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All you need to know about interest in GST

When Interest can be levied in GST?

Section 50 of CGST Act provide for the levy of interest in GST. This section contains three subsections:

Interest for late payment of amount of Tax: (1) 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 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. The rate notified for the purpose of this section is 18%.

Manner of calculation: (2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

Interest in case of Input tax credit: (3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council. The rate of interest notified in this case is 24%.

There is confusion in relation to the calculation of interest. We can understand by way of an example.

Illustration 1:

GST liability: Rs. 100

ITC in ITC ledger: Rs. 80

Due date of filing of return: 20th April 2019

The actual date of filing of return: 30th April 2019.

Calculation of Interest:

Amount due: 100Rs.

No. Of days: 21st April to 30th April = 10 days.

Amount of interest: 100*18%/365*10

Or it should be 20*18%/365*10

What is the rate and duration for levy of interest in GST?

The government notifies the rate for levy of interest.

  • For delay in payment of Tax: 18%
  • For overutilization of ITC: 24%

Interest will be charged from the due date of payment of tax till the date when payment is made. It is important to note that in GST return filing is mandatory to acknowledge the payment of taking and to take ITC.

Who is liable to pay interest in GST?

Every taxpayer making delay in payment of tax is liable for payment of interest. Also, the person taking the ineligible ITC is also liable for interest in GST.

How to calculate interest in GST?

The interest to be paid can be calculated as follows.

No. Of days*rate*Amount due/365

Scenario 1: When liability is there but the return was filed on time:

In this case, the interest will be chargeable on the amount of tax pending for payment. In this case interest, @18% will be charged.

Scenario 2: when the return was kept on hold:

Now the issue is what should be considered as the amount due for the calculation of interest.  Whether it should be the total amount payable by the taxpayer. Or it should be the amount of net tax payable.

  • Option 1: Total tax liability payable by the taxpayer- Input tax credit available in input tax credit ledger
  • Option 2: Total tax liability without giving any benefit of an input tax credit.

There are arguments for both of these options. Some taxpayers are of the view that the amount for interest is a net amount payable. But we need to have a look at some of the provisions of CGST Act.

Section 16(2) of CGST provide for the four basic conditions for eligibility of Input tax credit. One of those conditions is filing of return by the taxpayer. In case the return is pending on the part of the taxpayer, the eligibility of ITC is not there. Thus the taxpayer is liable for the interest on full amount as he was never being eligible for that ITC.

Principal approval by GST council  to the issue:

This issue was also considered by the GST council in its meeting. In 31st Meeting of GST council following principal approval was made:

  1. Amendment of section 50 of the CGST Act to provide that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit, i.e., interest would be leviable only on the amount payable through the electronic cash ledger. (Source: Press release of ministry of finance)

But unfortunately, these approvals never took the shape of a legal provision.  


Legal precedents for interest in GST

This issue caught the fire after the decision of High court against taxpayers. In the case of M/s. Megha Engineering & Infrastructures Ltd, Telangana High court ruled that interest shall be calculated on the full amount. The benefit of deduction of the input tax credit from the gross tax will not be available. According to the petitioner, the total tax liability of the petitioner for the period from July 2017 to May 2018 was Rs.1014,02,89,385/- and the ITC available to the credit of the petitioner during this period was Rs.968,58,86,133/-. There was a shortfall to the extent of 45,44,03,252/-, which the petitioner was obliged to pay by way of cash.

The petitioner pleaded that he should be liable to pay interest on the component of tax left after adjustment of ITC. But the court dismissed the application. It was held that the petitioner is liable to pay the interest on the full amount. The amount of ITC in his ledger can be adjusted only by filing the return.

The learned counsel for the petitioner relied upon two decisions of the Gujarat High Court, one inState of Gujarat v. Dashmesh Hydraulic Machinery, dated 19.01.2015, and another in State of Gujarat v. Nishi Communication, dated 29.01.2015.  But the court ruled that both of these cases belong to the pre-GST regime. The provisions of GST vary from the provisions of erstwhile tax laws. So they can’t be relied upon in this case.

Confusion still persists: The issue of interest levy on the full amount of tax is a genuine hardship on taxpayers. Many time they are not being able to file the return because they don’t have the full amount of tax due. In that case, they are burdened with a huge interest levy. It is quite unreasonable. But on the other hands, the ITC lying in ITC ledger is not a payment of tax unless the taxpayer creates a levy of tax and makes an adjustment. Both sides of this issue have some merit. It is expected from CBIC to come with a solution to this issue. Many taxpayers will have to bear huge losses due to this provision.

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Profile photo of CA Shafaly Girdharwal CA Shafaly Girdharwal

CA

New Delhi, India

CA Shaifaly Girdharwal is a GST consultant, Author, Trainer and a famous You tuber. She has taken many seminars on various topics of GST. She is Partner at Ashu Dalmia & Associates and heading the Indirect Tax department. She has authored a book on GST published by Taxmann.

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