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    Interest Payable Under Gst - Time To Reconceive The Legal Proposition

     

    In our last article, we have analyzed the legal provisions relating to interest payable under Goods & Services Tax (for brevity ‘GST’) laws towards delay in remittance of tax. Taking into consideration, the well established legal principle that interest is compensatory in nature and is required to be payable only when there is a loss to revenue for delayed remittance of tax, we have expressed our opinion that interest payable under GST law is on net liability after adjustment of input tax credit as against the view expressed by Principal Commissioner, Hyderabad vide his standing Order No. 01/2019 dated 04.02.2019. In the meantime, the Telangana and Andhra Pradesh High Court, in the case of M/s Megha Engineering and Infrastructures Limited vs CCT[1], has expressed that interest is payable gross tax liability. In this article, we will now analyze the reasons for such conclusion by Honorable High Court and the probable legal proposition that can be reconceived.

    While upholding the view that interest is payable on gross tax liability, the Honorable High Court has observed that a person gets credited with input tax in his electronic credit ledger only upon his filing of the return on self-assessment basis. Till a return is filed under Section 39 of CT Act[2], no credit becomes available to his electronic credit ledger. In the absence of such credit in electronic credit ledger, no payment can be made against output tax liability in terms of section 49(2) of CT Act. The relevant extracts vide para 37 is reproduced hereunder:

    “37. In other words, until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. As a consequence, no payment can be made from out of such a credit entry. It is true that the tax paid on the inputs charged on any supply of goods and/services, is always available. But, it is available in the air or cloud. Just as information is available in the server and it gets displayed on the screens of our computers only after connectivity is established, the tax already paid on the inputs, is available in the cloud. Such tax becomes an in-put tax credit only when a claim is made in the returns filed as self-assessed. It is only after a claim is made in the return that the same gets credited in the electronic credit ledger. It is only after a credit is entered in the electronic credit ledger that payment could be made, even though the payment is only by way of paper entries”

    Further, the Honorable High Court went on to make an interesting observation vide para 40 of order with respect to availability of tax revenue at the disposal of Governments. The relevant extracts are as under:

    “40. Let us look at it from another angle. Suppose a registered person under the Act purchases goods, which have suffered tax, to be used as inputs in the goods to be sold by him. Let us assume that the purchase is made in January and hence the same is reflected in the return filed by February 20. While filing the return in February, the dealer could have taken credit and it is possible that the credit is available in the electronic credit ledger for the month of February. If after some kind of processing, the goods are sold in March, the output tax becomes payable while filing the return by April 20. This payment can be either by way of cash or by way of adjustment against the claim for ITC. The payment is made by way of cheque in the case of the former and by way of a claim made in the return by way of an entry. Only when the payment is so made, the Government gets a right over the money available in the ledger. Since ownership of such money is with the dealer till the time of actual payment, the Government become entitled to interest upto the date of their entitlement to appropriate it.

    The Honorable High Court has observed that though input tax credit is claimed in electronic credit ledger, the Governments[3] get a right over the money in such ledger only when the payment is made. Till such time, the Governments are entitled to interest. In view of these observations, in the humble opinion of paper writers, it is worth to examine whether the revenue underlying the input tax credit is available for disposal of Governments or not. In this regard, it is worth to examine Goods and Services Tax Settlement of Funds Rules, 2017.

    Upon perusal of overall scheme of these rules, monthly reports are prepared and shared by GSTN by consolidating the information based on GST returns filed by taxpayers pertaining to cross utilization[4] of input tax credit, settlement of integrated tax collected between Centre and respective State and other related matters. Based on such reports, the collections towards GST are apportioned between Centre and respective State Governments. Rule 4 of the said rules requires GSTN to send a monthly report of the details of cross utilization of input tax credit to the Authorities for settlement of funds between Centre and respective State. This implies that delay in availability of funds to Governments would arise on account of cross utilization of input tax credit.

    As integrated tax is a pass-through tax which will be shared between Centre and States and will eventually turn out to be Central Tax and State Tax, cross utilization of input tax credit may lead to transfer of state tax component in integrated tax from one state to another state. This may lead to delay in availability of funds to Governments with respect to input tax credit available. Let us understand this with the following examples.

    Scenario #1:

    During January 2019, XYZ Limited of Telangana has purchased goods for Rs.10,00,000 from ABC Ltd of Karnataka. The invoice issued by ABC Ltd contains integrated tax of Rs. 1,80,000/- making the total invoice value Rs. 11,80,000/-. ABC Ltd being the vendor is required to deposit the tax amount by 20.02.2019 by filing GSTR-3B return. XYZ Limited will avail the input tax credit of Rs. 1,80,000/- in the month of January 2019 only. ABC Ltd has filed GST returns within due date and has paid the tax accordingly. This implies that the consuming state i.e. Telangana and Centre will get their share of revenue[5] within the due date.

    Suppose XYZ Ltd has sold these goods in the month of March 2019 for Rs. 15,00,000 to a customer in Tamil Nadu by charging integrated tax of Rs. 2,70,000/-. The due date to make tax payment by filing GSTR-3B return is 20.04.2019. The return has been filed on 10.05.2019 and part of the payment was made using input tax credit of Rs. 1,80,000. In this scenario, the revenue is required to be obtained by the consuming State i.e. Tamil Nadu and Centre. As the revenue of input tax credit was with Telangana and Centre until the return has been filed by XYZ Ltd, we understand that there is a delay in receipt of revenue.

    The interesting questions to be considered in this scenario is how much the real revenue short fall for the Centre and State would be. Coming to Central Tax, upon filing of return by vendor of XYZ Ltd, Centre would have received there share of underlying revenue in input tax credit i.e. Rs 90,000 (1,80,000/2) within the due date. If there is a delay in making adjustment of this tax with the output integrated tax of XYZ Ltd, there will not be any revenue loss because tax was already accrued to Centre. The revenue loss will only arise to the extent of cash payment i.e. Rs 45,000 (90,000/2). Coming to state tax, upon filing of return by vendor of XYZ Ltd, the state tax portion of integrated tax paid by him would have been accrued with Telangana state. As the integrated tax payable by XYZ Ltd is accruing in the state of Tamil Nadu, any delay in payment of tax by filing return would result into revenue loss to the extent of both input tax credit and cash payment. Therefore, there would be a revenue loss with respect to state tax of Tamil Nadu.  

    Scenario #2:

    Let us assume that in the above example, XYZ Ltd has sold the goods within the state of Telangana instead of Tamil Nadu. In such event, there won’t be any loss of revenue even with respect to state tax portion of integrated input tax availed because, even after utilization of input tax credit, the tax accrued to Telangana state will remain with the same state.

    Based on the above examples, the following propositions arise with respect to revenue loss on account of cross utilization of input tax credit:

    1. With respect to central tax portion of integrated tax that was availed as input tax credit and used for payment of outward tax, there will not be any short fall of revenue as tax was unconditionally accrued to Centre based on compliance of the preceding taxpayer in the supply chain.
    2. With respect to state tax portion of integrated tax that was availed as input tax credit and used for payment of outward tax, there will be a short fall of revenue if the subsequent supply is an inter-state supply and the input tax credit adjusted with output tax is required to be transferred to other state.

    In other words, there will not be any short fall of revenue on account of delay in adjustment of input tax credit with respect to central tax is concerned. Coming to state tax, the delay would happen only when there is a cross utilization i.e. integrated tax input set-off with state tax or vice versa.

    In addition to the above, the other interesting aspect that needs to be considered in the above context is that such reports of cross utilization can only be prepared by GSTN only when GSTR-1 return[6] has been filed within the due date. In this context, what would be the situation where a taxpayer files his GSTR-3B return within due date by paying taxes while the corresponding GSTR-1 return has been filed after the due date.  

    Interestingly, the GST Council in their 31st Meeting has recommended amendment to section 49 of CT Act that interest should be charged only on the net tax liability of the taxpayer after considering the admissible input tax credit. Subsequent to the decision of High Court, representations were made to GST council to implement the said amendment with retrospective effect.

    It is a settled legal principal in indirect taxes that interest is compensatory in nature and is required to be payable only when there is loss to revenue on account of delay in remittance of tax. In the erstwhile regime, with respect to input tax credit, the underlying tax component is always accrued to the revenue[7]. However, considering the architecture of GST law being dual levy and consumption based, at times due to cross utilization of input tax credit, there will be loss to revenue on account of delay in making tax adjustment of input tax credit available. In view of the changed architecture of indirect tax law and based on the observations made by High Court, it is of paramount importance to reconceive the rationale in collection of interest and accordingly, the GST council is required to make an appropriate revisit to the recommendations given earlier strike a fair balance from taxpayer and revenue point of views. Otherwise, this would lead to vexatious litigation.

     

    [1] 2019 (4) TMI 1319-Telangana and Andhra Pradesh High Court

    [2] Central Goods and Services Tax Act, 2017

    [3] Central Government and corresponding State Government

    [4]Central tax and State tax adjusted with Integrated tax or vice versa.

    [5] Centre will get central tax component of integrated tax (Rs 90000) and State will get state tax component of integrated tax (Rs 9000)

    [6] Place of consumption details would be available based on GSTR-1 return

    [7] This proposition was explained in detail in our previous article. In this regard, kindly refer

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