Would Interest Be Payble On Net Taxes Under GST? There has been in ambiguity since the beginning regarding the interest chargeability on gross or net tax liability

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The law which in itself is not complete, explicit and explanatory gives a chance to various interpretations, which sometimes gives the liberty of each to its own, the interpretations are usually arbitrary and in the best interest of self and sometimes many at large. The same situation arises in the case of GST laws which are still changing and needs clarity at various aspects from time to time, one of which is the chargeability of interest. Section 50(1), CGST Act 2017 states that every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, 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.

Traditionally, under the erstwhile Indirect tax laws—Service Tax, VAT, etc.—interest is payable on the amount of tax liability after adjustment of the input tax credit (ITC), which remains unpaid by the due date. What the above provision did not explain was on which amount such interest shall be calculated, the total output tax liability or the tax liability after reducing the input available or after setting off the ledger balance, if any. Different interpretations existed for the issue at hand. Taxpayers considering the availability of input having reduced the same and netted the tax liability for the purpose of calculation of interest whereas the department considering interest payable on gross output tax liability issued notices demanding interest.

Let us understand this issue with the help of an example.

Gross tax liability

Tax on outward supply: INR 50,000

Tax on inward supply or ITC available: INR 30,000

Amount on which interest is to be paid INR 50,000

Net tax liability

Tax on outward supply: INR 50,000

Tax on inward supply or ITC available: INR 30,000

Amount on which interest is to be paid INR 20,000

The provision has been in ambiguity since the beginning regarding the interest chargeability on gross or net tax liability. The issue first arose at 31st Council meeting where it was recommended that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible ITC. In February 2019, the principal commissioner (Hyderabad) had issued a standing order No. 01/2019 to clarify that interest is payable on gross liability, including on the portion of the liability that was adjusted using the accumulated ITC, which was upheld in case of Megha Engineering & Infrastructures Ltd. The Telangana High Court held the contention that in order to avail input tax credit in the electronic credit ledger, there is a necessity to make payment and file return. Liability to pay interest u/s 50(1) arises even without any assessment as the person is required to pay such interest on his own. It is clear that liability to pay interest u/s 50(1) is self-imposed and also automatic without any determination by anyone. It is only after a claim is made in the return that ITC gets credited in the electronic credit ledger and it is only after credit is entered in the electronic ledger that a payment could be made. Hence, denying the benefit of the ITC available.

Amidst all the perplexities, Madras High Court in the case of Refex Industries Ltd held that levy of interest on delayed payment of GST is purely compensatory. Accordingly, interest is liable to be charged on the net cash payment and not on the gross liability. The Finance Act 2019 has inserted a proviso to section 50(1) stated above read as follows, which is to be effective from 1 September, 2020:

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.

In simple words, if a taxpayer files a return at a later date other than a due date the person shall be liable to pay tax on the amount debited from electronic cash ledger, the same does not apply in case where the return is filed in response to proceedings under section 73 or section 74.

Few national dallies reported in February 2020, that more than INR 46,000 crore of revenue was unrecovered to the department because of interest on delayed GST payment. In the 39th Council meeting, the Union finance minister recommended/announced that the changes in section 50(1), proviso added that interest shall be charged on the tax component to be paid in case of belated tax payment will be effective retrospectively that is with effect from July 1, 2017, and law would be amended retrospectively which will be enforceable by way of a notification to be issued. However notification no. 63/2020 issued on 25 August, 2020 was issued which stated that the said change would take effect only prospectively w.e.f 1 September 2020.

In a statement the CBIC later clarified that the Notification relating to interest on delayed payment of GST has been issued prospectively due to certain technical limitations. However, it has assured that no recoveries shall be made for the past period as well by the central and state tax administration in accordance with the decision taken in the 39th meeting of GST Council.

On 21 August 2020, the Orissa High Court in case of Prasanna Kumar Bisoi vs Union of India directed the GST department to dispose the representation filed by petitioner keeping in view the decision taken in 39th meeting of GST Council, as expeditiously as possible, which was not even applied retrospective as per the notification issued.

It seems a battle is between taxpayer and department with respect to the applicability of provision of this section. Now the ambiguity arises in relation to the cases which fall in the period 1 July 2017 to 1 September 2020. The notices or orders which have been already issued demanding interest charged on gross tax liability pending final order or pending in appeal shall be disposed of considering which event Council meeting recommendation and clarification issued later on or Not giving the benefit of ITC, is also one of the major doubt. Taxpayers who have already paid their taxes based on the notices or demand order issued will demand a refund for the amount already paid. All such cases will be held in abeyance till the time no official notification or retrospective amendment is made within the Act.

Charge of interest on gross basis or net basis has gone through high drama in GST council and courts, now it seems that lawmakers are determined to give this benefit retrospectively. However, what needs to be seen is whether taxmen would abide by the general guidelines given by GST council till the time a legal notification is issued.

Rajat Mohan & Priyanka Sachdeva

Senior Partner and Partner, AMRG & Associates

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