal.
The debate revolved around whether interest be imposed on the gross tax liability till the time the monthly returns are filed on the ground that availment or adjustment of ITC or even the transfer of cash lying in electronic cash ledger is to be made through tax returns, or whether the interest is liable to be computed on the net tax liability after the adjustment of available ITC for the relevant tax period on the ground that interest levy is compensatory in nature.
The GST Council, while deliberating on this issue, recognised the compensatory nature of the interest levy and recommended amendment in the law to unambiguously enable the collection of interest only on the portion of the tax paid through cash (after deducting ITC available).
At the time when representatives of some states supported the move to notify the said amendment retrospectively i.e. from the commencement of GST (1 July 2017), the Law Committee was concerned that a retrospective amendment would result in the government having to refund a material amount of interest already collected since a large number of taxpayers had already deposited interest computed on the gross tax liability.
Basis the Council’s recommendation, the law was amended vide Finance (No. 2) Act, 2019. Contrary to the industry’s expectation, the amendment has been made effective prospectively from 1 September 2020.
Before this could give rise to yet another controversy, the Central Board of Indirect taxes and Customs (CBIC) vide a Press Release has assured that while it has been constrained from notifying this amendment retrospectively on account of technical difficulties, the tax administration will not make any recoveries for the past period in accordance with the decision of GST Council.
While all of this was going on, the high courts had issued contrary rulings on the subject. The Telangana High Court held that interest was to be charged on the gross tax liability as the taxpayer was not entitled to ITC until the monthly return was filed. On the other hand, Madras HC observed that interest provision is specifically intended to apply where the state has been deprived of funds and accordingly, interest was chargeable only on the net tax liability after adjusting ITC.
Impact of the above developments
The press release has possibly addressed industry concerns of recovery proceedings for the past periods in cases where interest had been discharged with reference to only the cash component. Writ petitions pending before various Courts on this issue are expected to be now disposed of accordingly.
For businesses, which have already paid interest on gross tax liability, i.e. on both, cash and credit component, amendment poses a challenge due to its prospective applicability. This was perhaps also the reason why the amendment was not brought in retrospectively. However, it may be worthwhile staking a claim for the refund of the excess interest deposited taking cue from the favourable judgements delivered by various high courts.
It is pertinent to note that the amendment covers only the cases where the return for the period is filed belatedly and not the scenario where incomplete returns are filed and the supplies pertaining to a tax period and resultant tax liability are reported in subsequent months. Thus, litigation in such cases cannot be ruled out.
Further, the applicability of interest in a case where the taxpayer has adequate balance in his cash ledger but the returns are filed belatedly has not been specifically dealt with by the amendment. This ideally could be considered akin to a situation of ITC availability, since both electronic cash and credit ledger mechanism go hand in hand under the GST payment procedure.