Taxmann's Analysis | Levy of Interest on Delayed Payment of Tax – Persisting Challenges

Levy of Interest on Delayed Payment of Tax

Levy of Interest on Delayed Payment of Tax Persisting Challenges!

1. Introduction

Under the GST laws, the interest is typically calculated on the amount of tax payable, for the period of delay in filing the periodical return. According to Section 50 of the CGST Act, 2017 if a registered person fails to make the payment of tax by the due date, it shall be liable to pay interest at a prescribed rate which is 18 percent.

2.

Background on the Issue

There was uncertainty that whether interest should be calculated on the total tax owed (i.e. gross amount of tax payable) or just the net amount after adjusting available input tax credits in the electronic credit ledger for that period.

To address this, the GST Council, during its 31st meeting, recommended that interest should only be due on tax paid in cash through the electronic cash ledger. Amendments were proposed to be retrospectively applied from the start of GST to prevent potential legal issues.

Following this, the Finance Act 2019 added a proviso to Section 50(1) of the CGST Act, mandating interest only on the cash-paid portion of tax, except in cases where returns were filed after proceedings under sections 73 or 74 had started. Notably, this amendment was made effective from September 1, 2020, led to disputes over interest demands for prior periods. To resolve this anomaly, the Finance Act 2021 made another amendment in the law, thereby making the proviso to Section 50(1) of the CGST Act, to have retrospective application from July 1, 2017.

Recent Development by the Patna High Court

The issue resurfaced with a ruling from the Patna High Court in the case of Sincon Infrastructure (P.) Ltd. v. Union of India1, where1 it was determined that interest charges automatically apply to delayed return filings, regardless of whether payments are made through the Electronic Credit or Cash Ledger. In this case, the taxpayer challenged the imposition of interest for taxes paid via the Electronic Credit Ledger for the fiscal year 2018-19.

Brief Facts of Sincon Infrastructure Case:

• The petitioner was an assessee under the CGST Act. The Proper Officer issued a notice for the recovery of interest on the belated payment of tax

• The interest was charged for the tax paid through Electronic Credit Ledger for the financial year 2018-19

• Aggrieved by the order, the petitioner filed a writ petition before the Patna High Court and contended that the interest shall not be levied if payment is made from credit ledger 1 Sincon Infrastructure (P.) Ltd. v. Union of India [2024] 161 taxmann.com 616 (Patna)

Provisions of Section 50 (1) - Interest on delayed payment of tax

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.

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 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.

Arguments by Department

The proviso to Section 50(1) of the CGST Act only enables levy of interest when the debit is made from a cash ledger and it does not prohibit levy of interest when the debit is made from a credit ledger. Whether the tax is paid via credit ledger or the cash ledger there can be payment of tax only when the return is filed and if there is delay, interest under section 50(1) gets attracted.

Observations and Decision of Patna High Court

• The High Court noted that the payment of tax and furnishing of return have to occur simultaneously

• The input tax credit and the resultant payment of tax from the Electronic Credit Ledger occurs only when a return is furnished. If there is a delay in furnishing of returns then there is a delay in the input tax credit coming into the Electronic Credit Ledger and a resultant payment being made to the Government as tax is belated leading to levy of interest

• The deposit made into the cash ledger by an assessee does not necessarily deem it to be a payment of the dues under the Act

• Given the above, the Hon’ble Patna High Court has held that the proviso of Section 50(1) mandates the levy of interest only when there is a delayed furnishing of return, irrespective of whether the tax was paid via credit ledger or the cash ledger

3. Earlier

Decisions on the Same Subject Matter

In case of Refex Industries Ltd., the Madras High Court has held2 that the specific proviso under Section 50(1) was introduced to correct an anomaly in Section 50(1) and it requires levy of interest only on that part of the tax which is paid in cash.

Interestingly, the very same Single Bench Judge of the Madras High Court in the case of M/s. India Yamaha Motor Pvt. Ltd. has3 held that unless an assessee actually files a return and debits the respective registers, the authorities cannot be expected to assume that available credit will be set off against tax liability and therefore interest is payable for the period in default.

The Patna High Court in the case of Sincon Infrastructure (Supra) relied on the decision in M/s. India Yamaha Motor Pvt. Ltd (supra) while concluding that interest is payable for the period in default irrespective of whether the tax is paid via credit ledger or the cash ledger.

4. Future Outlook

From the above, it can be inferred that this matter will take another round of litigation to settle. It is relevant to mention here that the CBIC vide Circular F. No. CBEC-20/01/08/2019GST, Dated 18-9-2020 has clarified that for the period 01.07.2017 to 31.08.2020, field formations in respective jurisdictions may be instructed to recover interest only on net cash tax liability (i.e. that portion of the tax that has been paid by debiting the electronic cash ledger or is payable through cash ledger) and wherever SCNs have been issued on gross tax payable, the same may be kept in Call Book till the retrospective amendment in section 50 of the CGST Act is carried out. Despite the circular, which is binding on the department, it has been overlooked, leading to widespread litigations on a Pan India basis. Additionally, there have been conflicting decisions issued by different High Courts on this issue. It is expected that the Government in the upcoming Budget should issue a detailed guidelines to resolve these ongoing disputes.

2 [2020] 114 taxmann.com 447 (Madras)

3 [2022] 142 taxmann.com 369 (Madras)

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