Every taxpayer who collects taxes from customers on the outward supply of goods or services is required to remit the amount collected to the department within the due date on a self-assessment basis. Failure to pay the tax within the prescribed due date leads to the application of interest on the unpaid amount. In this blog, we will explore the concept of interest liability in the context of GST (Goods and Services Tax) and shed light on important provisions related to the payment of interest.
Understanding Tax, Penalty, and Interest
In fiscal statutes, the terms “tax,” “interest,” and “penalty” hold distinct meanings. Tax refers to the compulsory amount payable as a result of the charging provision, enforced by law for public purposes. Penalty is levied on an assessee for contumacious conduct or deliberate violation of the statute’s provisions. On the other hand, interest is compensatory in nature and is imposed on an assessee who withholds any tax when due and payable. It is calculated based on the actual amount of tax withheld and the extent of the delay in payment.
Payment of Interest on GST Liability
Section 50(1) of the CGST Act 2017 deals with the payment of interest. It states that every person liable to pay tax under the Act but fails to pay it within the prescribed period shall pay interest on the unpaid tax. A careful reading of this provision suggests that interest should be paid on the gross GST liability, as it does not explicitly mention the net liability. This differs from the previous tax regimes where interest was computed on the net liability.
The Principal Commissioner (Hyderabad) issued a Standing Order 01/2019, stating that interest should be paid on gross liability, including the amount of input tax credit utilized for outstanding tax liability payment. Consequently, the department has started issuing notices for the recovery of interest on gross liability.
Impact of Filing Returns on Input Tax Credit
According to the provisions of GST, the input tax credit is considered updated only upon filing of returns, and until then, it remains provisional. The Telangana High Court, in the case of Mega Engineering & Infrastructures Ltd, observed that until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. Therefore, no payment can be made from such credit until it is entered in the electronic credit ledger. It further clarified that the amount available in the bank is different from the amount available for the bank.
Changes in Interest Computation
Based on recommendations from the trade and industry, the GST Council proposed changes to the interest computation in Section 50(1). The changes, provided in Section 99 of the Finance Bill 2019, state that interest on tax payable for supplies made during a tax period and declared in the return furnished after the due date shall be levied on the portion of tax paid by debiting the electronic cash ledger. The Madras High Court, in the case of Refex Industries Ltd. Vs. Ass. CCGST, held that interest should be paid on the net liability based on the proposed changes in the law. However, until the state acts are amended and notified, the debate continues on whether interest should be paid on gross liability or the amount debited to the cash ledger.
In conclusion, the payment of interest in GST is an important aspect that taxpayers should understand. As per the current provisions, interest is payable on the gross liability. However, proposed changes aim to make interest payable on the net liability. The amendments, yet to be notified, will have implications for taxpayers and industry as they seek clarity on the retrospective or prospective nature of the change. It is crucial for state governments to amend their respective SGST Acts to enable the
central government to notify the changes and provide relief during challenging times like the ongoing pandemic.
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