Interest to be levied on Net Tax Liability or Gross Tax Liability under GST

Background

This update is of great importance to all the professionals and business owners for complying with the hardship under the GST law. One such hardship that has been faced by all the taxpayers and professionals is the charging of interest by the GST department. Notices are being received by the taxpayers for recovery of interest on Gross Tax Liability. This issue was further escalated when the CBIC issued internal departmental instructions regarding recovery of interest on Gross Tax Liability. Also, CBIC in a tweet dated Feb 15, 2020 at 12:41 A.M. to recover Rs. 46,000 crore on the basis of Interest charged on Gross Tax Liability. As per the tweet, proviso added to Section 50(1) (i.e charging of interest only cash portion) shall be applied prospectively. This means that Central Government has made an amendment that Interest shall be charged on Net Tax liability but this amendment shall be made prospectively w.e.f. Aug 01, 2019 (So what about the Interest for the period July 01, 2017 to July 31, 2019). This is the biggest question & hardship for the business owner and tax consultant.

Let us understand this hardship through an example:

A taxpayer is required to file GSTR-3B for the month of August 2017 till due date (i.e September 20, 2017), and if he failed to file GSTR-3B before September 20, 2017. The particulars GSTR-3B for the month of Aug 2017 were as follows:- 1. Output tax liability Rs. 10 Lakhs 2. Input Tax Credit availed Rs. 7 Lakhs 3. Balance payable in cash Rs. 3 lakhs Here, the Gross Tax Liability is Rs. 10 Lakhs and the Net Tax Liability is Rs. 3 Lakhs. The department is charging interest on the whole amount Rs. 10 Lakhs i.e. Gross Tax Liability. Now the hardship is that the taxpayer is only paying Rs. 3 Lakhs in Cash but as per the provision of the GST the taxpayer has to pay interest on Rs. 10 Lakhs (i.e On gross liability instead of net liability). Author View :

In my view, Interest should be charged in Net Tax Liability (Cash component). My view can be supported by the following judgments & council recommendations: -

1. Refex Industries Ltd. Vs Assistant Commissioner of CGST & Central Excise (Madras High Court) Madras High Court in its order dated Jan 06, 2020 has upheld the view of the petitioners that the interest shall be charged at Net Tax Liability. 2. The proviso to Section 50(1) is clarificatory in nature: - Although this amendment issued vide Press Release by the Ministry of Finance is still on paper and not given effect but it clarifies the intent of the department. The intent of the department is to charge interest on Net Tax Liability. This has also been clarified by Madras High Court in Refex Industries Ltd.

3. 31st and 39th GST Council Meeting: - In a Press release of 31st and 39th GST council meeting dated Dec 22, 2019, and Mar 14, 2020, respectively, it was recommended by the council to charge GST on Net Tax Liability i.e. on Cash component only. From these 2 meetings, it is also certain that the intent of the GST law was to recover interest on net tax liability.

4. GSTR-3B is not a return and Rule 61(5): - Gujarat HC in case of AAP & Co. on June 24, 2019 stated that GSTR-3B is not a return. In response, the GST department amended Rule 61(5) on October 09, 2019 which states that GSTR-3B is a return w.e.f. July 01, 2017. If we go only through law then how can the department charge interest from July 01, 2017 when the taxpayer came to know that GSTR-3B is a return on Oct 09, 2019. As per various Supreme Court judgments, no amendment can enforce from the retrospective effect which is detrimental to the interest of the taxpayer.

5. No option to file GSTR-3B by making partial payment: - While filing For GSTR-3B, the return is always accepted when the whole output tax liability is discharged either by utilizing Input Tax credit or by way of payment in Cash. There is no option available on the GST portal that GSTR-3B can be filed without making payment in cash. If the option was available, the taxpayer would have filed the return after utilizing ITC and therefore the department would be left with no option but to recover the interest on cash component only. Since the utilization of ITC is restricted by the GSTIN, therefore no interest can be charged on the restricted portion i.e. ITC portion.

After all the above explanations, it is clear that the interest shall be charged and recovered on Net tax liability. We should wait for the good news from the government through a notification.


CA Mehul Gupta

B. Com(H), CA

+91-8368972811

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