Interesting issues on Interest

Tax laws operate on three fundamental
impositions viz tax, interest and penalties. Each of these recoveries are
designed to meet specific objectives and interest has one striking peculiarity
i.e. it is not static and accumulates
over time.

In common parlance, interest is understood
as a compensation payable to the owner of funds for the usage of money borrowed
from such person. Black’s Law Dictionary defines interest, in the context of
usage of money, as a compensation allowed by law or fixed by parties for the use or forbearance of borrowed money. In
the context of tax laws, the Supreme Court in Associated Cement Co. Ltd. vs.
CTO (1981) 48 STC 466 has explained tax, interest and penalty as follows:

“Tax, interest and penalty are three
different concepts. Tax becomes payable by an 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.”

The Supreme Court in Prathibha
Processors vs. Union of India (1996) 88 ELT 12 (SC) has held that interest
is compensatory and its levy is mapped to the actual amount of tax withheld
and the extent of delay in payment of tax from the due date. 

Settled
principles on interest under fiscal legislations

The well-settled principles of interest
under fiscal legislations have been summarised for guidance while interpreting
the GST scheme:

i.   Interest
provisions are part of the substantive law of the fiscal statute and cannot be
imposed by implication. The statute should specifically provide for the
circumstances leading to the imposition of interest.

ii.  Imposition
of interest is mandatory in nature and with no scope for any discretion.

iii. Reason
for delay (intentional/ unintentional etc.) in payment of tax is irrelevant
while deciding the imposition.

iv. Interest
should be calculated as per the law prevailing for the period under
consideration.

v.  Interest
need not be quantified in the assessment order.

vi. Interest
can be waived only by specific statutory provisions (say VCES scheme, etc).

vii.       Interest
would be applicable even if there is an interim stay of recovery by any Court.

viii.      Interest
cannot be demanded where the tax recovery itself has become time barred.

Overview
of provisions of interest under GST Law

The provisions of interest under the GST
laws can be categorised as follows – (a) interest on demands; and (b) interest
on refunds. Any interest computation is based on three variables and the GST
law is no different:

(a) Principal
– Tax unpaid

(b) Time
period – Period commencing from due date of tax payment to date of actual
payment

(c) Rate
– Rate of interest prescribed as a percentage

A) Interest
on tax demands

Interest provisions are contained in
Chapter-X : Payment of tax. The circumstances under which interest is
applicable under GST law are:

i.   General
Provision – Interest on delayed/ short payment of tax

Section 50(1) applies when a person fails
to pay the tax or any part thereof within the prescribed period. Interest would
be calculated on the principal (being the tax involved) at the rate notified by
the Government, not exceeding 18% per annum (N-13/2017 –Central Tax dt.
28.06.2017 prescribes a rate of 18% p.a). The delta of the following dates is
used for the determination of the time period for which interest applies:

(a) Due date for payment of tax (section 39):
Section 39 provides that tax shall be paid as per the monthly return within the
due date for the said return. Rule 61 requires that every registered person is
required to furnish the monthly return in form GSTR-3 by 20^th of the
succeeding calendar month. The said rule inserted an additional return in Form
GSTR-3B w.e.f. 27.07.2017 in cases where the due date of filing GSTR-3 has been
extended. Notifications have been issued from time to time prescribing the due
date of GSTR-3B as the 20^th day following the relevant tax period.
The said notification also contains a clause that requires the assessee to
discharge its liability of tax, interest and penalty within the due date for
GSTR-3B.

(b) Date of payment of tax (section 49): Tax
liabilities (either self-assessed or otherwise) of a taxable person are
recorded in the electronic liabilities ledger (ELL) of the taxable person on
filing the return.  Section 49 provides
for depositing amounts in Government accounts under various heads (major and
minor heads) which would be reported in the electronic cash ledger (ECL). The
amounts available in the electronic cash ledger or electronic credit ledger
(ECrL) would be debited and adjusted towards the outstanding liabilities in the
ELL. Section 49(7) & (8) states that the taxes of a tax period would be discharged
in a particular manner.

Therefore, the due date for payment of
taxes is sought to be fixed by the notification as 20^th of the
succeeding calendar month. Prima-facie, any delay in payment of taxes
after this date would involve payment of interest @ 18% p.a. The assessee would
have to follow the system of reporting the taxes on the GSTN portal and then
discharge its liabilities in the ledger by filing the due return. This position
is subject to further discussion of the interplay between GSTR-3 and GSTR-3B
explained later.

ii.  Interest
on undue or excess claim of input tax credit or reduction of output tax

Similarly, section 50(1) also provides for
interest in cases of an undue or excess claim of input tax credit u/s. 42(8) or
an undue or excess reduction in output tax u/s. 43(8).

– Section 42 applies where GSTR-2
(statement of inward supplies) generates a mismatch report on account of
duplication, incorrect data, etc. amounting to excess claim of input tax
credit. Section 42(8) levies interest on the amount so added from the month of
availment of credit till the corresponding addition is made in the return.

– On similar lines, section 43 applies
where the GSTR – 1 (statement of outward supplies) generates
a mismatch report on account of duplication, incorrect data, etc. in
credit notes claimed towards reduction of turnover. Section 43(8) levies
interest from the date of claim of reduction till the corresponding addition is
made in the return. 

Time frame for matching – Rule 69 of the
CGST rules provides for matching of the input tax credit claims by the
Government. The said rules do not provide for an outer limit within which input
tax credit matching should be performed by the Government, though it empowers
the Commissioner to extend the date of matching in cases where the filing of
GSTR-1 and 2 are extended. Rule 71 states that the mismatch report would be
communicated to the tax payers on or before the last date of the month in which
the matching is carried out.

The said provisions were originally
intended at matching of input tax credit claims/ output tax reductions by the
end of the calendar month in which returns were filed which effectively
resulted in interest on the mismatch for a period of 1 month, in case of
duplicate claims, and 2 months in the case of erroneous claims. GSTN is yet to
conduct the matching of GSTR-2 and 2A. To the knowledge of the author, none of
the Commissioners have exercised this power of extension on the presumption
that matching is the prerogative of GST Council. In view of the decision of the
GST council to defer matching, this reporting of mismatch has not taken place yet.

While discussions over the mechanism of
matching of input tax credit claims are underway in the GST council meetings,
it is evident that this would be undertaken sooner or later[1]. In the
recently concluded GST Council Meeting, it has been decided that a single
return would be formed for GST compliance with the matching being performed at
the backend. The said return is announced to be operationalised on the GST
portal within 6 months.

Until then, it unfortunately implies that
a mismatch would be recoverable from the recipient and interest provisions
would be invoked for a period more than what was originally envisaged. To add
to this, the supplier may not be in a position to even rectify the mismatch
identified by the GSTN since the same may be beyond the month of September of
the following financial year.  The tax
payer may have to bear the brunt of interest for delays attributable to the
Government/ GSTN which may extend to more than one year (one should consider
filing a counter claim from GSTN for such delay!).

iii. Interest
on provisional assessment

Section 60 provides for provisional
assessment in cases where tax is not determinable by the tax payer/ assessing
authority. Section 60(4) imposes interest in respect of any additional tax
payable on closure of such assessment from its original due date to the actual
date of payment of tax, irrespective of the date of conclusion of the
provisional assessment. This issue has experienced intensive litigation under
the Excise law right upto the Supreme Court. With specific provisions under the
GST law, it seems clear that interest liability has to be determined from the
original due date and not from closure of provisional assessment.

iv. Waiver
of interest in case of incorrect classification of supply

Section 77(2) r/w 73/74 of the CGST law
implicitly provides for fresh payment of the appropriate tax in cases where a
taxable person has incorrectly classified an ‘intra-state supply’ as an ‘inter
state supply’. Conversely, IGST law would also be read in a similar manner in
view of section 20 of the said law. However, the section waives the interest
liability on account of the delay in payment of the appropriate tax. This is on
the premise that the tax payer has made the tax payment, albeit under an
incorrect tax type and should not be saddled with an interest liability. This
is the only provision under the statute which waives interest liability on
account of delayed payment of taxes.

v.  Other
cases of interest recovery

Other provisions of interest are as follows:

– Reversal of input tax credit where the payment
of the inward supplies has not been made within 180 days from the date of issue
of invoice: interest is applicable from the date of availment of input tax
credit to the payment by way of reversal/ addition to output liability.

– Recovery of irregular input tax credit
distributed by the Input Service Distributor to its recipients : recovery of
tax and interest would be from the recipient of the ISD credit in terms of
sections 73 and 74 of the GST law.

– ITC reversals in respect of any exempted/
non-taxable activity is provisionally arrived at on a monthly basis and finally
adjusted at the year-end at an aggregate level : interest is applicable from 1^st
April following the end of the financial year till the date of payment/
reversal of such excess credit.

– Inputs or capital goods which are supplied to a
job worker without payment of tax and either not returned or supplied therefrom
within 1 year/ 3 years respectively – interest is applicable from the month in
which such goods were original removed to the date of actual payment.

– Rectification of any under-reporting of tax in
view of an omission/ error in any subsequent return (section 39(9)) is liable
for interest.

– Failure/ delay on the part of the deductor to
deposit the taxes deducted to the Government within the prescribed date is
liable for interest in the hands of the deductor.

– Rectification of any under-reporting and taxes
collected at source by an e-commerce operator is subject to interest.

– Interest is applicable in cases where payment
of tax is permitted to be made on instalment basis in terms of section 80.

– Amount demanded by an anti-profiteering body in
cases where the benefit of taxes have not been duly passed on would also be
subject to interest provisions.

– As an exception to the general rule of tax
liability, section 13(6) and 14(6) defers the time of supply in cases where the
value/consideration of a service is enhanced due to inclusion of interest, late
fee or penalty as part of the value of supply in terms of section 15(2)(d).
Consequently, the start point of calculation of interest stands deferred to the
date of its receipt.

– Interest on taxes short paid or not paid are
liable for recovery whether or not the same is stated or quantified in the show
cause notice or assessment order

– Interest computed under the GST law should be
rounded off to the nearest rupee

B) Interest
on delayed refunds due to an applicant

Section 56 grants interest on refunds due
to the applicant if the same has not been paid within sixty days from the date
of refund application. Interest is applicable from the expiry of sixty days to
the date of actual refund at the rate presently notified at 6% p.a.

In cases where the refund is ordered by an
adjudicating authority, appellate authority, court, etc. the assessee is
entitled to an interest of 9% p.a. for the aforesaid period.  It also applies to cases where the refund
sanctioning authority orders refund in its order but fails to issue the refund
cheque to the applicant along with the refund order. For the purpose of
computation of interest of 9% p.a., the period has to be reckoned from the date
of application filed consequent to the said order. In cases of appellate
relief, interest would be applicable from the date of payment of the taxes
against the aggrieved order and not from the date of the appellate order
(section 115).

In context of availing refund for
zero-rated supplies u/s. 54, an applicant is not entitled to claim interest in
case the authority fails to grant the provisional refund of 90% (Rule 91 of the CGST
Rules) of the claim of refund of input tax credit.

In the context of section 77 (incorrect
classification of supply), though there is a waiver for interest on delay in
payment of the correct tax type, there is no bar on claiming the interest on
refund of the incorrect taxes paid in cases of any delay in granting such
refund. 

Issues
in determination of interest

i.   What
is the actual due date of payment of tax? In other words, by deferring the due
date of GSTR-3, has the Government also inadvertently deferred the due date of
payment of tax?

Section 39(7) states that self-assessed
taxes are required to be paid within the due date of filing the return. The GST
scheme originally envisaged the filing of the return in GSTR-3 on a monthly
basis by 20^th of the succeeding month. The Government has however
made multiple changes in the return filing procedures in order to address the
technical challenges in the GSTN portal. GSTR-3B was introduced as an
additional return until the portal was sufficiently equipped for filing GSTR-3[2].  A question arises on whether the due date of
return/ payment of tax should be understood as per the due date prescribed for GSTR-3B or GSTR-3? We may look at the said provisions in detail. 

Section 39(1) requires a return to be
filed on a calendar month basis by 20^th of the succeeding month –
the return referred to in section 39(1) is a return of outward/ inward
supplies, input tax credit availed/reversed, tax payable/ paid and other
prescribed particulars. Strictly speaking, GSTR-3B is only an additional return
(recording summary figures) to that originally envisaged u/s. 39(1).  As the law stands today, tax payers would
eventually have to file the monthly return in Form GSTR-3. 

Can one take a stand that the due date
prescribed for tax payment is vis-à-vis the due date of GSTR-3 and not
GSTR-3B? The thrust of this stand hinges on whether GSTR-3 or 3B is the
‘return’ referred to in section
39(1)/ (7). The arguments in favour of GSTR-3 may be as follows:

– GSTR-1, 2 are statements which are
auto-populated in the monthly return in form GSTR 3 and should be considered as
part of GSTR-3 itself (Instruction 2 & 4 of form GSTR-3). Section 39(1)
refers to a return of inward and outward supplies with other details such as
input tax credit availed, reversed etc. The said section thus envisages
a return detailing the inward and outward supplies and not merely a form
reporting aggregate amounts i.e. GSTR-3.

[1] State officers in
some states have started issuing scrutiny notices for verification of input tax
credit claims by exercising powers u/s. 61.

– Strictly speaking, GSTR-3B is not a return
of inward or outward supplies – attention should be placed on the
preposition ‘of’ which means that the return should be that which records
outward and inward supplies and not merely the turnover at an aggregate level.

– The instructions in GSTR-3 and GSTR-3B conveys
that ECL, ECrl and ELL are updated only on filing the GSTR-3 and not GSTR-3B
(contrary to the functionalities of the GSTN portal) – legally speaking,
GSTR-3B is not a valid document to update the ELL/ ECrL and should not be
considered as the return u/s. 39(1) & (7).

– Section 39 refers to ‘a’ return to be filed for
every calendar month i.e. a singular return. The rules seem to extend beyond
the requirement of a singular return for every calendar month since the filing
of GSTR-3B does not dispense with the requirement of filing GSTR 3.  Therefore, GSTR-3B is a document which is
clearly not envisaged in section 39.

– GSTR-3B does not displace GSTR-3 as a return
for inward or outward supplies. The returns seem to parallelly exist and this
requirement exceeds the mandate of section 39(1) of filing a singular
return. 

– GSTR-3B can at most be considered as a
provisional document subject to the final return in form GSTR-3. The entries in
the electronic ledgers are merely provisional entries to tide over the
difficulties posed by the common portal until GSTR-3 is fully functional.

– CBEC circular (No. 7/7/2017-GST dt. 01.09.2017)
clarified that any error in GSTR-3B could be rectified while filing GSTR-1/2
and 3. GSTR-3 certainly enjoys a superior status compared to GSTR-3B, and being
so, the due date should be understood with reference to the said document and
not from an inferior document.

– Form GSTR-3, 4, etc. are titled ‘Return’
whereas GSTR-3B does not hone such a title.

– As it is well settled, where there are two
interpretations of law, the one which is beneficial to the tax payer should be
adopted.

Based on the above arguments, one may take
a view that the extension of GSTR-3 has also lead to the extension of the due
date of payment of tax. 

However, the said contention may fail if
one applies the purposive interpretation as against a literal interpretation of
law. The intention behind introduction of GSTR-3B was to facilitate the
Government to collect taxes on a monthly basis and overcome the technical
glitches in the common portal. Rule 61(5) term GSTR-3B as a ‘return’ to be
filed in cases where GSTR 3 is extended in special circumstances (also refer Circular
7/7/2017-GST dt. 01.09.2017 & Circular 26/26/2017-GST dt. 29.12.2017).  The Circular mentions that any rectification
subsequent to filing the GSTR-3B should be accompanied by interest on delayed
payment, if any.  The notification
prescribing due dates of GSTR-3B also requires the tax payer to discharge its
taxes, interest and penalty within the said due dates.  Further, Government(s) would be deprived of
its revenue, if taxes are not paid in a timely manner.  The taxes which are collected by suppliers
are in the capacity of an agent of the Government and the Government never
intended the tax payer to collect taxes from the consumers and retain this sum
without any outer time limit. 

If the amounts are substantial, this would
certainly be a heated issue between the tax payer and the department and
warrant a resolution by the Courts. 

ii.  Whether
balance available in respective ECL / ECrL can be reduced for ascertaining
taxes unpaid? As a corollary, whether interest is applicable if utilisation
through the return filing mechanism is not undertaken on the common portal?

The overall scheme of reporting and
payment may give pointers on this question. 
Section 40 provides for a mechanism of reporting liabilities and payment
of tax through electronic ledgers. Three ledgers have been designed for this
purpose: ECL, ECrl & ELL. The said ledgers have been created separately for
each enactment and cross movement of cash/ funds is not permitted except
through the cross credit utilisation mechanism in section 49(5) of CGST/ SGST
law and 18 of IGST law:

– ECL: Credited with bank remittances and used
for payment of tax, interest, penalties, fees.

– ECrL : Credited with self-assessed input tax
credits and used for payment of tax.

– ELL : Credited with return related and
non-related liabilities and is debited with payments from ECL / ECrL.  This ledger is updated only after filing the
statutory return (currently GSTR-3B).

Discharge of tax dues under the GST law
involves a two-step mechanism – (a) a bank payment (involving flow of funds)
into the cash ledgers and (b) an accounting adjustment (an appropriation of
such funds).  There have been many
instances where assesse has sufficient ECL/ ECrL balance to set-off the ELL but
has failed to file the GSTR-3B for one reason or another, due to which the
utilisation or discharge of liabilities reported/ due to be reported in the ELL
has not taken place. 

In such cases, an issue arises whether
interest is applicable on failure to discharge the ELL / non-filing of return
even-though the tax payer has paid the amounts into Government coffers?  Has the law made a distinction between
payment of taxes and discharge of tax liability?  Are they co-terminus or independent actions
to be performed by the tax payer? 
Whether the double entry accounting adjustment on filing the return
would have any revenue impact for Government? 
These questions would certainly come up to address the question of
interest applicability.

While logically, there seems to be no doubt
that the benefit of funds available in ECL/ ECrL should be given to the tax
payer and non-filing of returns should not entail any interest liability, one
should also give cognisance to the literal interpretation of the Statute.

Literal interpretation

Section 60(1) terms the credit into the
ECL as a deposit towards tax, interest, penalty, fee or any other sum
dues.  Section 60(3) states that ECL may
be used for payment of tax under the Act. Section 60(7) & 60(8) provide
that all liabilities would be recorded in the ELL and discharged in a
prescribed manner. Rule 85(3) states that all liabilities would be paid by
debiting the ECL/ ECrL as permissible. 

ECL in form PMT-05 maintains separate
account heads – minor head (such as Tax, interest, penalty, etc.) under
each tax type – major head (CGST/ SGST/ IGST) for deposits made into such
account. The law does not permit cross transfer of amounts reported in one
account major/ minor head into other account heads.  

If one examines the GSTN portal, filing of
GSTR-3B creates a credit entry in the ELL and a simultaneous debit in the ECL/
ECrL as the case may be, as discharge of taxes. The tax dues are said to be
discharged on filing the returns and corresponding utilisation of ECL / ECrL.  Therefore, interest seems to be prima-facie
applicable from the due date to the actual date of filing the return. 

In the view of the author, even if the
returns are not filed, deposits into the Government accounts should be
considered as payment of tax dues and benefit of such credits be granted for
ascertainment of the taxes unpaid u/s. 50(1). Following arguments can be taken
in support of this stand:

– Section 50 (1) states that interest is
applicable on failure to pay the tax dues. 
The failure is with reference to the tax payment and not with reference
to utilisation of the ECL with the ELL (referred to as discharge of tax
liability).

– Section 39(7) requires the assessee to pay the
taxes due as per such return before the due date of filing the return, i.e. the
act of payment should be one which can be performed ‘before’ filing the
return.  As stated above, the book
adjustment (credit in ECL and debit in ECrL) takes place only after filing the
return (refer instructions of form GSTR-3). Therefore, payment of taxes is distinct
from discharge of taxes. 

– Moreover, the IT framework does not allow one
to file a return unless sufficient balance is available in the appropriate
ledgers. This implies that payment of taxes precedes the adjustment in
ELL.  Hence, bank payment in ECL should
be considered as a ‘payment’ u/s. 39(7).

– Principally, interest is collected to
compensate the Government of its rightful revenue. Amounts credited to ECL are
funds received into respective Government accounts and it is free to utilise
this revenue for its functioning.

– The amounts lying in the ECL are not under the
control of the assessee. One has to necessarily follow the procedures
prescribed in GSTR-3B/3 to claim the refund of any excess balance, implying
that the funds are available with the Government. 

– Provisions of refund provide for interest @ 6%
if the Government delays in refund of the excess ECL balance also implying that
these funds are being used by the Government and under its control.

– Amounts lying in ECL are akin to amounts lying
in PLA under Excise laws.  Where a
manufacturer delays in filing its excise return or carries excess balance in
its PLA, it was considered as amounts paid under the Excise law.

– Similarly, amounts lying in ECrL represents
credit eligible to the assessee – Courts have held that input tax credit
permissible under law is as good as taxes paid. 
Though an assessee may not have filed the returns, the liability of such
assessee for a tax period would have to be computed after deduction of amounts
lying in ECrL.

In view of this, one can take a stand that
the Government has not incurred any loss of revenue and hence interest should
not apply where sufficient amounts are lying in the ECL/ ECrL.  The CBEC Circular No. 7/7/2017 (supra)
on the contrary states in para 11 & 12 that interest is applicable till the
date of debit in the ECL/ ECrL; i.e. until the return is filed and the
corresponding utilisation in the respective ledgers takes place.

Inter-Government Account Settlement

The flow of funds
between Government accounts are an important factor to ascertain whether the
rightful Government is enjoying funds. 
The settlement of accounts of Governments takes place at the back-end
based on the returns filed by the tax payers. 
‘Place of supply’ reported in the tax invoices identifies the Government
which is entitled to the revenue in an outward supply.  However, these details can be ascertained by
the Government only when accurate and complete returns are filed in GSTR-1, 2
& 3. 

Transfer of funds on cross utilisation of
input tax credit and settlement of accounts by the Governments are covered u/s.
53 of the respective CGST/ SGST Acts and Chapter VIII of the IGST Act
(comprising of section 17 and 18).  The
settlement of accounts between Governments can be categorised in two broad
types:

a)  Input
tax credit Settlement

– Section 53 of the respective CGST/SGST Acts
provide that on utilisation of the credit of CGST/ SGST for payment of IGST,
corresponding amounts would be transferred from the Central Government/ State
Government account to the IGST account.

– Section 18 of the IGST Act provides that on
utilisation of the credit of IGST for payment of CGST/ SGST, corresponding
amounts would be transferred by the Central Government to the Central
Government / State Government account.

– Section 53 and 18 above, convey that cross
utilisation of credits lead to a transfer of funds between Government accounts
in the back end and the Government granting the set-off towards input tax
credit receive its share of revenue.  The
section also states that this cross utilisation takes place only at the time of
filing the return and to the extent of the amounts are reported in the
return.  Where a return is not filed or
the return filed is erroneous, the cross utilisation to the extent of the error
would not take place and the rightful Government would not receive this
revenue. 

b)  Cash
Settlement

– Cash payments in the ECL takes place through
electronically generated challan in PMT 06. 
Major heads represents each statute under which the collection is being
made and funds cannot be cross-transferred to other major heads; Minor heads
represents the folios under which collection is being made (such as tax,
penalty, interest, etc.) and merely an accounting head of the respective
Government. 

– CGST/ SGST-ECL ledgers represents funds
received by the respective Government and hence no further adjustment or
transfers are required. The funds in the ECL can be used for any payment including
tax, interest and penalties.

– IGST-ECL ledger represents the amounts
collected by the Central Government and due to both Central Government and
State Governments as per prescribed formula. Section 17 of the IGST Act
provides for a mechanism of apportionment of IGST collected and settlement of
accounts. 

Legally speaking, revenues would accrue to
the State only once the return is filed and the appropriate utilisations are
made in the ECL/ ECrL and ELL.  In case
this is not done, revenues would remain un-appropriated and fall into an
apportionment formula.  To this extent,
there is every possibility that the Government has not received its rightful
share of revenue.  Governments may then
claim that on account of an incorrect return or an omission of filing a correct
return, it has been deprived of the rightful revenue. In that sense, the issue
is not really of the amount being paid and only offset entry not done.

During the last one year, there have been
multiple cases where amount were lying in the ECL/ ECrL, but the assessee was
unable to file the return or failed to file the return within the due date, due
to which the appropriate utilisations could not be made at the back-end by the
Government(s). A matrix of various possibilities has been tabulated and the
compensatory nature of interest can be put to test based on the interpretation
that unless the Government is deprived of funds, interest should not apply.

In certain cases, interest becomes
applicable and in certain cases, interest should not apply on the fundamental
principle of being compensatory in nature. The above table depicts the
conundrum which one would face if they have to convince a Court that interest
is not applicable per compensatory principles. Though an argument can certainly
be taken that the assesse should not be saddled with an interest merely because
Governments have not settled their accounts internally.

iii. Whether
blocked/ ineligible credit claimed in ECrL and remaining unutilised is subject
to interest at the time of its recovery?

Sections 16, 17 and 18 provide for the
mechanism for granting the benefit of input tax credit to an assessee.  Input tax credit eligible under these
sections can be availed by reporting the same in GSTR-2 (currently in GSTR-3B)
and these amounts are credited in the ECrL for further utilisation u/s. 49(4)/
49(5).  Under the input tax credit
scheme, eligibility, availment and utilisation have distinct meanings:
Eligibility addresses the qualification of an amount to be termed as input tax
credit; availment involves recording these eligible amounts in ECrL as input
tax credit and utilisation involves making tax payments by way of adjustment
with the output tax liability. Eligibility precedes availment and availment
precedes utilisation.

Section 73 and 74 provide for recovery of
input tax credit erroneously availed or utilised by the assessee.  The said section empowers tax officers to
recover the input tax credit at the stage of availment itself and the assessing
officer need not wait for the assessee to utilise the said input tax
credit.  Financially speaking, there is
no outflow of revenue from the Government when the assessee avails input tax
credit in its returns. The flow of funds only takes place when the said amounts
are utilised from the said ledger for discharge of liabilities recorded in the
ELL (refer discussion above). The question thus arises on whether interest is
applicable on incorrect availment of input tax credit?

Similar instances came up under the Cenvat
Credit regime.  Rule 14 of the Cenvat
Credit Rules (as existed during the period up to 2012) contained a provision
for recovery of Cenvat availed ‘or’ utilised. The Supreme Court in Union of
India vs. Ind-Swift Laboratories ltd 2011 (265) ELT (3) SC held that
revenue is permitted to recover the unutilised Cenvat at the stage of availment
itself. It also held that revenue can impose interest in case of incorrect
availment of Cenvat even though such amounts have not been utilised by the
assessee. However, the High Court of Karnataka and Andhra Pradesh have held to
the contrary in spite of the decision of the Supreme Court. Subsequently, the
law was amended in 2012 to recover Cenvat and interest only after utilisation
of such Cenvat Credit. 

In the context of GST, section 73 and 74
direct recovery of Input tax credit at the stage of availment but interest is
applicable in terms of section 50(1).  A
question arises on whether availment of input tax credit in ECrL results in
failure of payment of tax to the Government? 

Input tax credit is a claim by the
assessee from the Government for taxes in respect of taxes paid to the
supplier. From a recipient’s perspective, it represents amounts due ‘from’ the
Government rather than due ‘to’ the Government. 
If this claim is rejected prior to its utilisation, there is no revenue
loss and hence it cannot be said that taxes are ‘unpaid’ to the
Government. 

Section 49(4) also states that amounts
lying in the ECrL may be used for payment of taxes. The utilisation of input
tax credit is an option to the tax payer and if the tax payer does not utilise
this amount, it continues as a balance but does not result in ‘taxes unpaid’.
Though recovery provisions may be initiated for incorrectly availed input tax
credit, interest on such incorrect availment cannot be imposed. 

From the point of view of settlement and
flow of funds, sections 53 of the CGST/ SGST law and 18 of IGST law require
payment of funds from Centre to State or vice-versa only when the cross
utilisation takes place from the ECrL to the ELL. Until such time the
Government in whose name the Credit stands retains the funds.  On these grounds, one can take a stand that
interest is not imposable on incorrect availment if the same is not
utilised. 

iv. Whether
interest applicable on payment made through ECrL but later credit held to be
wrongly availed (say blocked credit)?

Section 50 uses the phrase ‘tax unpaid’.  This is different from input tax credit
wrongly availed and/or utilised.  Though
mathematically speaking, a wrong input tax credit claim results in short
payment of taxes, recovery of short payment of taxes is different from recovery
of erroneous availment and utilisation of input tax credit.  To cite an example : short payment of taxes
are cases of under-valuation or lower rate, etc where the error is on the
calculation of output taxes while recovery of input tax credit takes place in
case of an error on the inward supplies to an assessee. This distinction is
highlighted in view of separate phraseology for recovery of input tax credit
wrongly availed and utilised and for short payment of taxes in section 73 and
74.  Explanation to section 132 specifically
clarifies that taxes unpaid also includes input tax credit wrongly
availed or utilised. However, the said explanation has been made applicable
only section 132 and not section 50. 

Under the Cenvat Credit regime, Rule 14 of
the Rules, made specific provisions for recovery of input tax credit wrongly
availed or refunded. Rule 14(ii) specifically enabled the tax authorities to
recover interest under the Excise/ Service tax law. Section 50 of the GST does
not seem to capture this situation and the recovery of interest in such
scenarios can certainly be challenged by the assessee.

v.  Whether
interest is applicable on early claim of input tax credit?

The above analogy would apply in such
cases and interest is not recoverable from the assessee. It may also be
interesting to note that in terms of second proviso to section 16(2), where an
assessee fails to make a payment on inward supplies within 180 days of the date
of invoice, the assessee is specifically required to repay the input tax credit
along with interest.  The specific
mention of recovery of interest in such cases makes it clear that section 50
does not capture cases of erroneous input tax credit claims.

vi. How
is interest to be computed in cases of mismatch?

Section 50(1) and (3) provides for imposition of interest in cases where
mismatch reports are generated. Mismatch could arise under various
circumstances:

– Non-reporting of invoice by supplier itself
resulting in short payment of taxes.

– Erroneous reporting of invoice (incorrect
details) by supplier but taxes have been paid (wholly or partly in cases where
value is short reported).

– Duplicate reporting of invoice by recipient.

There seems to emerge some confusion while
reading the provisions of section 42/43 (mismatch reports) and section 50(1)
and 50(3).  Section 42/43 provide a tax
payer a minimum of two attempts to claim input tax credit in its return – in
case of an error in the first attempt, the tax payer would be liable for
interest @ 18% for the period of 2 months. 
However, if there is an error in the second or any subsequent attempt,
the tax payer would be liable for interest @ 24%.

In such cases, interest is imposed for the
period during which the mismatch continued. It is interesting to note that
interest is imposed on the recipient right from the date of availment even
though taxes are paid along with interest at supplier’s end (wherever
applicable). There may be instances where the liability of interest is thrust
upon the recipient even for delays or errors on the part of the supplier. While
it is just to claim interest in case of duplicate reporting of an invoice, in
other cases, the Government seems to be receiving the interest from both sides
of the transaction.

vii. Whether
transition credit claimed but later reversed through GSTR3B/GSTR-3 liable for
interest?

In the view of the author, though
transition credit is directly credited to the ECrL from the Transition returns,
the answer to this question would remain the same.  Interest would not apply till the time the same
has been utilised from the ECrL based on the principles of compensatory
levy.  Even in cases where the said
amount has been utilised, interest would not apply in the absence of a specific
provision of recovery of interest u/s. 50 on irregular input tax credit. 

An issue also arises whether incorrect
carry forward of transition credit also entails interest under the erstwhile
laws. The savings clause u/s. 174 places the liability of interest on such sums
until the recovery of such incorrect credit. However, the said provisions are
subject to any specific provision under the GST law. GST law does not contain
any specific provision for recovery of interest for incorrect credits in the
ECrL directly. 

Therefore, interest may be liable to be
paid under the erstwhile laws on account of the saving provisions, no further
interest should be recovered under the GST law. 
One may take a stand that where the recovery provisions are invoked
under the earlier law and sums due to the Government have been paid with interest
till date, the credit brought forward in the GST law should not be disturbed,
else it would result in double jeopardy to the tax payer. 

In summary, it
seems evident that the front end portal, back-end settlement mechanism and the
GST laws are at divergence in many instances. 
A simple concept of interest will surely throw up unexpected challenges
and we are entering an era where calculation of interest is turning into an
subject by itself. This primarily arises due to the hybrid GST mechanism of bringing
all the States on a common platform. 

It is important for the GST Council to
identify all possible permutations to ensure that interest is paid to the right
Government and should be equipped to answer questions on accountability &
propriety of Government funds. At 18%, the stakes are certainly going to be
high for the tax payer as well as the Government!!!