Amendment of law pertaining to calculation of interest u/s 50 on gross output tax liability

Introduction

1. Interest is chargeable u/s. 50 of the Central Goods and Services Tax Act, 2017 (sections referred to hereinafter refer to sections of this Act only) if there is delay in payment of tax. As per the view expressed by the officers of the Revenue, such interest is payable on the gross value of output tax

without making any adjustment of input tax credit. The GST Council, in its 31st meeting held on 22.12.2018, has decided that interest should be charged only on net tax liability of the taxpayer, after taking into account the admissible input tax credit. The existing and the proposed law can be explained by way of the following Table.

Table-1:

	The existing law as interpreted by the Revenue		Law as approved in 31st GST Council meeting
	CGST	SGST	CGST	SGST
Output tax (Rs.)	50000	50000	50000	50000
Input tax credit (Rs.)	30000	30000	30000	30000
Net tax liability (Rs.)	20000	20000	20000	20000
Return - Due date	20.02.2019	20.02.2019	20.02.2019	20.02.2019
Return – Filed on	25.02.2019	25.02.2019	25.02.2019	25.02.2019
interest is payable on (Rs.)	50000	50000	20000	20000
Interest payable for	5 days	5 days	5 days	5 days
Rate of interest (in %)	18	18	18	18
Interest payable	123	123	49	49

Elimination of litigation in the matter of calculation of interest

2. It is pertinent to mention here that sub-section (2) of section 50 provides that interest under sub-section (1) shall be calculated in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid. However, nothing has been prescribed in the CGST Rules, 2017 till date in pursuance of the provisions of sub-section (2) of section 50. Hence, some of the taxpayers have calculated interest on gross output tax liability whereas others have calculated interest on net tax liability after adjustment of input tax credit. In fact, it is highly debatable whether the interpretation of the Revenue regarding payment of interest on gross value of output tax is correct or not ? The matter would have certainly landed up in the Courts but for the decision of the GST council. Hence one should applaud the GST Council because it has nipped the evil in the bud.

Whether Proposed amendment is prospective?

3. The detailed agenda notes and minutes of the 31^st GST Council Meeting are yet to be uploaded on the website http://www.gstcouncil.gov.in. Hence, it is not clear whether the amendment suggested by GST Council will be effective from 01.07.2017 or will be a prospective amendment? Before one argues for retrospective amendment one should understand the arguments that can be given in support of or against charging of interest on gross value of output tax even under the existing law.

Arguments in support of charging of interest on output tax without adjustment of input tax credit under the existing law

4. Section 16(2)(d) says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s. 39. Section 49(2) says that the input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger. Section 49(3) says that the amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fee, etc. Similarly, section 49(4) says that the amount available in the electronic credit ledger may be used for making any payment towards output tax only. Rule 61(3) says that tax liability shall be discharged by debiting the cash ledger or credit ledger. It is argued that one cannot utilize the input tax credit for payment of output tax without furnishing return u/s. 39. The date of furnishing of return u/s.. 39 shall be deemed to be the date of payment of tax. Output tax liability is discharged by debiting the cash ledger and/or credit ledger and reverse charge tax liability is discharged by debiting cash ledger only. Accordingly, if one makes delay in furnishing of return u/s. 39, then his entire tax liability (i.e., gross value of output tax and reverse charge tax liability) remain unpaid till the date of furnishing of return u/s. 39. Therefore, interest should be charged on the entire output tax liability without making any adjustment of the input tax credit.

5. Argument in support of charging of interest on net output tax after adjustment of input tax credit even under the existing law :

5.1 It must be said here that input tax credit concept is not a new concept which was brought into the new GST regime for the 1^st time. In the Finance Bill 1986-87, MODVAT scheme was introduced so as to extend the then existing system of proforma credit to all excisable commodities with exception of a few sectors. The then Finance Minister in paragraph 114 of the Budget Speech 1986-87 said, "Introduction of MODVAT will decrease the cost of the final product considerably through the availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs". This MODVAT scheme was later on replaced with CENVAT Credit Rules and input tax credit was being allowed while determining excise as well as service tax liability. Input tax credit concept was also introduced in the taxation of sale of goods during the year 2005 with introduction of VAT.

5.2 Under excise, service tax and VAT regime a dealer was also liable to pay interest on delayed payment of tax, but the interest was calculated on the net tax liability after set off of input tax credit. This was so because the objective was to ensure availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs.

5.3 Under GST regime, the objective of input tax credit remains the same. However, because of some unintentional drafting error in the law, a situation has cropped up wherein the dealer will have to pay interest on the gross amount of output tax liability without any adjustment of input tax if he makes any delay in filing of return u/s. 39. Thus, the objectives of instant availability of input tax credit and the consequential reduction of interest costs are to some extent lost because of the drafting error.

5.4 Another important aspect is unjust enrichment. The input tax credit is available to the buying dealer only if the seller has paid the tax. Thus, the buying dealer is claiming a credit of tax which has already been received by the government. Still, the government has provided that if the buying dealer makes any delay in submission of return u/s. 39 then benefit of input tax credit will not be available till the date of submission of return. It is well-settled principle of taxation law that interest is compensatory in nature. If the government is trying to levy interest on any amount which it has already received then this payment will not be compensatory in nature but will be in the nature of penalty. It is pertinent to mention here that for delayed filing of return u/s. 39 a dealer is already liable to pay late fee u/s. 47 and penalty u/s. 125. Now, you are also making him liable to pay interest for the same default. Is it not a case of unjust enrichment and that two by a State?

5.5 There in fact is no dispute with the provision of section 16(2)(d) which says that no registered person shall be entitled to the credit of any input tax unless he has furnished the return u/s. 39. But that section nowhere explicitly says that the date of submission of return will be deemed as the date of availability of input tax credit to the buying dealer.

5.6 It has been held in State of Tamilnadu v. M.K. Kandaswamy [1975] 36 STC 191,198 (SC) that in interpreting a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed.

5.7 It has also been held in Calcutta Jute Manufacturing Co. v. CTO 1998 taxmann.com 1652 (SC) that a court should not adopt a construction which would upset or even impair the purpose in introducing a particular provision in the statute.

5.8 It has further been held by the Apex Court in Madras Port Trust v. Hymanshu International 1979 taxmann.com 50 that "It is high time that government and public authorities adopt the practice of not relying upon technical pleas for the purpose of defeating legitimate claims of citizens and do what is fair and just to the citizens".

5.9 Delhi High Court in the case of CITv. Mitsubishi Corpn. [2008] 172 Taxman 13/306 ITR 260 (Delhi) has held that "The State should not raise technical pleas to defeat a just claim. The State cannot recover or hold back any tax except in accordance with law for otherwise it would be unjustly enriching itself, which is impermissible."

5.10 Hon'ble Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) had held, "When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred".

5.11 Input tax credit has been introduced to decrease the cost of the final product considerably through the availability of instant credit of the duties paid on inputs and the consequential reduction of interest costs.

5.12 The very purpose of input tax credit will be defeated if interest is charged on gross value of output tax without offsetting the input tax credit and, therefore, this interpretation should be eschewed keeping in view the ratios of the aforesaid judgments of the Hon'ble Apex Court and High Court.

6. Need for retrospective amendment :

6.1 It is well-settled that an amendment can be treated as curative in nature if it has been made with a view to remove the unintended consequences and such curative amendments are retrospective in nature. [CIT v. Alom Extrusions Ltd. [2009] 185 Taxman 416/319 ITR 306 (SC)].

6.2 In the case of Allied Motors (P.) Ltd.v. CIT [1997] 91 Taxman 205/224 ITR 677 (SC) it has been held as under:

"A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole."

6.3 The aforesaid view has once again been reiterated in CIT v. Calcutta Export Company [2018] 93 taxmann.com 51/255 Taxman 293/404 ITR 654 (SC).

6.4 In the present case GST Council has suggested for amendment of law in order to remove the unintended consequence of the existing law.

6.5 Hence, it is suggested that the law may be changed prospectively with effect from 01.07.2017. Unless it is done the matter will travel all the way up to the Supreme Court.

7. Need for an immediate amendment to law :

7.1 It is pertinent to mention here that a dealer is required to file u/s. 44 an annual return in Form GSTR-9 for the financial year 2017-18 by 30.06.2019. Similarly,as per section 35, read with Rule 80, a dealer whose aggregate turnover during the financial year 2017-18 exceeds two crore rupees has to file on or before 30.06.2019 audited accounts and a reconciliation statement in Form GSTR-9C duly certified by the auditor.

7.2 It is therefore suggested that the law may be amended without further delay so as to bring clarity on this issue as it will help both the dealers as well the auditors to determine the correct interest liability for the financial year 2017-18.

8. How to bring about the amendment to the law :

8.1 As already stated above nothing has been prescribed in the CGST Rules, 2017 till date in pursuance of the provisions of sub-section (2) of section 50.

8.2 Hence, it is suggested that a new Rule may be inserted in the CGST Rules, 2017 prescribing that interest under section 50 should be calculated after setting off the allowable input tax credit.

8.3 If it is felt that the GST Act needs to be amended then the same can be done by issuing necessary "removal of difficulties order" u/s. 172 as this route can be adopted till the expiry of three years from the date of commencement of the GST Act and it is a less time consuming method.

Conclusion

9. GST Council has shown enough maturity in accepting that interest should be charged on net tax liability after adjusting the input tax credit. Now the onus is on the government to act fast and make necessary modifications in the law without further delay as more than two months have already elapsed from the date of the decision of the GST council in this regard.