Authored by CA Vikas Shenoy
Levy of interest in case of delay in payment of taxes and imposition of penalties in case of defaults or contravention are an integral part of any tax statute. Similarly, in the case of GST law. However, being a neonatal law, the law has seen its fair share of interpretational issues in the matter of interest and penalty.
In this series of two articles, the author wishes to touch upon the prevalent issues and attempts to apprise the trade of various concerns in the matter. In this first article, matters pertaining to interest under GST is only covered. Those pertaining to penalty would be covered in the article in the subsequent issue of the journal.
Background
In taxation statutes, interest is a compensatory charge by the revenue on delayed payment of taxes by a taxpayer. As such, it is generally understood that interest is merely an accessory to tax, which is the principal. In this regard, one may recall the legal maxim “ubi non est principalis non potest esse accessorius” meaning where there is no principal, there cannot be an accessory. Thus, without there being a tax payable, no interest can be sought to be levied thereon. On the other hand, it has been held by various judicial forums that interest, being compensatory in nature, is automatic and has to be applied mandatorily.
Under the earlier indirect tax regimes, the Hon’ble Supreme Court had got opportunity to pronounce its view on charge of interest. It was observed by it that any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as a substantive law and not adjectival law. This meant that interest could only be levied from the date when the tax was determined and payable.
Under GST law, the substantive provisions for charging interest are contained in a single section, ie section 50 of the CGST Act. The said section provides for two kinds of charge of interest. While it empowers the Government to notify interest up to 18% in case of
non-payment or short payment of tax, interest up to 24% can be levied in case of undue or excess claim of input tax credit or undue or excess reduction in output tax liability. In both these cases, the maximum rate of interest has been prescribed.
Certain open issues in case of interest
After a lot of representations and judgements of High Courts, it was clarified by way of inserting explanation in section 50 that interest is leviable only on the cash portion payable towards outward tax liability after reducing the amount payable using input tax credit. However, the said explanation is subjective and, from the wordings, seems to be applicable only when the tax is paid through GSTR-3B filed belatedly. This leaves scope for mischievous interpretation by the department, whereby interest may be demanded on gross tax liability for tax payments made after GSTR-3B for respective periods have been filed. In the view of the author and based on the ratio decidendi in the recent case of Refex Industries Ltd, interest should be applicable only on net tax liability payable in cash.
Another such issue in case of interest is whether interest would be applicable in case of erroneous refunds received. On a reading of the provisions pertaining to demands and recoveries, it appears that interest is leviable on repayment of erroneous refunds. This could as well be supported by the interpretation that interest is compensatory in nature and that the loss of revenue for the interim period due to erroneous refund ought to be compensated.
The above being said, it has been remarked by the Hon’ble Supreme Court in the case of India Carbon Ltd, that interest can be levied and charged only if the statute that levies and charges the tax makes a substantive provision in this behalf. Based on this and various other judicial precedents, a holistic reading of law suggests that while provisions pertaining to demand and recoveries seek to invoke interest in case of erroneous refunds, the substantive provisions contained in section 50 do not speak of levy of interest in such cases at all. Well, till such time this matter is taken to the Courts for settlement, the issue is at large and open for interpretations.
Finally, one would do well in acknowledging that the wordings of section 50 are unambiguous in stating that the interest thereunder at 24% is applicable only when undue or excess claim of input tax credit or undue or excess reduction in output tax liability is on account of the matching provisions as per sections 42 or 43 of the CGST Act, which have not been made practically operative till date. As such, no interest should be leviable at 24% even in case of undue or excess claim of input tax credit or undue or excess reduction in output tax liability. Contrary to this legal interpretation, it is seen that the department is seeking to levy interest at 24% and the innocent taxpayers are making the payments without questioning its legality. In this regard, even without going into the applicability of the provisions pertaining to interest, it may be noted that no interest should be made applicable in case of ineligible input tax credit availed but not utilised, as was held in the case of Commercial Steel Engineering Corporation by Hon’ble Patna High Court.
Conclusion
As given above, in cases where the dust has not yet settled with regard to applicability of interest, taxpayers should evaluate whether to pay the tax payable without paying the interest thereon or pay such interest under protest and challenge the validity of the levy of interest before appellate forums. In any case, as is generally remarked by the professionals “the interest clock stops on payment of tax due” and “there is no interest on interest”!
This article was published in January 2021 issue of the KCCI Journal
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