Input Tax Credit And Interest, An Interplay

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Input Tax Credit And Interest, An Interplay

The Law Lexicon (P. Ramanatha Aiyar) defines interest as “interest is a consideration paid either for use of money or forbearance in demanding it, after it has fallen due”. Interest is generally payable for an amount that is lent or due, and, in the case of fiscal (taxation) laws, for any delays in remitting to the exchequer any sums that are due from the taxpayer. Interest is computed for the period in question. In the GST law, Section 50 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) stipulates the levy of interest in certain circumstances; it also prescribes when, and the period for which it is to be applied.

A recent judgement by the Telangana High Court, in the case of Megha Engineering & Infrastructures Ltd. (Writ Petition No. 44517 of 2018), examined Section 50 and, put the spotlight on the issue of the levy of interest for delayed remittances of GST. The moot point, which the High Court was posed, is whether interest is to be levied on the gross liability of GST due or whether it is to be levied on the net liability, i.e. after allowing for the setting-off of the input tax credit (ITC) that is legitimately available to the taxpayer-assessee. The taxpayer in this case had delayed the filing of its returns and the paying of its output GST liability, and claimed that a significant amount of ITC (the GST that is paid by vendors on the supplies to the taxpayer) was available with it, meaning that the interest for the delay was to be computed on the net GST liability, after reducing the available ITC.

The High Court clarified that, interest is automatically applied, and the High Court also observed that it is only with the filing of the return that the taxpayer-assessee becomes entitled to ITC, enabling the setting-off of the output (GST) tax thereafter. The High Court added that the Government does not receive the right on the tax amount until the appropriation of the ITC in relation to the GST liability has been made by the assessee. In conclusion, interest was held to be payable on the entire (gross) amount of output GST, which remains unpaid on the due date and which is to be applied until the payment of the GST.

Upon a strict and literal interpretation of the statutory provisions, it is a foregone conclusion that, without the return being filed and the ITC being availed, it is not possible within the framework of the law to contend that ITC is “available” to an assessee, resultantly interest will be computed on the entire output tax liability.

The key aspects of the eligibility and availment of ITC and the payment of output tax are as follows:

  • The entitlement to ITC is conditional upon the possession of a tax invoice coupled with receipt of goods or services, as well as the filing of the return and the payment of tax into the exchequer by the vendor.

  • ITC, on a self-assessment basis, can be availed on a provisional basis by declaring such a credit in the return that is furnished. An entry of ITC in the electronic credit ledger of the taxpayer-assessee is reflected at the same time as it is disclosed on the return, i.e. on the date of the filing the return.

  • The payment of output GST is made by debiting the electronic credit ledger and / or electronic cash ledger through the online portal (GSTN) and crediting the amount to the Government’s account. This payment coincides with the date of the filing of return.

Now, it is a fair proposition that the GST that is paid by the vendor is available to the recipient-taxpayer, to avail it as ITC, since it is incapable of being used otherwise. In this sense, the ITC is locked-in as a benefit (as ITC) to the Government. Viewed as such, it is harsh to foist upon the taxpayer, the interest on the portion of the output GST liability that is secured by ITC.

Presently, in the GST law, the availment of ITC is crystalized upon filing of a return by the taxpayer, which results in an effective entry of ITC in the electronic credit ledger of the assessee. A perspective is that this requirement is a procedural prescription, and it is well-settled that the non-fulfilment of procedural compliance cannot result in a right (in this case, to ITC) being altogether de-recognized until the return is filed. In other words, the law is onerous, since it legally recognizes the “availment” of ITC only upon the filing of the monthly return (presently in GSTR3B), and thus ignores the taxpayer’s claim for ITC in GSTR2 (details of inward supplies), even if this was capable of being filed. Such a situation deserves a policy relook.

The GST Council, in its thirty-first meeting, which was held on 22 December 2018, in New Delhi, recommended that Section 50 of the CGST Act be amended to provide that interest should only be charged on the net tax liability of the taxpayer, after taking into account the admissible ITC. In other words, the interest is to be applied only on that portion of the GST that is payable through the electronic cash ledger.

There cannot be a more opportune moment for the new Government to amend the GST law, preferably with retrospective effect, and to spare hapless taxpayers from undue interest charges. A similar saga concerning interest played itself out in the context of the CENVAT Credit Rules, 2004, as well.

Ranjeet Mahtani is Partner and Sherin Daniel, Principal at Dhruva Advisors.

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