Introduction
Due to periodical amendments, the provisions relating to levy of interest under GST has been the subject matter of varied interpretations. The issue concerning payment of interest on the gross/net tax liability in case of delayed payment of taxes was the subject matter for our article published in Tax Amicus (May 2022/Issue 131).
Post the said article, there have been further developments in respect of provisions relating to interest. Recently, the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) have been amended vide the Amendment Rules, 2022 to introduce a new Rule 88B, retrospectively with effect from 1 July 2017. The said rule provides for the manner of calculating interest on delayed payment of tax.
In this Article, the authors intend to analyze the nuances of the new Rule 88B and the implications arising therefrom.
Section 50(1) of the CGST Act, 2017 – A recap
Section 50(1) of the Central Goods and Services Tax Act, 2017 is the substantive provision which provides for the levy of interest in cases where a person fails to pay tax within the prescribed period. 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).[3] The intention behind introducing the proviso was the natural concept of ‘interest’ which signifies a compensatory character.[4]
However, the language in which the proviso has been couched created a doubt on its exact contours and ambit. The scope of the proviso to Section 50(1) came up before the Madras High Court in the case of Srinivasa Stampings[5]. The High Court held that the proviso will apply only in cases where tax had been belatedly paid through returns filed after the prescribed due date. The proviso was interpreted strictly to not apply to all cases of delayed payment of tax.
Through our previous article, we had examined the implications of this interpretation especially on those cases where liabilities have been discharged belatedly through returns filed on time. We had foreseen a situation where the Department could levy interest even on liabilities paid through credit in cases where there was no belated filing of returns as the same did not explicitly fall within the scope of proviso to Section 50(1). This apprehension has now turned into reality through the introduction of Rule 88B.
Rule 88B of the CGST Rules
Section 50(2) of the CGST Act, 2017 has always provided that interest payable shall be calculated in such manner as may be prescribed. Section 2(87) of the CGST Act defines the term ‘prescribed’ to mean prescribed by the Rules made under the Act on the recommendation of the Council. Until recently there was no specific Rule prescribing the manner of calculation of interest. Now, the Central Government on the recommendation of the GST Council has introduced Rule 88B vide Notification No. 14/2022-Central Tax, dated 5 July 2022 with retrospective effect from July 2017. The said Rule prescribes the manner of computing interest on delayed payment of tax.
The Rule can be classified into the following three categories: -
|
Provision |
Scenario |
Period for which interest is payable |
Amount on which interest liability has to be computed |
|
Rule 88B(1) |
If tax has been belatedly paid through credit balance on account of delayed filing of return, before commencement of proceedings under Section 73 or 74 of the CGST Act [proviso to Section 50(1)] |
Interest to be paid for the period of delay in filing the said return beyond the due date upto date of filing GSTR-3B |
Tax paid by debiting the electronic cash ledger |
|
Rule 88B(2) |
In all other cases where interest is payable on delay in payment of tax covered by Section 50(1) |
Period starting from the date on which such tax was due to be paid till the date such tax is paid |
Amount of tax which remains unpaid |
|
Rule 88B(3) |
Where interest is payable on the amounts of ITC wrongly availed and utilised covered by Section 50(3) |
Period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount |
Amount of input tax credit wrongly availed and utilised |
From a bare reading of the above Rule, it appears that the benefit of paying interest on the net cash component has been restricted to cases where there is a delay in filing the return in Form GSTR-3B. In all other cases, such as delay in payment of tax due to inadvertence or an interpretation issue, though returns are filed on the due date, the provision suggests that interest would have to be remitted on the gross tax liability.
That said, it becomes relevant to consider the vires of Rule 88B of the CGST Rules.
As the law stands on date, Section 50 of CGST Act read with Rule 88B of the CGST Rules provides for a levy of interest on the gross tax liability for short payment or non-payment of tax in cases other than situations where tax has been paid after the due date on account of delay in filing the returns.
The benefit of levying interest on the net cash liability has been extended only to a limited situation of delay in filing returns leading to late payment of tax. This distinction, although not explicitly carved out in Section 50, has been specifically created through Rule 88B and the same has been brought in with retrospective effect as well.
Even if the proviso appended to Section 50 is read in a strict manner to only apply to cases where there is delay in filing returns, prior to insertion of Rule 88B, there was no explicit condition in the main sub-clause (1) of Section 50 which required tax to be paid on the gross tax liability. In fact, the Madras High Court in the case of Refex Industries v. Assistant Commissioner[6] held that once sufficient ITC is available, then no interest can be charged under Section 50 for delayed payment of tax.
The fact that the condition has been introduced retrospectively goes to show that the Rule is introducing a restriction that did not explicitly exist prior to introduction of the amendment to the CGST Rules.
Therefore, the vires of Rule 88B is susceptible to challenge and the question as to whether the taxpayers can still avail the benefit of paying interest on net cash liability in cases where sufficient balance was maintained in electronic credit ledger for short paid liability is not settled. It will have to be seen if the Rule survives the test of time.
[Both the authors are Principal Associates in GST Advisory practice at Lakshmikumaran & Sridharan Attorneys, Chennai]
[1]Section 50(1) -
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] The 39th GST Council meeting was held on 14 March 2020.
[4] Pratibha Processors v. Union of India, 1996 (88) ELT 12 (SC)
[5] 2022-VIL-285-MAD.
[6] 2020 (2) TMI 794 - Madras HC.
