Retrospective effect to the levy of Interest on Net Tax Liability! Clause 103 of Finance Bill, 2021

Clause 103 of Finance Bill, 2021. In section 50 of the Central Goods and Services Tax Act, in sub-section (1), for the proviso, the following proviso shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July, 2017, namely:–

“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 payable on that portion of the tax which is paid by debiting the electronic cash ledger.”

Section 50 of the CGST Act is being amended, retrospectively, to substitute the proviso to sub-section (1) so as to charge interest on net cash liability with effect from the 1st July, 2017.

The liability to pay interest in case of non-payment of tax arises out of the provisions contained in Section 50 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) which reads as follows:

“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 the recommendations of the Council.”

It may be seen from the above provision that interest is applicable on the amount of tax that has not been paid by the registered person.

Various other sections related to payment of tax are as follows:

(i) Section 49(2) of the CGST Act provides that the input tax credit as self-assessed in the return (not necessarily be a valid return) of a registered person shall be credited to his electronic credit ledger.

(ii) Section 49(3) and 49(4) of the CGST Act provides that the amount available in the electronic cash ledger may be used for payment towards tax, interest, penalty, fees or any other amount whereas the amount available in the electronic credit ledger may be used for payment towards output tax. The term “tax dues” has been defined, as per Explanation (b) to section 49 of the CGST Act so as to mean the tax payable under the CGST Act and does not include interest, fee and penalty.

(iii) Section 39(7) of the CGST Act provides that the tax payable as per the return is required to be paid not later than the last date on which the return is required to be furnished.

(iv) Section 2(117) of the CGST Act provides that a valid return means a return furnished under section 39(1) of the CGST Act on which self-assessed tax has been paid in full.

A perusal of above provisions indicate that the law permits furnishing of a return without payment of full tax as self-assessed as per the said return but the said return would be regarded as an invalid return. The said return, however, would not be used for the purposes of matching of ITC and settlement of funds. Thus, 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. The same is illustrated as below:

Suppose a registered person has self-assessed his tax liability as INR 100/- for a particular tax period. He has an amount of INR 10/- as balance in his electronic credit ledger and he is eligible to avail INR 80/- as input tax credit (which would be credited to his electronic credit ledger only on furnishing of return). He is, therefore, required to pay only INR 10/- from his electronic cash ledger. The IT system will not allow the said registered person to furnish his return (and therefore the ITC of INR 80/- will not be credited in his electronic credit ledger) until he is in a position to discharge his complete self-assessed liability of INR 100/-. He would be liable to pay interest on the entire self-assessed tax liability of INR 100/- as he is not able to pay INR 10/- or part thereof from his electronic cash ledger.

It may be seen from the above that if the facility for part payment, as permitted under law, was available, the registered person would have been required to pay interest only on INR 10/- but presently he is liable for interest on entire tax liability of INR 100/-.

It is also pertinent to mention that the liability of any registered person is related to the value addition made by him since GST is leviable only on value addition. Accordingly, input tax credit is allowed to the registered person in respect of the tax paid by him on his inward supplies. And, while making the outward supplies, the input tax credit so allowed is permitted to be utilized for discharging his output tax liability. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, by this mechanism 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.

Presently the interest is not calculated by the IT system. The registered person himself calculates the said interest and deposits the same. It appears, therefore, that any change would not pose any IT related challenge.

The issue was deliberated by the Law Committee in its meeting held on 15.12.2018. The Committee observed that the proposal to charge interest only on the net liability of the taxpayer, after taking into account the admissible credit, may be accepted in principle. Accordingly, the interest would be charged on the delayed payment of the AMOUNT PAYABLE through the electronic cash ledger. 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.

Accordingly, in-principle approval of the GST Council is sought for carrying out the amendment in CGST/SGST Act as per the proposal above. Law Committee may be directed to frame suitable amendments in the law. Similar amendments would be required in the respective SGST Acts also.

Requirement of amendment in the Act: It is pertinent to note that the said amendments has not been carried out in the GST (Amendment) Act, 2018. In fact, the paper rolled out for Stakeholders comments did not contained the aforesaid amendment. It is important to note that though the amendment has not been proposed in the GST (Amendment) Act, 2018, the proposal approved has not yet been withdrawn.

Amendment in the CGST Act: The Government vide Clause 99 of the Finance Act, 2019, has inserted a proviso to section 50 which 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 shall be levied on that portion of the tax that is paid by debiting the electronic CASH ledger i.e. on Net Tax Liability basis. However, the aforesaid proviso shall not be applicable where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period.

Proposal for Retrospective amendment: Since the amendment in the law was made prospectively, therefore, taxpayers were issued notice for recovery of interest on Gross Liability which made the entire trade and industry hue and cry. Many taxpayers approached High Courts by filing Writ Petitions wherein in some of the cases verdict was given to levy interest only on net tax liability.

Section 50 of CGST Act, 2017 deals with levy of interest on delayed remittance of output GST liability. Section 100 of Finance (No.2) Act, 2019 inserted a proviso to section 50 which stated that interest is leviable only on that portion of output liability which is discharged by way of cash and effective date of amendment was not specified, which was later discussed in 39th GST Council held on 14-3-2020 meeting where recommendation was made for retrospective applicability of interest on net tax liability only with effect from July 1, 2017. Thus, amendment by insertion of proviso to section 50 was intended to be retrospective and accordingly, recovery of interest will be on net cash tax liability from 1-7-2017. - Maansarovar Motors (P.) Ltd. vs. Assistant Commissioner, Chennai - [2020] 121 taxmann.com 135 (Madras)[29-09-2020]

Accordingly, a proposal has been made vide Clause 103 of Finance Bill, 2021, wherein in section 50 of the CGST Act, in sub-section (1), for the proviso, the following proviso shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July, 2017, namely: –

“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 payable on that portion of the tax which is paid by debiting the electronic cash ledger.”

Section 50 of the CGST Act is being amended, retrospectively, to substitute the proviso to sub-section (1) so as to charge interest on net cash liability with effect from the 1st July, 2017. Since the provision has been expressly proposed to be incorporated in the Act itself, therefore, it is important to note that the recovery already made on gross tax liability should ideally be refunded. Infact, where the recovery has been made on gross tax liability, should interest on interest to be refunded is also eligible to the taxpayer. Further, if the interest has been voluntarily paid on gross tax liability, even though the period of claiming refund has been lapsed, still due to the retrospective amendment, it appears that the refund of such interest should also be given.