Interest on Late Payment of GST: Case Law and Opinion

Interest on delayed GST Payment

The legal position

Recently, the GST Council has held its 39th meeting in which it has approved that the interest on GST late payment shall be payable on liability paid belatedly in cash component only, and this shall be made applicable w.e.f. Jul’2017 i.e. retrospective effect.  However, it shall be noted that these recommendations are still on paper, and necessary amendments are yet to be introduced in the law.

The matter was litigated and discussed on a mass scale when CBIC directed its field formation for recovery of interest amounting to approx. INR 46,000 Crs. Later the Board tweeted (dated 14 Feb’2020) that interest shall be recovered on liability paid belatedly in cash as well as the ITC component.

The tweet included that the application of amendment (Amendment to Section 50(1) to collect interest on cash component brought in vide Finance act (No.2) of 2019) shall be from the date of notification i.e. Prospectively.

Case law

It has also referred to the Judgement of the Honourable High Court of Telangana in the matter of Megha Engineering and Infrastructure Ltd. vs The Commissioner of Central tax, wherein it was pronounced that interest shall be payable on Gross liability.

One of the facts that were not entertained by the HC in the above ruling was that payment of taxes and filing of returns are two separate elements in any indirect tax system. It was also separate in the Pre-GST regime, and even in the GST regime filing of returns is dealt with in Chapter IX and payment of taxes is dealt with in Chapter X. But the GST Common portal doesn’t allow such functionality.

It won’t allow file GSTR-3B until and unless 100% liability has been paid either by way of debiting Electronic cash ledger or Electronic credit ledger. Let us understand this with an example-

Total tax liability for the month- 10,000

ITC available in Electronic credit ledger- 6,000

Liability payable in Cash- 4,000

GST portal is designed in such a way that returns can not be filed until 10,000 is paid. Had such restriction would not be present on the portal, the assessee could have filed a return by the due date along with payment of INR 6,000.

Here the facts that worth noting are that the above judgment came when the recommendation of the council (In the 31st meeting dated 22/12/18) to collect interest on the cash component was on paper. The amendment in the legislation corresponding to such recommendation was brought in the Finance Act (No.2) of 2019 (not yet made effective).

Opinion

In my opinion, Interest payable under Section 50(1) is an automatic interest and compensatory in nature. It applies to compensate the revenue for the delayed remittance of taxes. The term ‘Delayed‘ connotes the ‘Situation of deprival‘.

Whereas when the taxes are paid by way of adjustment entry in Electronic credit ledger i.e. with ITC, it is enriching the department to that extent since those funds were already in possession of the department.

It may be argued that ITC used for the payment of taxes may be invalid in certain cases and may be liable to be reversed. Agree, but any ITC is valid till such time it is invalidated by recourse to mechanism provided under legislation.

[A similar view was held in the matter of Reflex Industries (P) Ltd.[2020] 114 taxmann.com 447 (Madras)[WP(C) no. 23360 and 23361 of 2019 & WMP Nos.  23106 and 23108 of 2019] by the Honorable High Court of Madras.]

Applicability

The proviso inserted by Finance Act (No.2), 2019 shall be applicable from the retrospective effect since it was introduced to eliminate the anomaly in the statute. Moreover, the retrospective application has also been approved by the GST Council in its recent meeting.

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