[By Shubham Gupta and Jayesh Advani]
The authors are students at the National Law University, Odisha.
Introduction
Section 50(1) of the Central Goods and Service Tax (CSGT) Act, 2017, imposes interest on the tax liability occurred in accordance with the provisions of the CGST Act on the person who fails to pay the whole tax or any part of the tax, in the prescribed time. The interest is added to the original tax liability until the period the whole tax liability is settled by the defaulter. The interest rate notified by the government on the defaulted amount is 18 %. Although Section 50(2) provided for the method of calculation of interest, the Act was silent on the question of whether the interest has to be calculated on the gross amount of tax liability or the net amount. For instance, assume the Gross amount of tax that is not paid to be Rs. 1,00,000 and the amount of Input Tax Credit (ITC) to be 60,000. The question of law was whether the interest should be charged on Rs. 1,00,000 or on the Net amount which is calculated by deducting the ITC from the Gross amount i.e. Rs. 40,000.
To solve this dilemma, the Central Board of Indirect Taxes has given effect to Section 100 of the Finance Act, 2019 from 1st September 2020 to amend Section 50 of the CGST Act. According to the Amendment, the interest is applied to the net amount i.e. Rs. 40,000 which is calculated by deducting the ITC from the gross tax liability. The inserted proviso to Section 50(1) has explicitly mandated to pay the interest in accordance with Section 39 of the CGST Act. However, in situations where initially no tax is paid by the defaulter and he is paying tax only after the notice is served, under Section 73 or 74 of the CGST, the interest is to be calculated on the gross amount.
Exception to the Proviso
There seems to be a major issue with the provision that has been added to Section 50 of the Act. It mentions two exceptional scenarios in which the benefit will not be available. The bare text uses the words “except where such return is furnished after the commencement of any proceedings under Section 73 or Section 74 in respect of the said period…”. The use of these words implies that when Section 73 and Section 74 come into play, the interest will be calculated on the gross liability. Both these Sections talk about the procedure that is followed to determine the tax liability in cases when the “tax is not paid, or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized”. The difference lies in the applicability conditions of both sections. Section 74 is attracted specifically when an element of fraud, wilful misstatement, or suppression of facts is present with an intention to evade tax. On the other hand, Section 73 is attracted in the case where the events occur for any other reason than the ones covered in Section 74.
It is pertinent to note here, that both these Sections determine the amount of penalty which shall be applied on such person chargeable with tax. When these sections specifically mention certain percentages of tax liability to be imposed as a penalty in different situations, then why an additional penalty is being imposed by charging an additional interest under the veil of these exceptions? In the author’s view, the reason for charging the interest on gross liability, even in these exceptional scenarios is unfounded.
Moreover, charging a higher interest in these cases makes the ‘interest’ punitive in nature. This goes contrary to the judgments delivered by the courts. One of the initial cases in this regard is M/s Pratibha Processors v. Union of India. In this case, the Supreme Court held that interest is compensatory in nature and should be payable only when the cenvat (now known as ITC) is actually utilized. It has been repeatedly adjudicated by the Supreme Court that “interest is a mere accessory to the principal and if the principle is not payable, consequently, no interest is payable”. The approach of the courts has remained the same in the post GST era as well. In the case of State of Karnataka v. Karnataka Pawn Brokers Association, the Supreme Court sustained the approach adopted in the Pratibha Processors’ case. This issue was further discussed in the latest case of Reflex Industries v. Sherisha Technologies dated 6 January 2020. In this case, the Madras High Court articulated the purpose of imposing the interest on the default amount and elaborated why in all scenarios the interest must be calculated only on the net amount. The court also held that the purpose of imposing interest is to compensate the state, for the loss of funds; they were entitled to receive. The interest imposed is in no sense a punishment. Hence, in a scenario where the interest is calculated on the gross amount, it will lead to the enrichment of the state, which is contradictory to the very purpose of this provision.
These judicial decisions suggest that different treatment of the cases where proceedings related to Section 73 and Section 74 has commenced is not a correct approach. The amount of ITC had been effectively paid to the department, thus, reducing the amount of principal that is payable. Considering the fact that interest is only an accessory to the principle, the amount of ITC shall always be deducted to charge interest. The same should be the case when proceedings are commenced under Section 73 and Section 74. Moreover, if interest is charged on the gross value in these cases, then it would not be compensatory in nature. Instead, it would turn into a method of penalizing and punishing the person chargeable with tax.
The Unfilled Gap
The above-mentioned judgments highlight the fact that the concerned amendment is a mere articulation and addition to the approach of the judiciary. It is brought into force to remove the scope of discussion regarding the calculation of interest. However, the amendment failed to address the issue of whether the benefit will be given in a scenario where the tax liability is been missed completely in GSTR-3B of a particular period and is been paid in the subsequent period of tax liability. This dilemma will again open the flood gates to litigation and will raise the possibility of the conflicting opinion of the judiciary, deviating the very purpose of the amendment.
The Amendment is also silent on the issue regarding the application of the proviso; however, the Government has mentioned in a press conference that this amendment will have a prospective effect. The application of this amendment on prospective effect will be arbitrary and discriminatory to the taxpayers who have paid the interest on a gross basis. The justification from the end of the government is that the retrospective effect of this amendment will cause technical disparities. The blanket of technical disparity, in the authors’ belief, is disproportionate to the loss which will be faced by the taxpayers because of its prospective application. Further, the justification of prospective effect lacks transparency, because the government has not provided the details regarding the technical disparities, ignoring the fact that many taxpayers are going to be hugely affected by this decision.
The Way Ahead
The authors believe that the courts have rightly held that the nature of the interest is compensatory instead of punitive. Accordingly, it is suggested that the exception of Section 73 and Section 74 should be removed from the Amendment. Moreover, the Amendment still leaves a gap, creating confusion about whether the benefit will be provided in cases where the tax liability is missed completely and subsequently paid in the succeeding tax period. The government could have come with a more elaborative amendment to minimize the scope of litigation.
Lastly, it is quite absurd and arbitrary that the amendment does not have a retrospective effect. It is unfair to the people that have already paid interest on the gross value. Taking an example, in Megha Engineering and Infrastructure Ltd v. Commissioner of Central Tax, the ITC covered around 95% of the total tax liability but the petitioner was made to pay the interest @18% on the gross amount instead of the net liability. This approach would have made many such taxpayers pay a huge amount of excessive interest. Hence, the government must find a way to refund or adjust this excessive amount to do justice to these taxpayers. Further, there must be complete transparency to back up the excuse of the government that the refund or adjustment is not technically possible. To suggest a solution, the government can take a self-assessment approach, where the people can claim the excessive amount that they have paid in these 3 years and file an application for refund/adjustment of that amount by furnishing necessary documents.
Hence the Amendment might come as a relief to the taxpayers during the pandemic. However, it is unfair for the people who have discharged their liability by paying interest on the gross value of tax liability.