Interest on Delayed Payment of GST – Murky Legal Waters

[By Aditya Bhayal]

The author is a student at the NALSAR University of Law, Hyderabad         

Introduction

The Goods and Service Tax (GST) was introduced with ease of doing business as one of its main objectives. In its 3 year journey to date, the regime has faced quite a few roadblocks towards achieving that goal, one of them being the controversy surrounding the payment of interest on delayed payment of GST.  Section 50 of the CGST Act mandates such payment of interest. The moot point surrounding the quandary which marred the regime was whether the interest was to be paid on the gross-tax liability or the net-tax liability i.e. amount left after setting-off the Input Tax Credit (ITC), which was the case in the erstwhile regime. After shuttling back-and-forth for 3 years, the dust was finally settled when the amendment, which specified that interest is to be paid on net liability, was finally notified. This post seeks to reflect on the hue & cry surrounding this issue and discusses how the amendment, and its subsequent notification, leaves things to be desired for the taxpayers.

Background

Section 50 of the CGST Act, which imposes interest on delayed payment of GST, doesn’t specify the amount on which such interest is to be levied. GST Council, in its 31st meeting, took cognizance of the matter and suggested that the interest on such deferred payment is to be levied after setting-off ITC. Input Tax Credit allows the taxpayer to deduct the tax paid on its inputs for business from the tax collected on its output supply, thereby reducing the overall tax liability. Honoring the GST Council’s recommendations, the Government introduced the Finance Act (No.2) 2019, which amended  Section 50 to include a proviso clarifying that the interest is to be paid on the net-tax liability. As the amendment was never notified, the benefit never really reached the taxpayers. To the dismay of the taxpayers, the Telangana High Court in Megha Industries and Infrastructure ltd. v. CCT”, held that the interest is to be levied on the gross-tax liability, which would exclude the deductions under ITC. The GST Council, in its 39th meeting, reiterated that the amendment would be notified with retrospective effect from 1st July, 2017. The Amendment was finally notified on 25th August, 2020 with a prospective effect given to the proviso. The Central Board of Indirect Taxes and Customs (‘CBIC’), on the very next day, came up with a clarification that although the amendment is being given a prospective effect due to technical reasons, but the authorities won’t be making any recoveries so as to give a retrospective effect to the amendment in essence.

Prospective or Retrospective?

Although CBIC had clarified that the authorities won’t be recovering any dues to give a retrospective effect to the amendment, but the Ministry did not give any indication as to what will happen to the taxpayers who, in light of the ambiguity which was prevalent until very recently, had deposited interest on the gross tax liability. As no guidance was given for such taxpayers, the law remains prospective in nature for these assesses.

The Supreme Court, in the case of “Allied Motors v. CIT”, had held that “a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give it a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole”. With regards to section 50, the proviso was included to provide a beneficial reading for the taxpayers and avoid the unintended interpretation which goes against their interests, and thus, there is a need for uniform retrospective application of the proviso. The Apex Court, in the case of “Vijay v. State of Maharashtra”, also held that “It is now well-settled that when a literal reading of the provision giving retrospective effect does not produce absurdity or anomaly, the same would not be construed to be only prospective. The negation is not a rigid rule and varies with the intention and purport of the legislature, but to apply it in such a case is a doctrine of fairness”. Imparting a retrospective reading to the beneficial provisions, like the one added by this amendment, would be exigent to avoid multiple litigations and provide hassle-free application of the section.

Scope of Section 50

Section 50 is applicable to make good the deprival of the state and not when the state is retaining money to the credit of the assessee. ITC reflects the GST already deposited with the authorities. ITC is a book-entry and section 50 doesn’t envisage levying interest on something which is merely a book-entry. The section monitors cases of delayed payment of taxes for which the assessee is liable. It represents that part of tax which is unpaid. ITC is amassed to the taxpayer on the tax already paid. A right is accrued to the taxpayer when they pay tax on inputs. Moreover, the Supreme Court has previously ruled that interest is the payment to compensate the exchequer for delayed payment of tax. Taking a cue from the reasoning adopted by the Apex Court, it is only fair to hold that no such interest should be paid on loss that the government didn’t suffer in the first place. In such a scenario, it will be manifestly unjust on some taxpayers if the authorities fail to reimburse that amount of interest which was levied on the gross tax liability. Such views have also been upheld in the Madras HC ruling in “M/s. Refex Industries Limited v. Assistant Commissioner of CGST”, wherein it was noted that “The amendment introduced to section 50 is clarificatory in nature and therefore, retrospective”. The Delhi & Orissa High Courts also fortified this line of argument when they stayed a recovery of interest on the gross tax liability. These rulings call for the authorities to give a retrospective reading to the amendment across the spectrum of taxpayers and not limit the benefits to those who are yet to file their returns.

Such taxpayers who have deposited the interest on gross sum can also contest that such levying of GST on gross amount was without the authority of law. As the Finance Act (No.2) of 2019 had laid down that the interest is to be claimed only on net-tax liability, levying tax on gross amount can be regarded as devoid of the authority of law by taking a cue from Article 265 of the Constitution which expressly states that “no tax shall be levied or collected except by the authority of law”. As the GST was levied on gross sum without the authority to do so, thus the taxpayers would be entitled to a refund for it.

Another area where the taxpayers, who are yet to pay any GST, have to be cautious is while they are settling their pending obligation as there is no guidance on how the apportionment of tax credit is to take place.

As the authorities have previously gone back on their statements, it won’t be far-fetched to presume that the same might happen this time around as well. This could very well leave the taxpayers in a lurch as they have nothing but a word from CBIC to hold them accountable.

Conclusion

Notifying the amendment to section 50 can be regarded as a welcome move which clarified the position of law on this aspect. In this time of hardships, the announcement has given the burdened taxpayer a sigh of relief. However, the taxpayer’s sanguine expectations weren’t realized to the full extent as the CBIC failed to apply the said amendment retrospectively. This infirmity on the part of CBIC can lead to a multitude of litigation on the basis of the “principle of primary estoppel” as the authority is going back on their word of giving a retrospective effect to the amendment. In order to meet the objectives of GST to maintain a seamless flow of credit and to simplify the tax system, it is imperative on the part of the authorities to correct the anomaly by giving the amendment a retrospective application and allowing the taxpayers to realize the extraneous tax paid. It will also be “interest” ing to see whether CBIC’s commitment to forego any past recovery on gross amount takes some concrete shape or is kept hanging on a weak thread of oral assurance.

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