Notices for interest on tax paid from Credit Ledger – Suggestive Reply

By Dr. CA. Gaurav Gupta ([email protected])

Notices for demand interest has been issued to many assesses.  The interest is demanded on the late debit of Electronic Credit Ledger or in other words for payment of taxes using available Input Tax credit after the due date. The author is of the view that such interest is not payable and has shared some draft replies against such notices.

Suggestive Reply

In response to the above Notice, we humbly submit as under:

1. Computation and deposit of interest

The correct liability of interest works out to Rs. _______ as per the computation provided herein below:

The above interest is deposited vide __________.  Copy of proof of deposit is enclosed herewith as Annexure A.

We now present our submissions on the demand in respect of interest demanded on the tax part paid using Electronic Credit Ledger.  It may be noted that relevant part of judgements are highlighted / underlined for your kind attention.

2. The very object of GST law is defeated when interest is called on the Credit portion of tax payment

• • • At the time of introduction of CGST Bill, 2017, amongst others, the Statement Of Objects And Reasons read as under:

“4 …..

The  proposed legislation  will  simplify  and  harmonise  the  indirect  tax  regime  in  the  country. …..

Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers.  The proposed goods and services tax  will  broaden  the  tax  base,  and  result  in  better  tax  compliance  due  to  a  robust information technology infrastructure. 

1. 1. 5. The Central  Goods  and  Services  Tax  Bill,  2017,  inter  alia,  provides  for  the following, namely:—

(a)…

(b)        to broad base the input tax credit by making it available in respect of taxes  paid  on  any  supply  of  goods  or  services  or  both  used  or  intended  to  be used in the course or furtherance of business.”

• The phrase envisaged a seamless transfer mechanism of Credit and aimed at payment of taxes on the value addition. The word ‘seamless’ is itself contradicted by the very intent when interest is called for by your good office on the Credit part which is available to the Assessee and which could not be debited without filing of return.  Thus, the very ‘in-built mechanism’ as was envisaged in the Statement of Objects and Reasons is contraindicated.  Thus, it is humbly submitted that the reading of law without appreciating its objects is bad and illegal.

• Further, it shall also mean that the mechanism is not inbuilt to iron out the cascading effects. The new mechanism was to incentivise tax compliance, however, the way interest is being called on part of the tax paid from available Input Tax Credit, it seems that it has become so rigid in its structure that simple act like payment of tax by debit of electronic credit ledger is not a simple exercise for a taxpayer.

• Thus, a taxpayer has to effect his payment twice (to save interest) with the government today in the new mechanism –

• • one when he pays challan to the credit of government exchequer or when he makes payment for his purchases and;
  • when he shall debit such paid tax towards his output liability.

• Other taxes including income tax recognises advance tax challans or TDS as taxes paid to the government and no interest is charged in such cases. However, in present case, the law which was supposed to ease compliance, has itself complicated things for the Assessee by imbibing a structure which has multiple compliances and which calls for interest even when the money is lying with the government.

• Thus, it is humbly submitted that the interest on the credit part is not warranted by the Statement and Objects of the very Act and was never the intent of the legislature and thus, the demand may be dropped.

3. Recovery under Section 79 of disputed interest without Show Cause Notice is illegal

• Section 79 of the CGST Act provides the manner of recovery of any amount payable by a person to the Government under any of the provisions of this Act or the rules made thereunder if not paid. However, the Section is preceded by Section 78 which provides for initiation of recovery of any amount payable by a taxable person in pursuance of an order passed under CGST Act and on the expiry of the time allowed under the provisions of Section 78, recovery can be initiated by modes provided in Section 79.  In the present case, it is humbly submitted that the present demand of interest is not under any order not it is a demand which is admitted by the Noticee in any manner.

• Thus, in case of any dispute of any amount payable to government, it is an imperative limb of natural justice to allow fair hearing before raising any demand or penal action against the accused. The right is conferred by Article 14 of the Constitution.  Hon’ble Apex Court has held that the aim of the rules of natural justice is to secure justice and therefore, this doctrine is the most paramount doctrine that goes to the root of all laws and to the concept of justice.  As observed by Hon’ble Supreme Court in the case of UOI v Hanil Era Textiles Ltd. [2017 (349) E.L.T. 384 (S.C.)]:

10. In the instant case, it is not in dispute nor it can be disputed by the Revenue that before passing the review order the Development Commissioner had not issued a show cause notice to the assessee(s) inter alia asking it to show cause as to why the order passed earlier should not be reviewed. In our view, the omission on the part of the Development Commissioner would go to the fundamentals in the sense that no order could be passed against a person without issuing a show cause notice to him/it. This would be in violation of the principles of natural justice and also infringe Article 14 of the Constitution of India. Audi Alteram Partem, as the basic principle of natural justice ensures an opportunity of fair hearing to the parties. Issuance of a show cause notice is a part and parcel of the aforesaid principle which provides that the parties are in a position to defend themselves adequately; after being aware of the exactness of the allegation against them. The concept of natural justice cannot be put into a strait-jacket formula. The only essential point is that in the given facts of a case, if the person concerned has reasonable opportunity of presenting his case and if the administrative authority have acted fairly, impartially and reasonably.

• In Nirlon Ltd. v. Union of India, 2007 (209) E.L.T. 12 (Bom.) the issue was charging interest under the provisions of the Central Excise Act. This Court there held that it was requirement of law including natural justice that notice will be issued to the Petitioner or party aggrieved as to why interest amount should not be claimed from it and after affording a hearing that liability ought to be decided. Under the Customs Act if there is short levy of duty or non-payment thereof the requirement of serving a notice under Section 28 arises.

• • • The issues of recovery of interest without issuance of Show Cause Notice being illegal has already been decided in the case of L.C. Infra Projects Pvt. Ltd v UOI [2019 (28) G.S.T.L. 3 (Kar.)]

“6. Thus, the issuance of Show Cause Notice is sine qua non to proceed with the recovery of interest payable thereon under Section 50 of the Act and penalty leviable under the provisions of the Act or the Rules. Undisputedly, the interest payable under Section 50 of the Act has been determined by the third respondent-Authority without issuing Show Cause Notice, which is in breach of principles of natural justice. It is trite law that any order passed by the quasi-judicial authorities in contravention of the principles of natural justice, cannot be sustained. Similarly, after determination of the interest liable to be paid by the petitioner, no notice has been issued before attaching the bank account of the petitioner. There is a lapse on the part of the third respondent-Authority. The notion of the third respondent-Authority that Section 75(12) of the Act empowers the authorities to proceed with recovery without issuing Show Cause Notice is only misconceived. The said Section is applicable only to the self-assessment made by the assessee and not to quantification or determination made by the Authority.”

• Similar verdict has been awarded in the case of Hon’ble Madras High Court in the matter of Daejung Moparts Pvt. Ltd. [2019 (29) G.S.T.L. 29 (Mad.)] [W.A.No.2171 of 2019], wherein it was held as under:

“29. A careful perusal of sub Sections (2) and (3) of Section 50 thus would show that though the liability to pay interest under Section 50 is an automatic liability, still the quantification of such liability, certainly, cannot be by way of an unilateral action, more particularly, when the assessee disputes with regard to the period for which the tax alleged to have not been paid or quantum of tax allegedly remains unpaid. Likewise, whether an undue or excess claim of input tax credit or reduction in output tax liability was made, is also a question of fact which needs to be considered and decided after hearing the objections of the assessee, if any. Therefore, in my considered view, though the liability fastened on the assessee to pay interest is an automatic liability, quantification of such liability certainly needs an arithmetic exercise after considering the objections if any, raised by the assessee. It is to be noted that the term “automatic” does not mean or to be construed as excluding “the arithmetic exercise”. In other words, though liability to pay interest arises under section 50 of the said Act, it does not mean that fixing the quantum of such liability can be unilateral, especially, when the assessee disputes the quantum as well as the period of liability. Therefore, in my considered view, though the liability of interest under section 50 is automatic, quantification of such liability shall have to be made by doing the arithmetic exercise, after considering the objections of the assessee. Thus, I answer the first issue accordingly.”

The matter has been referred to Larger Bench.

• Thus, it is no longer res integra that any interest which is self assessed can be recovered directly by the authorities, however, in case of any interest which is being contested by the Assessee, proper course of assessment should be undertaken.

4. Amendment requiring interest on only debit from Cash Ledger is retrospective in intent

• Section 50 of the CGST Act has been amended to provide as under:

“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.”

• Hon’ble Madras High Court in the case of Refex Industries Ltd. v. Sherisha Technologies (P.) Ltd. [2020] 114 taxmann.com 447 (Madras) has held that interest only on Cash payment as brought in by the legislature is retrospective in nature.  The Hon’ble Court held as under:

“15. The above proviso, as per which interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 01-8-2019, but clearly seeks to correct an anomaly in the provision as it existed prior to such insertion. It should thus, in my view, be read as clarificatory and operative retrospectively.

16. Learned counsel for the petitioners also draw my attention to the decision of the Telengana High Court in the case of Megha Engineering and Infrastructures Ltd. v. The Commissioner of Central Tax and others (2019-TIOL-893), where the Division Bench interprets Section 50 as canvassed by the Revenue. The amendment brought to Section 50(1), was only at the stage of press release by the Ministry of Finance at the time when the Division Bench passed its order and the Division Bench thus states that ‘unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment’. Today, however, the amendment stands incorporated into the Statute and comes to the aid of the assessee.”

• Hon’ble Supreme Court of India has in the case of Commissioner of Central Excise, Bangalore versus M/s. Mysore Electricals Industries Ltd., reported in 2007 (204) E.L.T. 517. In the said Judgment, held that a beneficial circular has to be applied retrospectively while oppressive circular has to be applied prospectively.

• Similar decision has been upheld in the case of L&T Sargent & Lundy – 014(35) STR 945 (Tri. Ahmd.), depending on a Supreme Court judgement in the case of Suchitra Components Ltd. Vs. Commissioner – 2008(11)ST- R430(SC), and Jai Fibres Ltd. vs. CCE, Mumbai -2007 (218) E.L.T. 484 (S.C.), has held that a beneficial circular has to be applied retrospectively while an oppressive circular has to be applied prospectively.

• Thus, Hon’ble Madras court has held that the amendment is clarificatory and thus, is applicable retrospectively. Similarly, the other cases cited above hold that a beneficial clarification should be retrospective.

5. GST Council has made the proposal for amending Section 50 because of inherent nature of GST

• Article 279A of the Constitution as inserted vide 101^st Constitutional Amendment Act, 2016 provides as follows:

“(4)      The Goods and Services Tax Council shall make recommendations to the Union and the States on—

(a)        the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;

(b)        the goods and services that may be subjected to, or exempted from the goods   and  services  tax;

(c)        model Goods and Services Tax Laws, principles of levy, apportionment of  Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 269A and the principles that govern the place of supply;

***** 

(9)        Every decision of the Goods and Services Tax Council shall be taken at a meeting,  by  a  majority  of  not  less  than  three-fourths  of  the  weighted  votes  of  the members present and voting, in accordance with the following principles,………..”

• Further, it is only the GST Council which has the power to Article 279A provides for powers of settling any differences between governments on account of any recommendation or implementation thereof:

“(11)     The Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute —

(a)        between the Government of India and one or more States; or

(b)        between the Government of India and any State or States on one side and one or more other States on the other side; or

(c)        between two or more States,

arising out of the recommendations of the Council or implementation thereof.”

• Thus, as long as no State Government or Central Government opposes a recommendation of GST Council and such dispute is not brought in front of GST Council, it can be safely presumed that such recommendation is to be implemented by Central Government and State Government. Any delay in implementing in such recommendation is either to be made good by the delaying government to the benefit of the taxpayer and cannot be construed as a silent dissent by such government.

• In light of the above understanding, in context of interest to be paid on the Cash part only, we refer to the decision taken in the GST Council in its 31^st meeting wherein it gave in principle approval to the 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,  e. interest  would  be  leviable  only  on the  amount  payable  through the electronic cash ledger.

• In this context, the relevant extracts of the minutes to the captioned meeting are reproduced as under (Page 81):

Proposal for amendment of Section 50 of CGST Act to allow payment of interest on  net cash liability

• • • • Law permits furnishing of a return without payment of full tax as self-assessed as per the said return but the said return would be regarded as an invalid return
      • No such facility has been yet made available on the common portal. This inflexibility of the system Increases the interest burden
      • GST only on value addition

• Thus, the very basis of this amendment was the infirmity of procedure and its contradiction with the very thread of GST – tax on value addition. Thus, it was highlighted before the GST council that there is a problem with the return mechanism as it ran in GSTN portal and the same is not aligned to the law, it was going to the detriment of the taxpayers with no fault of such taxpayers.  Secondly, GST was supposed to be a tax only on value addition and thus, charge of interest on Input Tax credit portion of tax payment is against the very concept of GST.

• Thus, the amendment was brought out to rectify the error of the law which was leading to an unwarranted liability on the taxpayers and the amendment sought to make good such error. Thus, whenever the amendment is effected, it seeks to make goods the law as it should have been and thus, it should be read retrospectively in its application.

• Thus, the present proceedings demanding interest on tax paid from the available balance in Electronic credit Ledger is invalid in light of the above mandate of GST Council and is liable to be dropped.

6. No mechanism is available to Assessee for payment of tax except at the time of filing return

• Section 49 provides for payment of tax by debiting the Electronic Credit Register by the Assessee. The section reads as under:

“(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed”.

• Accordingly, Rule 89 provides that the payment of every liability by a registered person as per his return shall be made by debiting the electronic credit ledger maintained as per rule 86 or the electronic cash ledger maintained as per rule 87 and the electronic liability register shall be credited accordingly.

• Section 86 which deals with Electronic Credit Ledger provides that the electronic credit ledger shall be debited to the extent of discharge of any liability in accordance with the provisions of section 49 or section 49A or section 49B.

• Thus, while all provisions provide for the provision of facility to debit the electronic Credit Ledger, no such mechanism is provided in the portal for payment of tax and then, reflection of such paid tax in the return. The mechanism which has been suggested by the government vide   is as under:

“Payment can be voluntarily made by taxpayer for a self ascertained liability or in response to the show cause notice (SCN) raise by the tax authorities, u/s 73 or 74 of the CGST Act, 2017, within 30 days of issuance of SCN or even before issuance of the SCN.”

Source:  www.cbic.gov.in/htdocs-cbec/gst/GST-Update12102019.pdf

• Thus, the only mechanism available to an Assessee to pay tax is through DRC 03, which is not linked to his return and thus, taxes paid through DRC -03 will not be reflected in his return. Thus, in absence of a mechanism, it is not possible for the Assessee to make payment to the government of any taxes by debiting his Electronic Credit Ledger and he has to wait for his return to be completed in all aspects so that such taxes can also be paid.

• The Taxpayer is forced to abstain from such payment as he has been given no mechanism to pay his taxes, even though the balance is available in his Electronic Credit Ledger and even though he is willing to make payment. The delay in filing return can be attributed to many factors like finalisation of any of the liabilities, viz, output liability, reverse charge liability etc.  It can also be held back in case of any reversals under Rule 42 or 43 or 37 is being worked out.  It can also be delayed for reasons beyond the control of the Assessee like absence of his accounting team etc.  Thus, in all such cases, the function of payment of tax is held back against his own will.

• Further, there is no mechanism to file a revised return and thus, the Assessee has to wait for the next return to rectify the error. Thus, even the filing of return and rectification thereof is not possible.

• Thus, the very mechanism of GST which was made for the ease of doing business has made the payment of taxes a monthly full time exercise for an Assessee which leaves no scope of improvement, revision, partial payment and not even an option for performing any act between two returns. Thus, in case of any inadvertent error also, an Assessee has to wait for entire month to rectify the same and thus, even if does not want, he shall be forced to pay interest for an entire month.

• The very absence of the mechanism makes the entire law infructuous. In present case, there is no machinery possible for payment of tax utilising Input Tax Credit between two return periods and thus, any demand of interest in absence of such mechanism should be held in detriment to the interest of the Assessee.  Thus, the demand of interest on input tax credit portion or such portion where tax has accrued to the purchaser on account of eligible purchases and such amount is available for payment of tax, interest on such Credit is bad and is against the spirit of the GST law.

7. Section 50 provides for interest of amounts not paid to the government only

• Section 50 of the CGST Act provides that

“SECTION 50. Interest on delayed payment 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 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 :

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. 

(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. 

(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.”

• It is also important to note that the balance lying in the Electronic Credit Ledger or Electronic Cash Ledger cannot be withdrawn or transferred for any other purpose by the Taxpayer except with the permission of a proper officer and thus, a balance which is in full control of Government is nothing but payment made to government.

• It is merely an accounting activity of debiting such balance so as to apply such balances towards output liability and which is a matter of reconciliation and not actual payment.

• Till a valid balance is held by the Asseessee, no interest should be charged from him. It is a balance held in deposit with the government without interest and thus, till there is sufficient balance against the liability, no interest should be charged from the taxpayer.  Thus, charge of interest is not warranted for just not debiting the balance standing with the government.

• Further, it is evident from above that only the tax which is not paid to the credit of government is exigible to interest. The manner of payment is given under Section 49 of the Act which provides as under:

“(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.” 

• It is evident from above that the legislature provided for prescribing the time within which the tax was to be paid by the Assessee and not the time at which the tax was to be paid by the taxpayer.  In other words, the prescription of payment of tax with the return was never the intent of the legislature, rather, it was to provide that tax should be paid before submission of return.  Thus, there was no single point intended by the legislature at which tax was to be paid but a time frame within which it should have been paid.

• Thus, the present provisions in Rule 86 (in context of Input Tax Credit), it is provided that the electronic credit ledger shall be debited to the extent of discharge of any liability in accordance with the provisions of section 49 or section 49A or section 49B.

• Thus, the very restriction on the GSTN Portal allowing the taxpayer to debit the Electronic Credit Ledger only at the time of filing of return is ultra vires the provisions of the statute and thus, the GSTN Portal should allow the payment of taxes at the option of Assessee by allowing debit of Electronic Credit Ledger anytime before filing of return and in phases also.

• The facility gets blocked between two returns and thus, in absence of a mechanism to pay such tax through Input Tax Credit, no interest is chargeable from the Assessee till he holds a valid balance in his Electronic Credit Ledger. Thus, on the defect in the Electronic Credit Ledger for provision of facility of payment of tax as envisage in the Act, no interest is payable on this count as well.

8. Interest is compensatory in nature and not penal

• The difference between ‘tax’, ‘interest’ and ‘penalty’ has been expounded by the Supreme Court in the case of A.C.C. v. Commercial Tax Officer (AIR 1981 S.C. 1887). The relevant portion of the judgement reads :

“23. We are concerned in this case with the liability of the assessee to pay interest on the amount of tax which had remained unpaid, Tax, interest and penalty are three different concepts, Tax becomes payable by the assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not penal.” 

• Interest is compensatory and not penal in nature. We would like to draw your kind attention to the decision of Constitution Bench of the Hon’ble Supreme Court in the case of Central Bank of India vs Ravindra 2002 (1) SCC 367, wherein it has been held that –

“the levy of interest is compensatory in nature and consequently liability to pay interest can arise only if an actual loss is caused to the other party by virtue of deprivation of monies due to it. Since they always had an unutilized cenvat balance in excess of the credit wrongly availed, the exchequer was not deprived of any amount due to it and consequently no interest was leviable.”

• Similar decision was rendered in the case of Commissioner v. Padmashri V.V. Patil Sahakari – 2007 (215) E.L.T. 23 (Bom.) by Hon’ble Bombay High Court wherein it was held that interest being compensatory in nature is required to be paid by the assessee if there is any default in making payment of tax.

• Similar decision was upheld in the case of Shiv Om Paper Mills Pvt. Ltd. v CCE, Rohtak [2016 (342) E.L.T. 430 (Tri. – Del.)], wherein it was held as under:

“Entering the credit particulars in the books has no revenue implication. Thus, in the absence of any loss of revenue to the Govt. exchequer, the demand of interest cannot be sustained against the appellant since the interest liability is compensatory in character.”

• In commissioner of income – tax v. Deepchand kishanlal [1990] 183 ITR 299 Hon’ble Karnataka High Court while construing provisions of the Income – Tax Act, 1961, held at page 309, that interest is compensatory in nature and a person deprived of the use of his money, is normally entitled to be compensated for it, by way of interest. The balances which could not be used for payment of tax between two returns are nothing but a deprivation of person from payment of taxes and thus, either no interest be charged by government, or government should also pay interest on such withheld balances.

• Thus, in present case since there is no loss to the government exchequer as the tax credit is already on account of a liability paid to the government, no interest should be charged on that portion of tax which is paid from Input Tax Credit as available in the month to the taxpayer.

We trust that the above suffice the requisites and your goodself shall drop the present proceedings.