Section 50 of the CGST Act provides for interest on delayed payment of Goods and Services Tax. Section 50(1) of the CGST reads as,
"Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council."
Lately, there has been a lot of debate on which amount, interest under section 50 of the CGST Act shall be levied i.e on Net tax liability (tax paid by debiting electronic cash ledger) or on Gross tax liability in case of a delayed payment of tax. This article is an attempt to clarify the issue.
It may be noted that interest is compensatory in nature. It is way to compensate a person who has not been paid his money on time. Hence, there cannot be interest on book entry. Input Tax Credit is a mere book entry and no interest can be charged on the amount which has already been paid by the assessee while procuring the inputs itself. Interest is compensatory in nature and is to be charged on the actual amount of the tax that has been withheld and is paid after the due date.
In Pratibha Processors v. Union of India, [(S.C.): (1996) 11 SCC 101], it was held that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to the actual amount of tax withheld and the extent of the delay in paying the tax on the due date. It is compensatory.
In Commissioner of Customs v. Jayathi Krishna & Co. - [ (119) E.L.T. 4 (S.C.): (2000) 9 SCC 402], it was held that interest on warehoused goods is merely an accessory to the principal and if principal is not payable, so is it for interest on it. In view of the aforesaid principle, we are of the opinion that no liability of payment of any excise duty arises when the petitioner availed CENVAT credit.
It may be noted that ITC is available only when inputs are procured on payment of GST. Thus ITC represents the GST already paid. Mode of payment of duty through Input Tax Credit is as good as making payment through cash. In the case of Eicher Motors Ltd. v. Union of India [1999 (106) E.L.T. 3: (1999) 2 SCC 361], the Supreme Court held that the taxes paid by the suppliers and available to the assessee as Modvat Credit, in the value add based system of tax, is right accrued to the assessee and the right accrues on the date when the tax is paid on the raw material or inputs. This is the tax paid to the Revenue, on behalf of the assessee.
"6. We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto, then the tax on these goods gets adjusted which are finished subsequently. Thus, a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed."
Interest is to be calculated only on the net tax liability after deducting ITC from the total tax liability. The section refers to "liability to pay tax". It means that some part of tax which has not been already paid. It may be noted that Input Tax Credit is received in lieu of tax already paid in input supplies. That portion of tax has already been paid. What is left is mere book entry- receipt of such taxes in electronic credit register and use of such credit in payment of tax.
Section 50 was amended vide CGST Amendment Act, 2019 where a proviso is added to Section 50 of CGST Act, 2017, which says that,
"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 the commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger."
It may be noted that the amendment is a beneficial legislation and will have a retrospective application. In the present case, proviso was inserted by the Finance (No. 2) Act, 2019, with effect from a date yet to be notified. The amendment seeks to correct an anomaly in the provision as it existed prior to such insertion. In the case of The Bangalore Turf Club Ltd. Vs. Regional Director, Employees State Insurance Corporation [2002 (95) FLR 1149] the Supreme Court judged the ESIC act on beneficial grounds and emphasized that the beneficient construction is being preferred to help the intended beneficiaries. Hence, in the present case the intention behind the adding of the proviso is to benefit the assessee from avoiding payment of interest (in case of delay) on the total tax liability as ITC is already with the government and it is only the cash payment that interest is levied.
Whenever any legislation purports to give a benefit to the general public, without causing any detrimental effect to any other person, such then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. In the case Vijay v. State of Maharashtra [2006] 6 SCC 286, the Supreme Court 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. When a law is enacted for the benefit of the community as a whole, even in the absence of a provision, the statute may be held to be retrospective in nature. The appellant does not and cannot question the competence of the legislature in this behalf."
In the recent decision of Madras High Court in the case of M/s. Refex Industries Limited [WP No. 23360 and 23361 of 2019 and WMP Nos. 23106 and 23108 of 2019], the Madras High Court has settled the issues with regard to interest on ITC. Relevant para of the judgment states that,
"12. The specific question for resolution before me is as to whether in a case such as the present, where credit is due to an assessee, payment by way of adjustment can still be termed 'belated' or 'delayed'. The use of the word 'delayed' connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax. The availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. In my considered view, the proper application of Section 50 is one where interest is levied on belated cash payment but not on ITC available all the while with the Department to the credit of the assessee. The latter being available with the Department is, in my view, neither belated nor delayed."
In view of these, we are of the opinion that amendment introduced in Section 50 of the CGST Act is clarificatory in nature, and hence retrospective. In view of this, interest is required to be paid only on the cash portion of GST liability whose payment has been delayed.