What could be seen as a significant relief to GST assesses, Madras High Court has set aside orders for levying interest on input tax credit (ITC) as applied on delayed payment. This is in line with GST Council’s resolution of levying interest on net cash liability only with effect from July 1, 2017.
A GST assesses has two option to pay the tax, one by adjusting ITC available and second by way of cash. This issue is explained in section 50 of the GST Act which says, “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 many assesses got the order to pay interest on input tax credit in case of delayed tax payment, some of them approach High Courts. One such assessee, Chennai-based Maansarovar Motors moved Madras High Court to quash the order. Reason for the issuance of order possibly lied in one of the sub-sections of original section 50 which prescribed levying of interest on ‘undue or excess claim of input tax credit or undue or excess reduction in output tax liability’ at the rate of 24 per cent. It may be noted that Finance Act 2019 amended this section by bringing a proviso stating “interest on tax payable …. shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.”
During the hearing, the lawyer for the petitioner argued that the credit was available even before the arising of the output tax liability, and hence the question of delay does not arise. No opportunity was granted prior to raising of the impugned demand and consequential proceedings. He further mentioned that interest is a measure of compensation, and since ITC is already available in the electronic ledger, there is no question of the same being due to the revenue. He also presented proviso brought through an amendment for levying interest only on cash part. He said this proviso has been inserted to set right an anomaly and is therefore retrospective in operation.
The Court took note of GST Councils’ resolution on the applicability of interest. Also, it recalled circular issued by the Central Board of Indirect Taxes and Custom (CBIC) dated September stating an order to recover interest based on net cash liability with effect from July 1, 2017. Also, it has decided to keep those cases in ‘Call Book’ where show-cause notice has been issued on gross tax payable. Based on that, it set aside orders.
Commenting on the decision, K. Vaitheeswaran, the lawyer for the petitioner said that the issue of interest on the input tax credit portion had been a huge challenge for businesses. While the GST Council did debate this extensively and also brought amendments to give the benefit the action in the form of statutory amendments and effective dates resulted in a lot of confusion. “HC decision in this context is a path breaking decision since it has traced the entire history behind the issue, the nature of interest being compensatory and provided great relief by holding that the amendment to Section 50 is retrospective,” he said.