Introduction
This article concerns Section 50 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). Much has been said and done about whether interest is liable to be paid on the gross tax liability in case of delayed payment of taxes. With the introduction of the proviso to Section 50(1)[1] with effect from 1 July 2017[2], the legislature indicated that their intention is to levy interest only on the portion of output tax liability, discharged by way of cash (i.e., the net tax liability). The introduction of this proviso was a welcome measure which provided much-needed relief to taxpayers who were burdened with heavy interest liabilities on their total output tax payments including the portions remitted through input tax credit (‘ITC’).
The scope of the proviso to Section 50(1) came up before the Madras High Court in the recent decision of Srinivasa Stampings[3]. The High Court has interpreted proviso to Section 50(1) to not merely apply to a case of delayed payment of tax, but also to a scenario where the tax has been belatedly paid through returns filed after the prescribed due date. In other words, as per the High Court, returns must be filed belatedly and there must be a delay in payment of GST, only then interest is liable to be paid to the extent of the delayed payment of tax in cash. The corollary of this conclusion is that, in a case where there is a delay in payment of tax due to inadvertence or an interpretation issue, though returns are filed on the due date, interest would have to remitted on the gross tax liability.
For instance, let us consider a case where a person manufactures and sells a certain product under the belief that the goods attract GST of 18% and discharges tax at such rate through the returns filed within the due date. Subsequently, the manufacturer understands that the correct rate of tax applicable to the goods in question is 28%. The manufacturer accordingly discharges the differential tax liability of 10% through the returns filed in the subsequent months. The 10% differential liability is discharged through utilization of ITC. The question which arises is whether interest is liable to be discharged on the 10% paid through credit. Basis the reasoning of the Madras High Court, though there is a case of delay in payment of tax to the extent of the differential 10%, since there has been no delay in filing of returns, the proviso to Section 50(1) would be inapplicable. Accordingly, interest would have to be remitted on the tax liability discharged by the manufacturer, albeit through credit.
The rationale adopted by the High Court while arriving at this conclusion cannot be doubted, since the proviso itself is couched in such language. The proviso states in so many words that interest shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date. The High Court has interpreted the proviso strictly as any fiscal statute should[4]. This article intends to focus on the impact of the interpretation. In this regard, the authors proceed to trace the history behind introduction of the proviso to Section 50(1) with specific focus on the jurisprudence that has developed over time and the GST Council decisions.
The background
The GST Council, through its 31st Meeting[5] granted in principle approval for amendment to Section 50 of the CGST Act, thereby requiring payment of interest only on the net cash liability.[6] Section 100 of the Finance Act, 2019 inserted a proviso to Section 50(1) to give effect to the said recommendation.
The intention behind introducing the proviso was the natural concept of ‘interest’, which signifies a compensatory character.[7] The difference between a tax, interest and penalty is categorically brought out by the Supreme Court in Associated Cement Co. Ltd. v. Commercial Tax Officer[8]. It has been held that-
Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has willfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not penal.
Further, the Orissa High Court, in Executive Engineer v. Surendranath, AIR 1980 Ori 119 observed that the “natural conception of the word ‘interest’ is the ordinary or normal profit which the person entitled to the principal money might have made if he had the use of the said money, or his expected loss under usual or ordinary circumstances due to the non-payment of the same at the proper time”.
Thus, interest is nothing but a compensation payable for deprivation of the use of the principal amount. It is for this reason, the Madras High Court in the decision of Refex Industries Limited[9] found fit to observe that interest leviable under Section 50 should not apply to tax liabilities discharged through credit as the availability of ITC itself runs counter to the fact that the revenue department has been deprived of funds. Rather, it was held that payments through credit only meant enrichment for the State.
Apart from the decision in Refex Industries Limited (supra), this issue came up before other High Courts[10] and in some cases led to conflicting decisions where interest was held to be payable on the gross tax liability[11]. The reasons for the confusion was attributable to the fact that the proviso was yet to be notified and there was a lack of clarity on whether the effect of the law would be prospective or retrospective.
To ensure consistency, the subject was included in the agenda to the 39th GST Council Meeting[12]. The Council recommended that interest should be levied on the net cash liability with retrospective effect.[13] In the Agenda Note to the Council Meeting, the scope of the proviso to Section 50 was discussed and it was observed as follows: -
……
Accordingly, in cases of delayed payment of taxes, interest may be charged only on the net cash liability (i.e. that portion of the tax that is paid by debiting the electronic cash ledger) except in cases where proceedings under section 73 or 74 have been initiated in respect of the said period. However, it may be noted that the said provision has not been notified till date. Prior to the said amendment, interest was to be paid by the taxpayers on the tax payable, irrespective of whether it was to be paid in cash or by utilization of input tax credit.
It is evident from the said discussion that Council understood the proviso as being applicable to all cases of delayed payment of taxes and the only exception was to scenarios where proceedings under Sections 73 or 74 had been initiated. No specific requirement for delay in filing returns had been noted.
To summarise, interest is meant to only compensate for the time value of money lost because of delay in payment of tax. Payment of tax liabilities through credit should not attract interest as the Revenue is not deprived of funds (so long as the taxpayer had sufficient credit balance). Delay in payment of tax may be on account of late filing of returns or late discharge of GST at a subsequent date (through returns filed on the due date). In both cases, rationally, the interest should be attracted only on the net cash liability.
Conclusion
Having understood the nature of ‘interest’ and the background in which the proviso to Section 50(1) was introduced, it can be reasonably concluded that intention of the law makers was not to levy interest on tax liabilities discharged through ITC. Nevertheless, the manner in which the provision reads as on date in bound to create difficulties in implementing the law in cases where there is a delayed payment of GST without delay in filing returns. Businesses may foresee increased litigations on this front. The Revenue Department may levy interest on delayed payment of taxes even on the portions remitted through credit if the returns through which the liabilities have been discharged is filed on time. To mitigate such avoidable litigations, taxpayers may make suitable representations to the GST Council; seeking an amendment to the law or a clarification to extend the applicability of the proviso to all cases of belated tax payments so long as the taxpayer had sufficient credit balance.
[The authors are Principal Associate and Senior Associate, respectively, in GST practice at Lakshmikumaran & Sridharan Attorneys, Chennai]
[1] Section 50 - (1) 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.
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.
[2] Section 112 Finance Act, 2021
[3] 2022-VIL-285-MAD.
[4] A.V. Fernandez v. State of Kerala [AIR 1957 SC 657]
[5] The 31st GST Council meeting was held on 22.12.2018.
[6] Press release dated 22 December 2018.
[7] Pratibha Processors v. Union of India, 1996 (88) ELT 12 (SC)
[8] AIR 1981 SC 1887.
[9] 2020-VIL-71-MAD.
[10] Landmark Lifestyle 2019-(5)-TMI-1608 Delhi High Court
[11] Megha Engineering & Infrastructures Ltd. 2019-VIL175-TEL.
[12] The 39th GST Council meeting was held on 14 March 2020.
[13] Agenda Item 5A(iv) as recorded in the minutes of the 39th GST Council Meeting dated 14 March 2020.
