May 4, 2019

Failure to File GST Return in Time Can Mean Interest On Entire Gross Tax Liability

Recently a major judgment was passed in the High Court regarding the payment of interest under section 50 of CGST Act, 2017. The highlights of the judgement were:

Interest on Gross liability in case of late return filling: In case of late GST returns filling, liability to pay interest accrues on Gross tax liability

Interest u/s 50(1) – The liability to pay interest under Section 50 (1) is self-imposed and also automatic, without any determination by any one

Interest u/s 50(3) – Whenever an undue or excess claim of ITC is made or whenever an undue or excess reduction in out-put tax liability is made, a liability to pay interest arises under Sub-section (3).

Availability of ITC only after valid return filling: Entry in Input tax credit ledger is made and available to taxpayer only after filling of valid return and till such time such Input tax credit is only in air which can not be used for settlement of output tax liability.

This judgment will impact most taxpayers of India who are registered under GST. The judgment was passed in the TELANGANA AND ANDHRA PRADESH HIGH COURT in the case M/S. MEGHA ENGINEERING AND INFRASTRUCTURES LTD. VERSUS THE COMMISSIONER OF CENTRAL TAX, HYDERABAD, THE ASSISTANT COMMISSIONER OF CENTRAL TAX, KUKATPALLY, AND THE SUPERINTENDENT, O/O THE SUPERINTENDENT OF CENTRAL TAX, HYDERABAD; wherein HC dismissed the Writ petition filed by the petitioner on April 18th, 2019.

1. Background of the Case

The petitioner here is the M/S. Megha Engineering and Infrastructures Ltd, the company that makes MS Pipes and executes various infrastructure projects. The company claimed to file their GST returns properly but had delayed in filing the returns in Form GSTR – 3B for the period between October 2017 to May 2018.

They had paid the tax liability along with interest calculated on net tax liability while filing their returns. The petitioner also claimed that the delay in filing returns was not huge. The delay for the months October 2017, November 2017, February 2018 and May 2018 was just by one day.

The revenue had issued a claim letter that the interest is calculated on total tax liability or the gross tax liability. In response to this demand, M/S. Megha Engineering and Infrastructures Ltd. filed a Writ petition in the Telangana High court.

After considering all the various provisions under the GST law, the court dismissed the writ petition and ruled that the company has to pay interest on the gross tax liability.

2. The Legalities Behind The Case

According to section 39 of the CGST Act, 2017, every person registered with the GST law has to file their taxes on or before the 20^th of every month. If there are any discrepancies or incorrect particulars, then the registered person needs to rectify it before the returns are furnished.

During the proceedings, the petitioner, M/S. Megha Engineering and Infrastructures Ltd stated that the GST portal is designed in such a way that unless the assessee charges the entire tax liability, the system does not accept the return under GSTR – 3B Form. So even if there is a very small amount is left to be paid, the return could not be filed.

Section 41 of CGST Act 2017 says that every person registered with GST is eligible to take the credit of self-assessed input tax. The amount claimed by the person is credited on his electronic ledger on a provisional basis. But it can be utilised only after the self-assessed output tax is paid.

In layman terms, it means that while paying the tax on output as a manufacturer, agent, supplier, etc., the person can reduce the tax amount by what he has already paid on inputs.

As per section 16, before the person can claim the credit on his input tax paid him during his purchases, he needs to fulfil the below given four conditions:

He should have the tax invoice or the debit note issued by the registered dealer. When goods are received in parts or instalments, the debit note is issued with the delivery of the last lot.
The person should have received the goods or services.
The input tax charged should have been paid for by the supplier.
The supplier should have filed the GST returns under section 39.

Thus, the broad scheme of Section 39 which deals with the filing of returns, Section 41 which deals with the claim of ITC and its provisional acceptance, Section 16 which deals with the conditions and eligibility for taking ITC and Section 49 which deals with payment of tax, make it clear that the moment all the four conditions stipulated in Sub-section (2) of Section 16 are complied with, a person becomes entitle to take credit of ITC. Once a person takes credit of ITC, the amount gets credited on a provisional basis to his electronic credit ledger under Section 41 (1).

Hence when the person does the tax payment as a self-assessed return, it is credited in his electronic ledger which is used while doing the payment of output tax under the Act. But this amount becomes available in his credit ledger only after the return is filed on the self-assessment basis.

Until that is not done, no amount is available in the electronic credit ledger. Once the self-assessed return is filed, the amount in the credit ledger becomes available for payment under output tax.

3. Next is Interest on Delayed Payments

Special emphasis on the Section 50 of the Act deals with specific interest which is levied on the delay in payment of tax. With the failure to pay the tax within the prescribed period, the liability to pay the interest on the same also increases. Interest is levied if tax is not filed by an entity by the 20^th of each month and interest starts accruing from the 21^st of the month. The interest rate varies overall and is communicated beforehand by the government.

4. Reference to Current Case

Here is this case of M/S. Megha Engineering and Infrastructures Ltd. Versus The Commissioner of Central Tax, Hyderabad, The Assistant Commissioner of Central Tax, Kukatpally and The Superintendent, O/O The Superintendent of Central Tax, Hyderabad; the petitioner did file the return but belatedly. So the payment for the tax liability was made after the prescribed period. As a result, the liability to pay interest arose automatically. Thus, the petitioner cannot escape from this liability. Even though a couple of times, it was just by a day, the interest needs to be paid.

5. Interest on Gross tax liability -The Final Showdown

An amendment to the Act was proposed by the GST council via press release which was mentioned in the HC. The press release reads as follows:

“The GST Council in its 31st meeting held today at New Delhi gave in principle approval to the following amendments in the GST Acts:

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, i.e., interest would be leviable only on the amount payable through the electronic cash ledger.

The above recommendations of the Council will be made effective only after the necessary amendments in the GST Acts are carried out.”

Unfortunately, these amendments are still on paper only. These cannot be interpreted for the case mentioned above.

Other two decisions of the Gujarat High Court such as the State of Gujarat v. Dashmesh Hydraulic Machinery, dated 19.01.2015, and another in State of Gujarat v. Nishi Communication, dated 29.01.2015 was also referred to. But both these decisions were made based on the Gujarat Value Added Tax Act. VAT and GST are different from each other, and therefore these rulings did not serve its purpose for the petitioner.

The company, M/S. Megha Engineering and Infrastructures Ltd file a writ petition for the interest amount levied on the company. But the above-explained sections and sub-sections of the GST Act prove that the interest generated needs to be paid. No fault could be found with the tax portion, and so the High Court dismissed the writ petition.

6. The Aftermath

Our understanding of the ruling is that it goes against the intent of the government. Their ruling is contrary to their intention and the erstwhile practice that they were following. The government should strongly consider issuing clarifications and instructions to provide for the fact that no recovery proceedings should be initiated by a State Government, where taxpayer has sufficient credit balance to discharge output GST.

Availability of ITC based on reconciliation GSTR 2A and GSTR 3B is unfounded

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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