[Manohar Samal is an Associate Advocate at Ratan Samal & Associates, Mumbai and a Panel Arbitrator at the Indian Institute of Arbitration and Mediation]
The concept of interest under tax law has been one of the most significant sources of compensating the Government treasury for non-compliance with tax statutes in India. The most common forms of non-compliance for which interest is levied on the portion of tax amount computed are late filing of tax returns, claim of benefits or concessions under tax statutes without satisfaction of the mandatory conditions stipulated and non-payment of tax. The Supreme Court of India has stated that the inherent quality of interest under tax statutes is that it is compensatory in nature and such compensation is granted for any losses in taxes which are faced by the Government treasury. Even though the inherent nature of interest is compensatory, time and again, it has been witnessed that the tax administration has levied interest in the absence of any loss to the Government treasury. One of those situations is when interest is levied on late adjustment of tax deducted at source (TDS) credit and tax collected at source (TCS) credit while filing of goods and services tax (GST) returns. Due to the hyper-technical nature of discussions related to the issue being addressed, an attempt has been made to first explain the outline of the GST law in India and, then, proceed to the specific issue being dealt in the present post, with an aim to showcase the need for eliminating the levy of interest on TDS and TCS credit adjustments.
Outline of the Goods and Services Tax Law in India
The GST law is the unified indirect tax system which has subsumed several forms of indirect taxes that were extant earlier in order to prevent the cascading effect of multiple taxes and to create a seamless flow of input tax credit. Such a unified indirect tax mechanism was brought forth by imbibing the spirit of co-operative federalism under Article 246A of the Constitution of India. Resultantly, several statutes have emerged, viz., the Central Goods and Services Tax (CGST) Act, 2017, the State Goods and Services Tax (SGST) Act, 2017, the Union Territory Goods and Services Tax (UTGST) Act, 2017, the Integrated Goods and Services Tax (IGST) Act, 2017 and the GST (Compensation to States) Act, 2017.
The CGST Act, 2017 applies to all intra-state supplies of goods or services or both goods and services made in composite or mixed supplies. The SGST Act, 2017 (which is enacted with specific name of the respective States) and the UTGST Act, 2017 are pari materia statutes which apply conjointly to intra-state supplies of goods or services or both goods and services made in composite or mixed supplies. The IGST Act, 2017 applies to all inter-state supplies of goods and services or both goods and services made in composite or mixed supplies. The expression ‘inter- state’ has the effect of including supplies from one state or union territory to another state or union territory. inter-state supplies also include imports and exports as well as supplies from and to special economic zones. The GST (Compensation to States) Act, 2017 levies a cess on the tax amount of CGST and IGST, as the case maybe, with an intent to compensate the states for the loss of revenue that has occurred due to the change in indirect tax system.
The scope of supply is envisaged under the CGST Act, 2017, and the other GST statutes have adopted the scope of supply provided thereunder. Supply embraces sale, transfer, barter, exchange, rental, license, lease and disposal which are made in the course or furtherance of business for a consideration. Several transactions which do not satisfy the aforementioned requirement have also been treated as supplies through legal fiction under Schedules I and II appended to the CGST Act, 2017 and such supplies are referred to as deemed supplies. Similarly, a few transactions which would fall under the scope of supply have been excluded under Schedule III of the CGST Act, 2017.
Classification and Rate of Tax
For the purposes of classification, notifications have been issued by the Central Government in accordance with the recommendations of the GST Council. The classification of goods under GST is aligned to the First Schedule of the Customs Tariff Act, 1975 which, in turn, is aligned to the Harmonised System of Nomenclature, which is a product of the International Convention on the Harmonised Commodity Description and Coding System. The classification of services is based on the Services Accounting Code which has been devised by the GST Council and is inspired by the United Nations Central Product Classification. There are several rates of tax slabs provided and they are zero-point two five percent, three percent, five percent, twelve percent, eighteen percent and twenty eight percent.
Input Tax Credit Mechanism
Input tax credit is the benefit which has been conferred by the GST statutes on suppliers of goods and services in order to eliminate the cascading effect of taxes. The GST is a form of value added tax where the value of taxes is added in the chain of transactions and, owing to its destination-based nature, the tax should be levied only where the goods or services are consumed. This means that only the end consumer should bear the entire amount of GST and the cascading effect of the value of taxes being added in the chain of transactions should not be borne by the manufacturer, wholesaler, retailer, or service provider, as the case maybe. In order to ensure that such cascading effects are eliminated, a benefit is conferred by the GST statutes in the form of input tax credit. An input tax credit is nothing but a set-off which is made available to all registered taxpayers after the fulfilment of conditions as laid down under the statute. The said set-off is granted by way of crediting the electronic credit ledger with the taxes paid on the purchase of input goods or input services, and the balance in the electronic credit ledger comprising the said input tax credit can be adjusted against output tax liabilities; and the remnant portion if any, can be claimed as refund in the bank account of the taxpayer according to the statute.
TDS and TCS Mechanism
The concepts of TDS and TCS are often viewed in relation to direct taxes. But from the inception of GST, the concepts of TDS and TCS have also been introduced under the Indian indirect tax system. Whenever supplies of goods or services are made to any establishment of the Central or State Governments, agencies of the Government, local authorities or categories of persons who are notified and the contract value of such supplies of goods or services exceeds two lakh and fifty thousand rupees, then the governmental establishment or agency or local authority or notified category of persons are required to deduct TDS at the rate of one percent and deposit such GST amount deducted within ten days and, thus, become the deductor of TDS. The supplier of goods or services is then entitled to claim the credit of TDS which is paid by the deductor in its electronic cash ledger and, thus, becomes the deductee. Although the mechanism of TDS credit is similar to input tax credit, the core difference is that input tax credit is received in the electronic credit ledger whereas TDS credit is received in the electronic cash ledger. The electronic cash ledger is a ledger where deposits from the taxpayer’s bank account are reflected, and the taxpayer is entitled to either pay its output liability of GST from the cash ledger or adjust the available input tax credit from the credit ledger.
The TCS mechanism is applicable for electronic commerce operators, and they are required to deduct TCS at the rate of one percent and deposit it to the Government treasury within ten days. The supplier of goods or service who has made such supplies through the electronic commerce operator is eligible to claim credit of the TCS paid by the electronic commerce operator, in its electronic cash ledger.
[Continued in Part 2]
– Manohar Samal