AN E-BOOK ON VARIOUS ISSUES OF “INTEREST” UNDER INDIRECT TAXATION

 

 Senguttuvan K Partner

Veeraraghavan Varahan Senior Associate

Kshithija PrakashanAssociate

I. INTRODUCTION

“Interest is the most important thing in life; happiness is temporary but interest is continuous”

This famous quote on life now resonates with any taxpayer who becomes liable to pay interest, as a compensation for the time used someone’s laws, it is very important to understand the background, nature and evolution. Some basic questions have to be answered with respect to the purpose and object for which Interest is levied so and so forth after which, we shall discuss in detail and deliberate on the issues surrounding interest.

The Object and Nature of interest under the taxation laws can be understood from the decision of the Supreme Court in the case of Pratibha Processors vs Union of India [1] in a batch of appeals had observed that the character of Interest is compensatory in nature and is widely different from the nature of Penalty. The Court observed as follows:

“Interest is compensatory in character and is imposed on an assessee who has withheld of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty– which is penal in character.”

Therefore, Interest is nothing but a compensation for the tax ought to be paid on a certain due date. Now, has a taxing Statute ever defined the term Compensation? The clear answer is NO. Now, therefore, recourse to the definition and the legal understanding from the Indian Contract Act assumes significance. The Contract Act does not explicitly define the term compensation, but defines a much broader concept of the term “damages”, that is usually monetary, paid due to breach of a contract.

The Hon’ble Supreme Court of India had extracted the definition of the Word “Damages” from Mcgregor as follows:

“Damages are the pecuniary compensation, obtainable by success in an action, for a wrong which is either a tort or a breach of contract, the compensation being in the form of a lump sum which is awarded unconditionally.”

Therefore, the term Damages has been read, understood and interpreted as a form of pecuniary compensation that is paid unconditionally for a wrong, committed. This could be for a tortious wrong or a civil wrong or for the breach of a contract between two parties. Therefore, interest and penalties of certain nature are levied and collected as a means of compensation for the loss suffered by the revenue on account of belated remittance of taxes, short payment, suppressed/concealment of Income/Revenue/Sales resulting non-payment of tax, etc.

II. CONCEPT UNDER INDIRECT TAXATION

The damages collected in the nature of interest are compensatory in nature and this has been clearly ingrained in the provisions of all the Indirect Tax Act, whether enacted by Parliament or through delegated legislation

The Central Excise Act, 1944 had sanctioned charging of interest for short levy, short payment or erroneous refund.[2] However, whether duty is short paid or short levied or erroneously refunded shall be determined by the concerned central excise officer through an adjudication mechanism enshrined in the statute, when the tax payer failed to ascertain self and comply. The interest is payable from the date of default; the date of default is the due date for remittance as per the Act and not the due date for filing return

The Central Excise Act, 1944 had also imposed interest on delayed payment of duty after an expiry of three months from the date of determination of such default till the date of such actual payment with respect to delayed Payment of duty adjudicated and collected by the Central Excise Officer.[3]

However, there were a lot of ambiguity surrounding on charging of such interest, as the provision uses the term date of determination to decipher the actual default in payment of taxes. Further, a window of three months was given to charge such interest till the date of actual payment. However, with effect from 8th April 2011, the entire provision was substituted by imposing such interest immediately following the due date for payment for such taxes till the actual date of payment. This substitution helped the Government to remove such ambiguities and enabled them to collect such money that would compensate them for each day of default committed by a taxpayer.

The Finance Act, 1994 had various provisions that are para-in-materia to the provisions that is ingrained in the Central Excise Act, 1994. Therefore, the premise based on which Interest is levied was only compensatory in nature as it can be evidenced by the background and the provisions ingrained in the Central Excise Act, 1944 and the Finance Act, 1994.

Further, the premise that, interest is charged as a compensation can be further substantiated by making reference to various other provisions in the Central Excise Act, 1944 and the Finance Act, 1994 wherein, even the Government is liable to pay interest to the taxpayer for delayed refund under Section 11BB of the Central Excise Act, 1944.

Therefore, viewed from the perspective of the taxpayer and the Revenue, the theory that Interest is compensatory in nature has been fortified by virtue of amendments in the Central Excise Act, 1944 and the Finance Act, 1994 as substantiated above. 

III. THE ANALYSIS OF CHARGING QUANTUM OF INTEREST- AN INDIAN & INTERNATIONAL APPROACH

The Charging of Interest is an international phenomenon as it can be seen across different legislations across different countries. Interest, as it is compensatory in nature is charged as a consequence of failure to remit tax within the due date, failure to file returns within the due date and so on and so forth. However, interest is charged at different rates in different countries.

In Australia for Example, the rate of Interest for delayed payment of tax is arrived based on the lending rate fixed by the Reserve Bank of Australia plus a rate of seven percent.

There are two interest charges for overdue amounts. The interest charge applied in most circumstances is the general interest charge (GIC). The Government of Australia introduced it in 1999 to replace a large number of interest charges and penalties.

The Taxation Administration Act 1953 sets the GIC at a high rate to encourage taxpayers to promptly pay their tax debts and prevent them from using the Australian Tax Office as a source of cheap finance. The GIC is set at the Reserve Bank’s (RBA’s) monthly yield of 90-day Bank Accepted Bills plus 7%. It has generally been between 11% and 14%.

The Standard Rate of GST levied on goods and services in Australia is around 10% whereas the Interest rate charged for default under the GST is around 14 percent, which is four percent more than the actual rate of GST charged. This has been introduced by the Australian Government to discourage the public from using funds of the government to finance their business.

Whereas, in the Indian Context, the rate of interest for delay in payment of tax is charged at 18% per annum and an exorbitant rate of 24% on the erroneous availment of Input Tax Credit. While the Reserve Bank of India and the State Bank of India lending rates are somewhere close to 7% to 9%, a rate of 18% charged as Interest by the Government is excessive.

Comparing the said scenario to the Australian GST, wherein only a excess of 7% is charged over and above the lending rate prescribed by their Reserve Bank, the interest rate charged in India is bloated and exorbitant.

Further, a comparison of the rate of interest charged by different OECD Countries, of which India is also a member, will throw light on where the India stand in terms of  rate of Interest charged for delay in payment of taxes [4]:

 

Country Calculation Method Effective Rates per Annum
Australia Reserve Bank of Australia’s Bank rate plus 7% 13.3%
Canada 90-Day Treasury Bill plus 4% 8%
Ireland 0.0322% per day 12.5%
New Zealand 5% of tax plus 2% per month 29%
United Kingdom 5% of tax plus 5% after 6 months 10%

 

Therefore, on perusal of the above table extracted from an authentic source, it is abundantly clear that, barring New Zealand, most countries that belong to the OECD Convention are charging relatively lesser amount of rate of interest in comparison to India.

Further, even in countries line Canada where a dual rate of GST is being followed, the rate of interest for such kind of default is only 8%. Therefore, the Government has to seriously reconsider the rates on which such GST is charged.

IV. THE CONSTITUTIONAL PERSPECTIVES OF INTEREST

In order to understand the provisions of interest that are levied under Taxation, it is necessary to first look into the concept of interest in general, and the manner in which it is interpreted. The concept of interest was not new to the realm of taxation, as the Constitution of India mentions about the levy of taxes and interests thereupon. Article 246 of the Indian Constitution “distributes legislative powers including taxation, between the Parliament of India and the State Legislatures.” Article 265 of the Indian Constitution provides that “no tax shall be levied or collected except by the authority of law.”

In the case of Chhotabhai vs. Union of India[5], it was held that “the law providing for imposition of tax must be a valid law that it should not be prohibited by any provisions of the Constitution.” Further, a new Article 246A has been introduced under the Indian Constitution by the 101st Amendment Act, 2016, which makes a special provision with respect to Goods and Services tax. As per this Article, the Parliament as well as the State Legislatures has been conferred with the power to make laws with respect to Goods and Services tax.

V. INTEREST UNDER INDIRECT TAX LAWS- A WALK THROUGH FROM PRE GST REGIME TO POST GST REGIME

The Issues on Interest has traversed through many turbulent paths from the Pre-GST regime and continues to be an area of litigation under the current GST regime as well. This section traces the legal history and the judgements that throws light on some of the issues on interest in the Pre-GST regime.

1. Non-Payment Of Interest When The Situation Is Revenue Neutral

Under normal circumstances, interest is chargeable on short payment or non-payment of tax as discussed above, in revenue neutral situations, tax in itself is not chargeable and therefore there is no question of applicability of Interest. The Principle of Revenue Neutrality that has been evolved and propounded by the courts has been a hotly debated topic in the Pre-GST regime. Starting from the Jay Yushin to the Nirlon judgement by the Apex Court, the Assesses have been exempted from paying tax if the situation is found to be revenue neutral. If the Assesse is exempted from paying tax, Interest which is conjoint on payment of tax is also not payable. In these situations, there is certainly non-payment of tax by an Assesse but there is no pecuniary loss to the government and therefore, no question of interest arises.

However, to determine whether a situation is revenue neutral or not is purely factual. In disputes pertaining to short payment of taxes on account of valuation between two sister concerns, non-payment of tax on reverse charge mechanism, failure to include inputs supplied free of cost in the transactional value while sending it to the job worker etc.. are some of the facts based on which the Revenue Neutrality principles have been invoked.

1.1 Free Of Cost Supply Between Two Unrelated Entities- The Jay Yushin Case And Its Relevance In GST

In Jay Yushin[6] case – the facts of the case are such that, the Assesse manufactured automobile parts and accessories by receiving certain raw materials free of cost from the Maruti Udyog Limited. The Raw materials are subject to further processing and the resultant products that arises out of the said processing are cleared to MUL upon payment of duty. However, the Cost of the products received free of cost are not included in the final product manufactured and cleared to MUL. The Department issued a Show Cause Notice and wanted to recover the differential duty on the cost that was excluded. It was contended by the Appellant that, the Appellant had an option to exempt their clearance under the Exemption Notification No:214/86 (exemption for Job Work) and therefore, there would not be any necessity to pay any duty upon clearance of goods. It was contended by the Appellant that, the duty paid by the Appellant would be available as credit to MUL, therefore, the situation is revenue neutral. Four Important principles were laid down by the tribunal. They are as follows:

(a) Revenue neutrality being a question of fact, the same is to be established in the facts of each case and not merely by showing the availability of an alternate scheme;

(b) Where the scheme opted for by the assessee is found to have been misused (in contradistinction to mere deviation or failure to observe all the conditions) the existence of an alternate scheme would not be an acceptable defence;

(c) With particular reference to Modvat scheme (which has occasioned this reference) it has to be shown that the Revenue neutral situation comes about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee’s manufactured goods;

(d) We express our opinion in favour of the view taken in the case of M/s. International Auto Products (P) Ltd. (supra) and endorse the proposition that once an assessee has chosen to pay duty, he has to take all the consequences of payment of duty

As it can be seen from Point # (c), Revenue Neutrality will be applicable in relation to the credit available to the Assesse himself and not the buyer. Though under normal circumstances, interest is chargeable on short payment or non-payment of tax, in revenue neutral situations, tax in itself is not chargeable and therefore there is no question of applicability of Interest.

1.2 Does The Principle Apply In A Similar Transaction Under GST?

The fundamental question is whether the principle of revenue neutrality can be applied to similar transactions in the Jay Yushin case under GST. The answer is in the negative, as in such cases the plea of ITC being available should be made available only to the Assesse himself and not the buyer.

In transactions between related party and distinct persons, since Schedule-I of the CGST Act specifically charges tax on free of cost supplies between related entities and distinct entities, GST ought to be charged and any non-compliance will not be viewed with lethargy by the Department.

After the Jay Yushin [7] case, the jurisprudence on Revenue Neutrality was widened and finally in the case of Amco Batteries [8], the Supreme Court held that there can be no suppression of facts, when the situation is revenue neutral and therefore, if any demand is charged by virtue of invoking an extended period of limitation under Section 73 of the Finance Act, 1994 or a similar provision in the Central Excise Act, 1944 , such demand would not be sustainable and consequently no interest and penalty can be levied.

The principle laid down in the Amco Batteries was later on dealt by the Supreme Court in the case of CCE, Mumbai vs Mahindra and Mahindra 2005 (179) E.L.T. 21 (S.C.), by the three member bench, wherein it was held by the Supreme Court that, there cannot be any suppression of facts because of availability of Modvat Credit; will be applicable depending on the facts and circumstances of the case and cannot be applied as a hard and fast rule. The Principle laid down in the judgement laid down in the Amco Batteries case will be applicable only exclusively to the facts and circumstances in the Amco Batteries case.

2. Principle of Revenue Neutrality in the transaction between Principal Manufacturer and Job Worker- Relevance under GST

In the case of Amco Batteries, the transaction happened between the Principal Manufacturer and Job Worker. In the instant case, the scrap generated from the manufacturing process of the principal manufacturer was sent to the Job Worker, who in turn manufactured ingots out of the scrap which was later on sent to the principal manufacturer through a delivery challan. In such case, excise duty was demanded on the value of the scrap that was sent to the job worker for further processing or manufacture. It was held that, the entire situation is revenue neutral as the duty paid on the scrap will be available as Modvat Credit to the principal manufacturer.

2.1 Does the principle apply in a similar transaction under GST?

The Question is whether the same principle would apply to transactions under GST. Under GST, Job-Work is considered to be a Service as per Schedule-II of the CGST Act, 2017. Under Section 19 of the CGST Act, 2017, the Principal is allowed to take Input Tax Credit of the inputs that are being sent to the premises of the job worker for the further processing and treatment. Therefore, even if the Inputs are being sent free of cost under the GST regime as envisaged in the Amco Batteries case, failure to pay GST by not including the value of the inputs sent free of cost  will render the situation revenue neutral and therefore, the principal manufacturer will not be held liable to pay the principal amount. Since interest is conjoint on payment of principal, no interest is also liable to be paid.

3. Interest on Value Charged in the Supplementary Invoice

The situation prior to GST with respect to chargeability of Interest on Supplementary Invoices has left the judiciary open and divided. The Supreme Court of India in a series of conflicting view[9] has held both in favour and against the dictum of charging interest if there is a retrospective price revision by way of a supplementary invoice. While in the decision holding against payment of interest on supplementary invoices, the Supreme Court had interpreted the term “ought to have been paid” in the interest provision u/s-11AA of the CEA, 1944 refers to the point of time when the seller agrees for a price from the buyer. At the stage of initial clearance, the price specified in the invoice is the price originally agreed between the seller and the buyer and any revision of price thereof is not envisioned by both the seller and the buyer at the time of initial clearance. Therefore, no interest becomes payable. However, this matter has been referred to a larger bench.

3.1 Situation under GST

Under the GST, this anomaly has been removed by way of an insertion of Explanation to Section 12 of the CGST Act, 2017. As per the time of supply for supply of goods, tax has to be paid at the earliest of the two dates i.e. date of invoice or date of receipt of consideration whichever is earlier. As per Explanation to Section 12, a supply shall be deemed to have been made only to the extent it is covered by the invoice or the payment. In case of price increase, supplementary invoice is issued at a future point of time when the buyer agrees for the same. Thus, liability to pay GST on price increase shall arise at the time of issuance of supplementary invoice only. Such clear provisions were absent in the pre-GST regime

4. Payment of Tax and Consequential Interest in a RCM Scenario

The Situation prior to GST with respect to chargeability of tax and interest on non-payment or short payment of tax under RCM is open and divided. Whereas, tribunals and courts have invoked the principle of revenue neutrality in favour [10]of the Assesse for non-payment of tax on RCM, they have also passed orders and decisions that are against[11] the Assesse. For instance, in the case decided by the tribunal in favour of the Assesse, the Assessee had hired services of different non-resident service providers for fulfilling the telecast of different IPL matches in India. They had failed to pay the Service Tax on Reverse Charge Mechanism on the compensation paid to these Non-Resident Service Providers. The Tribunal placing reliance on the decision in Jay Yushin held that, the benefit of revenue neutrality should be available to the Assessee himself and not the buyer of the manufactured goods. Therefore, manner of payment will not change the nature of levy.

4.1 Situation under GST

Under Section 12(3) of the CGST Act, 2017, the Time of Supply for Services under GST in respect of tax liable to be paid on RCM shall be the earlier of the following dates namely, date of payment as entered in books of accounts of the recipient or the date on which payment is debited in his bank account or the day immediately following the expiry of sixty days from the date of issue of invoice by the supplier, in lieu thereof by the supplier. Therefore, the due date for payment of tax under RCM or Interest ought to be calculated from the subsequent day of the due date that is ascertained by virtue of reading and interpreting Section 12(3) of the Act.  Sub-Section (3) has been reproduced for convenience:

(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely:––

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier:

The Term Invoice referred to in sub-clause (3) refers to the commercial invoice raised by the supplier and not the self-invoice raised by the recipient as per Section 31(3)(f ) of the Act.

The term supplier has been defined u/s-2(105) of the CGST Act, 2017. It can be read as follows:

“supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied

Therefore, the definition of the term supplier does not include the recipient. Section9(4) of the CGST Act, 2017 classifies a recipient who is liable to pay tax under RCM as a Deemed Supplier. It also says, the provisions under the GST Act, 2017 that is made applicable to the person responsible for paying tax under the act shall apply to the recipient. The time of supply for provision of Services for a supplier is Section 13(2) of the Act that encapsulates the method of ascertaining the due date. It says, date of invoice or date of receipt of payment, whichever is earlier, if the invoice is raised within a period of 30 days from the date of provision of service. If the invoice is not raised within the period of 30 days, then date of provision or service or date of receipt of payment, whichever is earlier. Therefore the invoice herein refers to the self-invoice raised by the recipient. However, if the same is assumed to be correct, then there is no need for a separate provision u/s-13(3) of the CGST Act, 2017. The said provision becomes redundant if the same interpretation holds true. Therefore, the invoice referred to in Section 13(3) is the commercial invoice raised by the supplier. It is from the date of the commercial invoice issued by the supplier that the period of 60 days ought to be calculated.

The reason, why such elaborate discussion and interpretation on the above legal position is required because, it is important to ascertain the due date for payment of tax, which will consequently help us in ascertaining the necessity and quantum to pay interest.

The Next Important Question, is whether a dealer has to pay tax and interest if he fails to pay tax under RCM and whether the principle of revenue neutrality can be applied in such a scenario.

The answer is in the affirmative as the tax paid under RCM will be available as credit to the Assesse, since duty is not payable, interest is also not payable. Further, this facility or credit is available to the assesse himself and not to the supplier.

5. ISSUES OF PENAL INTEREST UNDER GST

Black’s law dictionary defines Penalty as ‘punishment imposed by statute as a consequence of the commission of a certain specified offense.” Subsequently as such the word “penal” is something relating to or containing a penalty. To put it in perspective, any default in payment of a loan transaction or in the supply of goods or services is liable for a penalty, which may be fixed or variable and thus may be in the name of additional interest or penalty interest, or overdue interest.[12] Penal charge is levied when there is a delayed payment in a money-to-money transaction or when there is a supply of goods or services.

As discussed above, the scope of Penal Interest comes into effect only when there is a delayed payment in either a money-to-money transaction or when there is a supply of goods or services. In order to understand it thoroughly, we must first analyse if the penal interest will be included in the value of supply.

According to Section 15(2) (d) of the CGST Act, ‘value of supply’ includes “interest or late fee or penalty for delayed payment of any consideration for any supply.” Therefore, any interest or penalty that are paid for delayed payment in the supply of goods or services or a loan transaction shall be included in the value of supply, i.e., the consideration amount. A Notification dated 28th June 2017 [13], on the Central Tax (Rate) has attempted to define the term ‘interest’ meaning “interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debit incurred or in respect of any credit facility which has not been utilized.” As penal interest satisfies the definition of “interest” given in the notification, penal interest charged by parties who enter into a contract of giving loans will be covered under Serial no. 27 of the notification dated 28th June, 2017.

In a landmark ruling of Bajaj Finance Limited (BFL)[14], passed on 6th August 2018, where it has been concluded that “penal charges collected by the BFL shall attract GST.” Here it was said that in case of default of payment of EMI by the customer, the applicant tolerated such an act of default or a situation and the defaulting party i.e. the customer was required to compensate the applicant by way of payment of extra amounts in addition to principal and interest. Also, the additional interest is not in the nature of interest but penal charges.

Therefore, the charges levied for any default in repayment of loan will be covered under clause 5(e) of Schedule II of the CGST Act. Also, the same is not an exempt service and will be liable to tax under GST.

With a subsequent Notification dated 28th June 2019,[15] a clarification as regards the Penal interest has been made through. Penal interest charged on delayed payment for supply of goods and services will be included in the value of supply and will stand liable for GST. However, penal interest charged on the delayed payment of loan repayment will be exempt under GST.

5.1 SAGA ON CHARGING INTEREST ON THE GROSS AMOUNT

The Central Board of Indirect Taxes and Customs (CBIC) released a Notification dated 25th August, 2020[16], prompting that the changes that were made in Section 50 by way of Amendment of the Finance Act, 2019 vide Section 100, with the insertion of a new proviso to Section 50(1), the same to come to effect from September 1st, 2020. Section 50 relates to ‘Interest on GST’ and it prompts charging interest on gross amount instead of the net amount.’ With this Notification, the Government has now notified that the interest will be applicable on the net amount with effect from September 1st, 2020. Under Section 50(1) of the CGST Act, the following proviso has been inserted:

“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 was only in the 39th GST Council Recommendations on Laws and Procedures that presented and clarified on interest provisions on GST. The Council presented that interest for delay in payment of GST should be charged on the net cash tax liability with effect from September 1st, 2017 (the law may be amended retrospectively) but the government nevertheless notified the provisions from September 1st, 2020.

In a recent ruling passed by the Hon’ble Orissa High Court in the case of Prasanna Kumar Bisoi Vs. Union of India,[17] it was held that “with respect to the interest liability for delayed payment of GST under Section 50(1) of the CGST Act, 2017, is required to be paid on net cash tax liability in view of the decision taken by the GST Council in its 39th Meeting.”[18]

In the landmark ruling of M/s Refex Industries Limited,[19] the Madras High Court has conclusively held that “the levy of interest on delayed payment of GST liability is purely compensatory in nature and accordingly is liable to be charged only on the net cash payment and not on the gross liability.”

Facts: For the period commencing from August 2017 to March 2018, the petitioner had belatedly filed its GST returns. Demand notices were issued by the revenue to the Banks seeking to recover arrears of interest from the account balance of the petitioner. The petitioner objected, stating that they had sufficient input tax credit available with the revenue and thus, interest could be demanded, if at all, only on the cash components of the tax admitted and paid after the due date. Petitioner accordingly had filed writ petition before the Madras High Court against the coercive recovery of the interest.

Order of the High Court: As per Section 50 of the CGST Act, 2017, levy of interest on delayed payment of tax is ‘automatic’ as it is intended to compensate the revenue for the remittance of tax paid beyond the time frame permitted under the law. Thus, the Court held that, the proper application of Section 50 is one where the interest is levied only on the cash payment, which was paid late, but not on ITC available with department to credit of assessee.”[20] Further stated that, the proviso inserted to Section 50(1) of CGST Act clearly seeks to correct an anomaly in the provision as it existed prior to such insertion. It should thus, be read as clarificatory and operative retrospectively.

Though the government had inserted an amendment to Section 50 of the CGST Act by superseding the judgement of the Hon’ble Telangana High Court on the said issue by virtually reinvigorating the principle laid down by the Supreme Court, the Hon’ble Supreme Court had laid down the principle thereby remanding the matter to the assessing authority to verify facts as to whether, sufficient credit balance was available.

In the pre-GST regime, the assesse maintained a CENVAT Register for the purpose of ascertaining the quantum and nature of credit available to the Assesse. Though, this is not a statutory record that requires to be maintained, it is a foremost document that would be sought by the Department for the purpose of conducting Cenvat audit. Further, in the Central Excise Regime, monthly returns were being filed on the 6th day of the subsequent month and any tax due would have to be paid on a month-on-month basis. Therefore, the claim can be validated by the Assessee by verifying the monthly returns to ascertain the quantum of amount claimed as Cenvat Credit and the amount paid using such credit. Subsequently, the amount entered in the monthly returns for availment and utilization has to be verified and compared with the Cenvat register. If there is any difference, then Invoices have to be verified so as to ascertain the genuiness of the claim. This becomes very difficult for the Assessee to prove once a notice for recovery of interest is issued and when he has to prove that, no interest is likely to be paid to the extent of the credit available. Further, he has to prove that, there was sufficient credit balance available at the end of each month to waive

Under the GST regime, a similar challenge lies to the Assesse, as GSTR-3B and GSTR-1 and 2 are monthly returns. Under the GST Regime, it has introduced the system of Electronic Credit Ledger and Electronic Cash Ledger that has digitized the record keeping system of the Assesse.

Once a notice for recovery of interest for short-payment is issued by the Department on a month on month basis, the Assesse has to reconstruct the entire ITC ledger, similar to the pre-GST regime for the purpose of ascertaining whether sufficient credit balance is available to the Assesse each month. Therefore, the Assesse finds himself in a rough terrain to prove that, there is sufficient credit balance and he is not liable to pay tax to that extent in case there is a short fall.

5.2 Payment of Interest – Availability of Sufficient Credit Balance – Analysis under GST Law in the context of the Bombay Dyeing Judgement

The Telangana High Court in its most recent judgement[21] had created a furore amidst the trade circles holding that, interest is chargeable on the gross amount liable to be paid by a Dealer including the output tax that could be set off by utilization of Input Tax Credit. This was a significant departure from the pre-GST law that was laid down by the Supreme Court in the case of Commissioner of Central Excise, Mumbai I Vs. Bombay Dyeing &Mfg.Ltd.[22]
Though the Government had superseded the judgement by way of an amendment to Section 50 of the CGST Act, the Department had used the said judgement as a weapon to coerce and collect interest on gross amount from the taxpayer. They continue to issue notices for recovery of interest based on the said judgement to recover interest on the gross amount. This is also primarily because of the fact that, the Government did not come out with specific date with respect to the effect of the said amendment. However, any amendment in a taxing statute, if it is beneficial to the assesse, has to be retrospective in nature. Hence, it is as if this amendment was brought in from the date of implementation of GST. It is pertinent to note the case of Thirumalai Chemicals Ltd. V UOI [23], wherein the Hon’ble Supreme Court on discussing the substantive and procedural law’s effect of application held the following:

“16. Therefore, unless the language used plainly manifests in express terms or by necessary implication a contrary intention a statute divesting vested rights is to be construed as prospective, a statute merely procedural is to be construed as retrospective and a statute which while procedural in its character, affects vested rights adversely is to be construed as prospective.”

This amendment would have retrospective effect as evidenced by the press release dated 14.03.2020 post the 39th GST Council Meeting, wherein, it was stated that the Interest for delay in payment of GST is to be charged on the net cash tax liability w.e.f. 01.07.2017. It was also stated that the Law was to be amended retrospectively.

Though the government has done its role in bringing the much needed relief and clarity to the law, it would be apposite to compare the provisions under Pre-GST and Post- GST regime as to whether the provisions charging interest are different. A Tabular comparison would be as follows:

 

Pre-GST Regime Post GST Regime
Notwithstanding anything contained in any judgment, decree, order or direction of the Appellate Tribunal or any court or in any other provision of this Act or the rules made thereunder, the person, who is liable to pay duty, shall, in addition to the duty, be liable to pay interest at the rate specified in sub-section (2), whether such payment is made voluntarily or after determination of the amount of duty under section 11A 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

 

As it can be seen based on a comparison of both the provisions, it is clear that, the provision under GST has been simplified to charge interest on non-payment of tax. The Judgement of the Hon’ble Supreme Court in the case of Bombay Dyeing holding that, Interest need not be paid to the extent of the tax due that can be set off using available Input Tax Credit. Therefore, the same interpretation holds good for the provision under GST.

5.3 The Section 50 Amendment in CGST Act, 2017– Nuances in applying the principle of Bombay Dyieng Judgement

Though the government had inserted an amendment to Section 50 of the CGST Act by superseding the judgement of the Hon’ble Telangana High Court on the said issue by virtually reinvigorating the principle laid down by the Supreme Court, the Hon’ble Supreme Court had laid down the principle thereby remanding the matter to the assessing authority to verify facts as to whether, sufficient credit balance was available.

In the pre-GST regime, the assesse maintained a CENVAT Register for the purpose of ascertaining the quantum and nature of credit available to the Assesse. Though, this is not a statutory record that requires to be maintained, it is a foremost document that would be sought by the Department for the purpose of conducting Cenvat audit. Further, in the Central Excise Regime, monthly returns were being filed on the 6th day of the subsequent month and any tax due would have to be paid on a month-on-month basis. Therefore, the claim can be validated by the Assessee by verifying the monthly returns to ascertain the quantum of amount claimed as Cenvat Credit and the amount paid using such credit. Subsequently, the amount entered in the monthly returns for availment and utilization has to be verified and compared with the Cenvat register. If there is any difference, then Invoices have to be verified so as to ascertain the genuiness of the claim. This becomes very difficult for the Assessee to prove once a notice for recovery of interest is issued and when he has to prove that, no interest is likely to be paid to the extent of the credit available. Further, he has to prove that, there was sufficient credit balance available at the end of each month to waive

Under the GST regime, a similar challenge lies to the Assesse, as GSTR-3B and GSTR-1 and 2 are monthly returns. Under the GST Regime, it has introduced the system of Electronic Credit Ledger and Electronic Cash Ledger that has digitized the record keeping system of the Assesse.

Once a notice for recovery of interest for short-payment is issued by the Department on a month on month basis, the Assesse has to reconstruct the entire ITC ledger, similar to the pre-GST regime for the purpose of ascertaining whether sufficient credit balance is available to the Assesse each month. Therefore, the Assesse finds himself in a rough terrain to prove that, there is sufficient credit balance and he is not liable to pay tax to that extent in case there is a short fall.

VI. INTEREST – SHOULD INTEREST BE COLLECTED AFTER FOLLOWING THE RECOVERY MECHANISM FOR TAX ARREARS OR TAX DUES?- TRACING THE JUDICIAL HISTORY

Under the GST Regime, the Department has now proceeded to recover the Interest Due from the Dealers for delayed payment of tax by directly sending intimation to the banks thereby attaching the bank accounts of the Dealers. This created a huge ruckus among the trade, as the Officers of the Department had started to abuse the powers given to them under Section 83 of the CGST Act, 2017, where the officer can provisionally attach the bank account of the Dealer “to protect the interest of the revenue”. This particular provision has already been misused by various officers of the department thereby leading to judicial intervention by various high courts by way of various Writ Petitions.

For instance, the Gujarat High Court[24] had to intervene and protect the interests of the directors of a company, as their bank accounts were attached by the GST officials for an alleged offence committed by the company under the GST Laws. In another instance, the Gujarat High Court[25] had to intervene, as the officials had attached bank accounts wherein the amount lying in such bank accounts was disproportionate to the amount alleged to be due towards the department.

Further in another instance where the Department raided the premises of an assessee and collected post-dated cheques forcefully getting the signature of the directors for recovery of erroneous availment of ITC. The Gujarat High Court [26] after placing reliance on its own decision in Atul Motors (P.) Ltd v. State of Gujarat had held that, cheques cannot be collected without the final demand being crystalized. The said decision was given by interpreting the provisions of the Gujarat VAT Act which had a similar provision. Therefore, unless the demand has been finalized, there is no authority for the Department to collect the outstanding due by such unscrupulous means.

The same principle will apply squarely to recovery of interest, as the liability is not crystalized or finalized at the time when department has found that, there is delayed payment or non-payment of tax. More so, in the cases of attachment of bank accounts, there is no locus standi for the officers of the department to touch the bank accounts of the dealers. The final demand can be crystalized only after affording an opportunity for the Dealer, who can explain the reasons for such delay and could also demonstrate that there is availability of sufficient credit to the extent to which he or she is not liable to pay interest.

VII. CONCLUSION

Therefore, ‘Interest’ being compensatory in nature, cannot be levied and collected in every circumstance where there is a non-payment and delayed payment of duty. This E-Book is a humble attempt of the Authors in bringing together, the various situations and circumstances under which the Interest can be charged and collected.

 

 

[1] CIVIL APPEAL NOS. 13097-l3l00 OF 1996 (Arising out of S.L.P.(Civil) Nos. 6015/93, 6016/93, 6017/93, 6018/93) AND Civil Appeal Nos. 2416-18/93, 2419/93, 2420-25/93, 2426-28/93, 2429-32/93, 2433-38/93

[2] Section 11A of the Central Excise Act, 1944, prior and post amendment in 2011.

[3] Section 11AA of the Central Excise Act, 1944 before amendment, prior to 8/04/2011

[4] OECD, Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series (2006), October 2006, pp 57, 69-71, viewed on 31 January 2007 at http://www.oecd.org/dataoecd/43/7/37610131.pdf.35

[5]  (1962) AIR 1006

[6] [2002-TIOL-126-CESTAT-DEL-LB]

[7] [2002-TIOL-126-CESTAT-DEL-LB]

[8] 2003 (55) RLT 272 (S.C.)

[9] CCE vs. SKF India Limited2009-TIOL-82-SC-CX ; CCE vs. International Auto Limited2010-TIOL-05-SC-CX; Steel Authority of India vs. CCE – 2015-TIOL-292-SC-CX; CCE vs. Hitkari Fibres Limited2015-TIOL-248-SC-CX

[10]  Jet Lite India Ltd vs Delhi-Ii on 19 July, 2019

[11] BCCI v. Commissioner of Service Tax[2018-TIOL-2641-CESTAT-MUM]

[12] http://vinodkothari.com/2019/07/applicability-of-gst-on-penal-charges/

[13] Notification No. 12/2017-Central Tax (Rate)

[14] https://mahagst.gov.in/sites/default/files/ddq/GST%20ARA%20ORDER22.%20BAJAJ%20FINANCE%20LTD.pdf

[15] Circular No. 102/21/2019-GST; https://www.cbic.gov.in/resources//htdocs-cbec/gst/circular-cgst-102.pdf;jsessionid=60EABBE974BB4725E973A12CE49C2546

[16] Notification No. 63/2020–Central Tax; https://www.cbic.gov.in/resources//htdocs-cbec/gst/notfctn-63-central-tax-english-2020.pdf

[17] W.P.(C) No.13190 OF 2020

[18] https://taxguru.in/goods-and-service-tax/interest-liability-delayed-payment-gst-net-cash-tax-liability.html

[19] 2020 (34) GSTL 588 (Mad)

[20] http://www.in.kpmg.com/TaxFlashNews-INT/KPMG-Flash-News-Refex-Industries-Limited.pdf

[21] M/s. Megha Engineering & Infrastructures Ltd. Vs The Commissioner of Central Tax Writ Petition No.44517 of 2018

[22] 2007 (215) ELT 3 (SC)

[23] 2011 (268) E.L.T. 296 (S.C.),

[24] H.M. Industrial (P.) Ltd. vs. Commissioner, CGST and Central Excise, [2019] 102 taxmann.com 410

[25] Mono Steel India Ltd. vs. State of Gujarat, [2019] 102 taxmann.com 123 (Gujarat)

[26] Remark Flour Mills (P.) Ltd. vs. State of Gujarat, (2018) 67 GST 559 (Gujarat)

 

 

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