Interest under GST- Has the debate stopped?

Under the GST Law, interest is levied under Section 50 of the Central Goods and Services Tax Act, 2017 (\'CGST Act\'), read with Notification No. 13/2017-Central Tax dated 28th June 2017 (collectively referred to as the \'Interest Provisions\'). Such interest provisions have been tested in various High Courts to analyze the applicability of interest on delayed payment of tax (e.g., Interest on Gross vs Net Tax Liability, what constitutes as payment of tax, i.e., Depositing in the Electronic Cash Ledger vs Filing of Form GSTR-3B).

The GST Council has time and again addressed this matter (based on the recommendations from industry and case laws) in its meetings notably in the 31st, 35th, 39th, and 43rd Council meetings. As a result, the Central Government has amended these interest provisions multiple times, even retrospectively.

Recently, the Hon\'ble High Court of Madras in the case of M/s Eicher Motors Limited (W.P. Nos. 16866 & 22013 of 2023 and W.M.P. No. 32200 of 2023) (hereinafter referred to as \'case under discussion\', has analyzed the Interest Provisions in its judgement dated 23rd January 2024.

Under this article, an attempt has been made to discuss the amendments made under the Interest Provisions along with the interpretation of such provisions by various High Courts referred to in the case under discussion.

A) Sub-section 1 and Sub-section 2 of Section 50 of the CGST Act

1) Interest on Gross Tax Liability or Net Tax Liability

1.1 As per the Interest Provisions implemented on 1st July 2017 (read with Notification No. 9/2017 dated 28th June 2017), interest was applicable on a person who failed to pay tax at the rate of 18%, within the prescribed period. Such interest was computed from the day immediately following the due date for payment until the tax was fully paid. Initially, it was interpreted that tax would mean gross tax liability. No relevance or importance was given to the mode of payment of such tax (whether through the Electronic Credit Ledger (\'ECrL\') or the Electronic Cash Ledger (\'ECL\')) and 18% interest was made applicable on tax short paid irrespective of its mode of payment.

1.2 The same resulted in a debate as to whether the interest liability would arise on Gross Tax Liability or Net Tax Liability. The said issue was deliberated by the Law Committee and in 31st GST Council meeting it was decided that amendments be made in GST Law to provide for interest on the amount paid by ECL (not on gross tax liability).

1.3 Vide Section 100 of Finance Act, 2019, read with Notification No. 63/2020 dated 25th Aug 2020 (effective from 1st Sep 2020), a proviso was inserted to Section 50(1) of the CGST Act which states that interest shall be levied on that portion of tax that is paid by debiting the ECL (in respect of supplies made during a tax period and declared in the return for said period, furnished after the due date). It is pertinent to note that this amendment was prospective in nature and resulted in GST Council to further deliberate the intent of GST Law.

1.4 Accordingly, the said proviso was further substituted w.e.f. 1st July 2017 vide Section 112 of the Finance Act, 2021, (read with Notification No. 16/2021 dated 1st Jun 2021) to provide that interest shall be payable on that portion of tax which is paid by debiting the ECL. It is pertinent to mention that vide Finance Act 2021, the benefit introduced vide Finance Act, 2019, was retrospectively allowed (since the inception of GST) to limit the exposure of interest to the amount that is paid through ECL.

1.5 Further, Rule 88B of the CGST Rules 2017 inserted w.e.f. 1 Jul 2017 vide Notification No. 14/2022 dated 5th Jul 2022 prescribes that interest shall be calculated @18% on the amount paid by debiting ECL, depending on the delay in filing the return under section 39 (where a registered person declares supplies made during a tax period in their return for that period, and this return is submitted after the due date). For other cases, interest @18% shall be paid starting from the day on which such tax was due to be paid till the date such tax is paid.

Analysis

The amendments discussed above intend to settle the dispute with the GST Authorities w.r.t. the amount of tax on which interest is applicable, incase the same is paid via Input Tax Credit and Cash. Finance Act, 2021, resolves the issue (Interest on Gross Tax Liability or Net Tax Liability) by providing (w.e.f. 1st July 2017) that interest shall be applicable only on the net portion of tax, i.e., the amount that is paid by ECL.

Another Pandora Box... debate continues

However, the interpretation of some of the provisions of the CGST Act by the Hon\'ble Madras High Court (discussed later) in the case under discussion has opened another Pandora\'s box of litigation by ruling that merely deposit of the amount under ECL constitutes payment of tax, and delay for computing interest would accordingly be calculated (date of filing of Form GSTR-3B is not considered relevant under Section 50(1)).

2) Judicial Interpretations on what constitutes as payment of tax

1.6 Section 50(1) states that interest shall be applicable if tax is not paid within the period prescribed. Hon\'ble Madras High Court in the case under discussion has referred to Section 39 of the CGST Act to determine the period prescribed.

1.7 Section 39(7) of the CGST Act states that tax shall be paid to the Government not later than the last date on which the registered person is required to furnish the return.

1.8 On a combined reading of the above provisions, Hon\'ble Madras High Court has interpreted that the tax paid to the Government before the date on which Form GSTR-3B is required to be furnished, would constitute as sufficient compliance for non-charging of interest.

1.9 Thus, the Hon\'ble Court has held that there is no linkage between the filing of Form GSTR-3B and the payment of tax to the Government. It has said that \"for payment of tax to the Government filing the monthly returns is not the matter but the last date for furnishing the monthly return is important. Thus, whether the monthly return is filed in time or not but the GST has to be remitted not later than the last date for filing the monthly returns.\"

1.10 To analyse \'payment of tax to the Government\', the court referred to the Explanation to Section 49 and Form GST PMT-06 (form for depositing amount in the ECL). Hon\'ble Court mentioned that Form GST PMT-06 refers beneficiary as RBI wherein the GST account of Government is maintained and Explanation to Section 49 states that the date of credit to the account of the Government in the Authorised bank shall be deemed to be the date of deposit in the ECL. It has been interpreted that vide depositing the amount in ECL, the amount is first credited to the account of the Government and thereafter it is reflected in the ECL, meaning that the tax has reached the kitty of the Government once it is deposited in ECL.

1.11 It further stated that the amount once deposited in the ECL is made available to the Government for their use and at any cost, the exchequer cannot be deprived of its right to utilize the amount deposited into the Government account under the pretext of non-filing of GSTR-3B monthly returns.

1.12 Further, placing reliance on Section 39(1), the court stated that while filing GSTR-3B, it is mandatory to provide details about the tax paid, which means that prior to the filing of any such form, tax should have been paid to the Government. Also, it said that the Government follows a prescribed procedure (which includes proper verification) for granting refunds under the GST Law, and also it pays interest in case of delay, which would not be the case if the amount has not been paid to the Government already.

1.13 Additionally, the Hon\'ble Court mentioned that it is not that the discharge would be treated only when debit entries are made in ECL (while filing Form GSTR-3B). It is treated as a mere accounting entry that does not has any relation with the actual payment of tax to the Government.

1.14 The Hon\'ble High Court has also distinguished the timeline interpreted by the Jharkhand High Court in the case of M/s RSB Transmissions India Limited (W.P(T) No. 23 of 2022) under proviso to Section 50(1) of the CGST Act (date of debiting ECL). The Hon\'ble Madras High Court relied on the judgement of the Hon\'ble Apex Court in the case of Romesh Kumar Sharma, stated that normally a proviso does not travel beyond the provision to which it is a proviso.

1.15 Based on the above interpretation of various provisions of the GST Act, the Hon\'ble Madras High Court has held that the deposit of the amount in ECL would be treated as payment of tax to the Government. Alternatively, it can be said that there would be no interest (even if Form GSTR-3B is delayed) if the amount is deposited in ECL before the due date.

1.16 Interestingly, other High Courts have interpreted the provisions differently and have given importance to filing of Form GSTR-3B, credit/debit entries in ECrL and ECL. Some of the contrary rulings on the Interest Provisions are mentioned below:

• High Court of Telangana in the case of M/s Megha Engineering & Infrastructures Ltd (WP. No. 44517 of 2018).
• High Court of Jharkhand in the case of M/s RSB Transmissions India Limited (W.P.(T) No. 23 of 2022).

Analysis

The above judgement/interpretation of the Madras High Court (in the case under discussion) opened a pandora box of litigation while dealing with the GST Authorities wherein the taxpayer would tend to rely on the case under discussion and GST Authorities would rely on other contrary rulings. Thus, it became crucial for the GST Council to take cognizance of the matter and the same was taken up in 53rd GST Council Meeting held on 22nd June 2024. Therein, the GST Council recommended an amendment in Rule 88B of the CGST Rules providing that the amount available in ECL on the due date of filing Form GSTR-3B shall not be included while calculating interest under Section 50 of the CGST Act (in line with the interpretation of the Madras High Court in the case under discussion).

In light of the above recommendation, a proviso was inserted in Rule 88B of the CGST Rules vide Notification No. 12/2024 dated 10th Jul 2024 (reproduced below for ease of reference):

\"Provided that where any amount has been credited in the Electronic Cash Ledger as per provisions of subsection (1) of section 49 on or before the due date of filing the said return, but is debited from the said ledger for payment of tax while filing the said return after the due date, the said amount shall not be taken into consideration while calculating such interest if the said amount is lying in the said ledger from the due date till the date of its debit at the time of filing return.\"

The above amendment would be benefical to taxpayers who have deposited the amount in ECL on or before the due date of filing Form GSTR-3B, but have filed the said return belatedly.

Even after the above amendment, it would be pre-mature to conclude that the debate around the interest provisions has settled. However, it would be interesting to see the interpretation from the following perspective:

• Prospective vs Retrospective application: Though the above amendment in Rule 88B is applicable w.e.f 10th July 2024 (prospectively), it will be interesting to see whether a plea is taken by taxpayers to extend the benefit for prior period(s) too (considering that the mechanism of making payment and filing return has been the same since the advent of GST).
• Will the benefit be extended to the amount lying in ECL based on the number of days: The proviso states that the amount would be excluded from the computation of interest if the amount is deposited on/before the due date and keep lying till the date of its debit at the time of filing return. However, it will be interesting to see whether this benefit is extended based on the number of days an amount keep lying in the ECL. For example, if a taxpayer has a cash liability of INR 1,00,000 for Aug and deposits the said amount in ECL on 20th Sep but fails to file the return till 30th Sep. In the meantime, say, he utilises INR 60,000 to pay any other outstanding liability (via Form DRC-03) on 28th Sep and deposits the same again on 30th Sep while filing Form GSTR-3B for Aug, will INR 60,000 be exempted from interest for 8 days?

Though the current provisions does not seem to extend the benefit of excluding INR 60,000 from interest for 8 days it will be interesting to observe the arguments of taxpayers and position of the Authorities going forward.

B) Sub-section 3 to Section 50 of the CGST Act

1) Making the provisions relevant as per the current schema of GST Returns

1.1) As per the CGST Act implemented on 1st July 2017 (read with Notification No. 9/2017 dated 28th Jun 2017), a taxable person who makes an undue/excess claim of input tax credit or undue/excess reduction in output tax liability u/s 42(10) or 43(10) respectively was required to pay interest at the rate of 24% (as notified) under section 50(3). However, since the complete matching and reversal introduced vide the Forms GSTR-1, GSTR-1A, GSTR-2, GSTR-2A, and GSTR-3 was not made effective, the suitable amendment was necessitated.

1.2) Vide Section 111 of the Finance Act, 2022, (read with Notification No. 09/2022 dated 5th Jul 2022, sub-section 3 of Section 50 was retrospectively substituted w.e.f. 1st Jul 2017. As per the substituted provisions, interest at a rate not exceeding 24% may be levied on the amount of input tax credit wrongly availed and utilized by the registered person.

1.3) Also, vide Section 116 of the Finance Act, 2022 (read with Notification No. 13/2017-Central Tax dated 28th June 2017), the interest rate under Section 50(3) was notified as 18% (reduced from 24%) retrospectively w.e.f. 1st Jul 2017.

1.4) Further, Rule 88B of the CGST Rules 2017 inserted w.e.f. 1st Jul 2017 vide Notification No. 14/2022 dated 5th Jul 2022 (read with Circular No. 192/04/2023 dated 17th Jul 2023) provides clarification on what would construe as wrong availment and utilization of Input Tax Credit along with the method of charging interest in cases where IGST credit has been wrongly availed by a registered person.

Analysis

Amendments discussed above substitutes the erstwhile provision of Section 50(3) in line with the compliances in force under the GST Law. Further, it is pertinent to highlight that Central Government still has the power to increase the rate of interest on such wrong availment and utilization under this subsection from 18% to 24%.