CGST INTEREST CALCULATION: BIG RELIEF FOR TAX PAYERS?
Updated: Jan 4
This post is authored by Abhishek Iyer, a fourth-year student of B.A. LL.B (Hons.) at the Gujarat National Law University, Gandhinagar.
Failure of timely payment of tax or a portion of such taxational liability within the prescribed time limit attracts payment of additional interest on such unpaid tax amount. However, one important question that arises along with the levying of such interest amount is the method of calculation of such interest liability. Section 50(1) of the Central Goods and Service Tax (CGST) Act, 2017 [hereinafter, ‘CGST Act’], imposes interest on such tax liability that occurs in accordance with the said provisions of the CGST Act, the same falls on the person who fails to pay the whole tax or any part of such tax dues, within the prescribed time. As per the notified provisions and the taxational framework, the interest amount is added to the original tax liability till the time period when the whole tax liability is duly settled by the defaulter The government has notified the statutory interest rate on such defaulted amount at 18%. Although the CGST Act by virtue of Section 50(2) provides for a foolproof method of calculating interest liability on such due amount, it is silent as to whether the said interest must be calculated on the relevant gross amount of raised tax liability or on the net amount which is usually calculated by deducting the Input Tax Credit. Hence, there exists a genuine dilemma on calculating the interest amount; because usually, the difference between the gross amount and the net amount would be very substantial.
Sections 73 and 74 are the two exceptions to this wherein if tax dues are not paid by a defaulter and notice for recovery of such default is already served, the interest penalty in such a situation will be calculated on the gross amount only. So, the main distinction between an ordinary default and the exceptions viz. sections 73 and 74 is the existence of a “default + notice for recovery”. Therefore, Sections 73 and 74 create an unethical and discriminatory distinction by adding extra interest charges as a penalty on the gross default amount while other defaulters outside the purview of the said sections who haven’t received any notice for recovery are only liable to pay interest for their net amount defaulted which is more often than not, substantially low. Hence, if you have received a notice under the said provisions, you are liable to pay interest calculated on the ‘gross’ amount and when notice hasn’t reached you under the said provisions, your interest liability is calculated out of the ‘net’ amount due.
The author in this research article aims to fundamentally discuss the jurisprudence and the current legal scenario for calculating such interest rate on tax liabilities. Further, the author will also elaborate upon the latest amendment of Section 50 of the CGST Act which has almost solved this interest calculation dilemma when it comes to determining unpaid tax dues and the interest liability accrued thereby.
2. DILEMMA SOLVED?
As mentioned earlier, charging 18% statutory interest on tax defaulters led to a dilemma whereby there was no clarity as to which amount must be considered as the base to levy the interest penalty. The Central Board of Indirect Taxes finally solved this grim air of uncertainty between ‘gross’ or ‘net’ amount as the base for interest calculation when it gave effect to Section 100 of the Finance Act, 2019 starting from 1st September 2020, to amend Section 50 of the CGST Act. Before we understand the amendment provision, it is important to hypothetically understand both gross amount and net amount along with deduction of Input Tax Credit. For instance, assuming the gross amount of tax that is not paid or defaulted is Rs. 5,00,000 and the amount of Input Tax Credit (ITC) to be paid is Rs. 1,20,000. Now, to calculate the 18% interest liability on unpaid tax, we are left with the question of whether the interest should be charged on Rs. 5,00,000 or only on the net amount of Rs. 3,80,000 which is calculated by deducting the ITC from the gross amount.
In furtherance of the above example, the 2019 Amendment, has clarified to an extent that the interest rate charged for tax default will be calculated on the net amount due, i.e., Rs. 3,80,000 (refer example). Hence, the calculation of interest for tax dues left over shall be on the amount which is calculated by deducting the ITC from the gross tax liability. Further, the inserted proviso to Section 50(1) has explicitly mandated to pay the interest in accordance with Section 39 of the CGST Act.
3. AN IMPORTANT EXCEPTION
One exception added is for the tax paid by the defaulter after the notice of dues and default is served to the defaulter. So, under Sections 73 and 74 of the CGST Act, any statutory interest as mentioned earlier of 18% will compulsorily be calculated on the gross amount only. The 2019 Amendment shall have no bearing on such defaults whereby payment is made after service of notice. The proviso added to Section 50 of the CGST Act has a little twinkle as it mentions two exceptional scenarios in which the benefit of calculating 18% interest on the net amount will not be available. A bare reading of the text as mentioned in the amendment portrays the following: “except where such return is furnished after the commencement of any proceedings under Section 73 or Section 74 in respect of the said period….” It is implicit in these words that when both Sections 73 and 74 come together in the picture for calculating interest, the interest due thereon at 18% will be calculated on the gross amount. So realistically, as per the earlier example, if the defaulter falls within the purview of the above two sections of the CGST Act, the interest liability will be calculated from 5,00,000, i.e., the gross amount due.
Both Section 73 and 74 are the core procedures which are reiterated and followed when “tax is not paid, or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized”. Apart from this, Section 74 is attracted specifically only when an element of fraud, wilful misstatement, or suppression of facts is present with an intention to particularly evading tax at the hand of a defaulter. On the other hand, Section 73 focuses more on events that are not directly covered within the purview of Section 74.
However, these two sections only portray the amount of penalty to be determined along with the requisite additional percentage within the mentioned scenario. But the distinction of levying interest on gross amount and not on the net amount deducting the Input Tax Credit is without any basis. The author believes that despite mentioning the percentage bracket that determines liability in peculiar scenarios which Sections 73 and 74 postulate, charging an additional 18% of statutory interest on the larger gross amount is far-fetched and unreasonable. Just because the defaulter agrees to repay the dues after a notice is served does not become a valid ground for extra interest rates to be levied on the larger amount.
Taking it forward on this unfair classification of levying interest on the gross amount to a certain class of defaulters which sounds like a ‘punitive’ affair, the courts have led towards the righteous path. Starting from the pre-GST era, in M/s Pratibha Processors v. Union of India,[i] the Hon’ble 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 also been repeatedly adjudicated by the Supreme Court[ii] that “interest is a mere accessory to the principal and if the principle is not payable, consequently, no interest is payable”. Even post GST, the Hon’ble Supreme Court in State of Karnataka v. Karnataka Pawn Brokers Association[iii] sustained the approach adopted in the Pratibha Processors’ case. This issue was further discussed in this judgment of Refex Industries v. The Assistant Commissioner of CGST & Central Excise, Chennai,[iv] wherein the Hon’ble Madras High Court elaborated on the purpose of imposing extra interest on the default amount and elaborated why in all scenarios the interest must be calculated only on the net amount and not gross amount. The court also held that the purpose of imposing interest is to compensate the state for the loss of funds that they were entitled to receive. Unlike the punitive nature envisaged in the Act, the court stated that there must not be an intention to punish the defaulter by charging unreasonable amounts. 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.
As observed and cited earlier, even the judicial pronouncements do not favour this indifferent treatment to two separate likewise defaulters. Considering the fact that interest is only an accessory to the principal amount that is due, it is suggested that the Input Tax Credit be deducted while the interest charge is being levied. Irrespective of the kind of default, this distinction should be resisted while interest rates are determined and a further penalty is imposed.
It is important to understand and maintain a standard that there must be no discriminatory and punitive difference between two sets of defaulters on the sole ground of service of notice or otherwise as listed under Section 73 and 74. The courts have time and again signified the importance of being compensatory and easy-going unlike the current status quo of punitive nature towards taxpayers and defaulters.[v] While the application of the GST notification is prospective in nature as has been mentioned through an official press release that this amendment will have a prospective effect. However, it will be fair that the government clarifies why there is no retrospective application of this change as millions of taxpayers have been affected without any logical clarification except for an excuse on technical grounds.
The author firmly believes that the courts have rightly led the path in the interest of justice. To further settle the issue it must be put on record that there will be no disparity between the calculation of interest on the gross amount or the net amount. The existing practice of levying the same on the net amount after deducting the Input Tax Credit must be maintained and accordingly, it is suggested that the exception of Section 73 and Section 74 should be set aside from the purview of the Amendment. Moreover, when there is a benefit being conferred,[vi] for the sake of completeness of the said amendment, the legislator’s object of providing benefit will be considered retrospectively. Now, in the present case itself, the tax amendment clarifies that interest is to be calculated on a ‘net’ basis, but unless it has a retrospective operation this benefit of calculation on the basis of ‘net amount’ cannot be conferred on taxpayers who have prior to this amendment already paid interest on ‘gross amount’ basis. Therefore, the author firmly opines that the government has to notify the retrospective operation of this amendment particularly to ensure that the same does not exclude earlier taxpayers who have paid on ‘gross basis’, which if not done, shall be extremely arbitrary and discriminatory. Although there is sufficient scope for litigation to arise from the impugned amendment, the author reiterates that the government has to come clean with a better solution for retrospective application of the amendment since the stakeholders affected by this amendment include taxpayers who have paid interest on ‘gross’ amount prior to the introduction of the amendment.
Lastly, in case there are some technical disparities from the tax administration point of view which makes retrospective operation difficult, the government must at least ensure a timely refund of the difference amount paid by taxpayers whose interest amount was calculated on ‘gross’ amount basis prior to the amendment. This will settle the issue and help a set of taxpayers who could not seek the benefit accrued through this amendment. Hence, it is suggested that the amendment is definitely a relief to the taxpayers during this pandemic but is doubly unfair to everyone who has been asked to pay an extra amount as interest on their ‘gross’ defaulted amount and not the net amount, prior to the enforcement of this amendment
[i] M/s Pratibha Processors v. Union of India, AIR 1997 SC 138.
[ii] Union of India through Director of Income Tax v. M/s Tata Chemicals Ltd., 2014 SCC OnLine SC 176.
[iii] State of Karnataka v. Karnataka Pawn Brokers Assn., 2018 SCC OnLine SC 231.
[iv] Refex Industries v. Assistant Commissioner of CGST & Central Excise, 2020 SCC OnLine Mad 578.
[v] M/s Pratibha Processors v. Union of India, AIR 1997 SC 138.
[vi] Vijay v. State of Maharashtra, (2006) 6 SCC 289.