[Manohar Samal is an Associate Advocate at Ratan Samal & Associates, Mumbai and a Panel Arbitrator at the Indian Institute of Arbitration and Mediation.
This is continued from Part 1]
Current Mechanism for Levy of Interest
Now that the basic outline of the GST law in India has been discussed, the manner of levy of interest under the GST statutes can be discussed. The CGST Act, 2017 envisages two forms of interest and apply to other GST statutes parallelly.
The first form of interest stipulated under the statute is the interest which is levied on late payment of taxes. The rate of interest applicable on late payment of taxes has been notified as eighteen percent per annum. Since the output liability of GST can be created by making a payment through the electronic cash ledger as well as making an adjustment of input tax credit available in the electronic credit ledger, in the initial years, interest was being levied by the GST Department on the portion of late adjustments made from the electronic credit ledger. However, this was remedied by way of insertion of proviso to sub- section (1) of Section 50 of the CGST Act, 2017 which clarified that interest can only be levied on ‘net cash liability’ that are late payments of tax which are made from the electronic cash ledger. For some time thereafter, a lack of clarity in respect of its retrospective operation existed and was resolved by two decisions of the Madras High Court (here and here) wherein it was held that the proviso to sub-section (1) of section 50 of the CGST Act, 2017 applies with retrospective effect. Therefore, it is a settled position now that interest can only be levied on belated payments of tax made from the electronic cash ledger, but it cannot be levied on belated adjustments of input tax credit made from the electronic credit ledger.
The second form of interest stipulated under the statute is the interest which is levied when input tax credit is wrongly availed and utilized. The rate of interest applicable for such interest is twenty- four percent per annum. However, for the purposes of this post, only the first form of interest is relevant.
Eliminating the Levy of Interest on TDS and TCS Credit Adjustments Against Late Payments of Tax Liability
The need for eliminating the imposition of interest on late adjustments of TDS and TCS credits from the electronic cash ledger arises from the fact that such adjustments of TDS and TCS credits are nothing but adjustments of credits on which tax has already been paid, similar to input tax credits. The difference is that input tax credits are credits of input tax that are already paid to the Government treasury and TDS and TCS credits are credits of output tax which are already paid to the Government treasury. As pointed out earlier, sub-section (1) of section 50 does not levy interest on late adjustments of input tax credit made from the electronic credit ledger. Despite the fact that credits of input tax as well as credits of TDS and TCS represent tax which is already paid to the Government, differential treatment in respect of leviability of interest continues to exist merely because of the fact that TDS and TCS credits are adjusted from the electronic cash ledger as opposed to input tax credit adjustments which are made from the electronic credit ledger. The core reason why this is detrimental to a taxpayer is that interest should only be levied when there is a loss to the revenue and, in the instances of TDS and TCS credit, since tax has already been paid, there is no loss to the revenue and, yet, interest is being levied, making it contrary to the principles laid down by the Supreme Court of India in the Pratibha Processors judgment. For better clarity, the issue is being explained with the help of three illustrations.
For the purposes of the first illustration, assume that Company “A” has defaulted in filing its returns on the due date and the GST amount which was supposed to be paid with such returns was rupees fifty thousand. The returns are filed after one year by late adjustments of available input tax credits in the ‘electronic credit ledger’. No interest is payable in such instance because of the retrospective operation of the proviso to section 50 of the CGST Act, 2017.
For the purposes of the second illustration, let the same example be taken where Company “A” files its returns and pays rupees fifty thousand after one year by late payments made from the ‘electronic cash ledger’ and the said payments were completely deposited from the taxpayer’s bank account to the electronic cash ledger. Interest at the rate of eighteen percent is payable in such instance along with the late filing of returns and late payment.
For the purposes of the third illustration, let the same example be taken with an addition that Company “A” already had rupees forty thousand as TDS Credit which was lying in its electronic cash ledger. The taxpayer made a deposit of rupees ten thousand from its bank account to the electronic cash ledger. Thereafter, the taxpayer made late payment of rupees ten thousand and late adjustment of TDS credit of rupees forty thousand. Although interest at the rate of eighteen percent should only be levied on the portion of rupees ten thousand since it was a belated remittance and not on the portion of adjustment of TDS credit of rupees forty thousand since it represents tax paid credit which is due in the favor of the taxpayer, interest as per the current mechanism of the GST law is being levied on the entire portion creating differential treatment between those adjusting late taxes by input tax credit and those adjusting late taxes by TDS/ TCS credit merely on account of a technical reason; the said technical reason being that TDS/ TCS credit, unlike input tax credit, is credited in the electronic cash ledger. The consequence of such differential treatment is that taxpayers, albeit at equal footing, are treated differently leading to suppliers of services to Governmental authorities and Governmental agencies and e-commerce operators to face additional interest liability, which is not compensatory in nature to the revenue, but is nonetheless being collected unjustly.
On a plain reading of the relevant statutory provisions, the legislative intent which can be gathered is that it was never the intention of the legislature to permit the levy of interest on the portion of late GST payments which are made by adjusting TDS/TCS credits from the electronic cash ledger. This is evident from two aspects in the statute. The first aspect is that section 49 of the CGST Act, 2017 only considers deposits from internet banking, credit cards, debit cards, NEFT, RTGS or other prescribed modes to be a part of the electronic cash ledger, and no mention of TDS credits or TCS credits are made anywhere. Coming to the second aspect, the terminology used in the proviso to section 50 read with rule 88B(1) is “paid by debiting the electronic cash ledger”. Notably, TDS/TCS credits are tax-paid credits in favour of a taxpayer and, therefore, is in the nature of a benefit which is granted to a taxpayer on the fulfilment of all the conditions by the recipient as well as the supplier of goods or service. Since such credits are in the nature of benefits conferred by the statute, they cannot be “paid” but can only be “adjusted” against output tax liability. Under such circumstances, it seems as if the legislative intent was never to permit the levy of interest on late adjustments of TDS/TCS credits and yet, authorities of the goods and services tax departments across all States have continued to calculate interest on the entire gross portion of cash liability instead of the net cash tax liability due to lack of sufficient clarity on the subject.
Such differential treatment being faced by a class of taxpayers that are entitled to claim TDS/ TCS credit, as the case may be, can only be remedied by way of an insertion in the statute book. The most viable option seems to be an explanation or a second proviso to section 50(1) of the CGST Act, 2017, which can clarify that interest cannot be levied on TDS/TCS credit since it represents tax paid credit which is due to an assessee even though it is credited to the electronic cash ledger.
In pursuance of the discussions carried out in the aforesaid paragraphs, the clarifications proposed may be the need of the hour so that suppliers of services to governmental authorities and governmental agencies and e-commerce operators do not face differential treatment in the levy of interest despite being equals to the class of taxpayers making late adjustments of output liability by way of available input tax credit.
– Manohar Samal