INTEREST ON REVERSAL OF ITC U/S 50 OF CGST ACT
Introduction:
According to section 49 (2) of the CGST Act, 2017 (hereinafter called “the Act”) the input tax credit will be self-assessed and shall be credited to electronic Credit ledger as prescribed. The amount available in the electronic credit ledger may be used for making any payment towards output tax liability under the Act. The method of utilisation is prescribed under section 49(5) of the Act. The balance in the electronic credit ledger after adjustment of all the liability or any other amount payable under the Act, may be refunded. All the liability under the Act shall be recorded and maintained in the Electronic Liability register, it means there are two registers to maintain, first is electronic credit ledger and another is electronic liability register.
According to amended laws, interest under section 50 of the Act is payable on net liability payable in cash and not on gross liability. It means, interest is not payable on liability adjusted through input tax credits available. Now, the question arises, whether the interest under section 50 of the Act is payable on wrongly availed ITC i.e., on availment or utilization, if the output tax liability is not payable/paid in cash.
It was also a bone of contention between the taxpayer and tax authorities under the erstwhile regime i.e., Excise and Service tax laws. Under the erstwhile regime, Rule 14 of CENVAT Credit Rules, 2004 as prevailing prior to 17-03-2012 provides for recovery of CENVAT credit that has been takenor utilised wrongly or has been erroneously refunded. The issue was arisen due to the phrase i.e., “CENVAT credit has been taken or utilised wrongly” as provided in Rule 14 of said Rules. In view of the phrase “taken or utilised wrongly”, tax authorities proceeded to recover interest from the date of CENVAT credit was availed irrespective of the facts whether the same was utilised or not in making the payment of tax liability. It is pertinent to mention that the Rule 14 was amended w.e.f. 17-03-2012 to substitute the words “taken or utilised” with “taken and utilised” which bring the issue to an end from the date 17-03- 2012; however, period prior to such amendment was continued under dispute.
In the landmark judgement of Pratibha Processors v. Union of India 1996 taxmann.com 72 (SC), an essential principal was laid down related to collection of interest in fiscal statutes by the Hon’ble Apex Court that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to the actual amount of tax withheld and the extent of the delay in paying the tax on the due date. In the said judgement, the Supreme Court has explained the distinction between the terms, “tax”, “interest” and “penalty”. The main excerpt of the judgement is as follows:
“In fiscal Statues, the import of the words – “tax”, “interest”, “penalty”, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is compulsory exaction of money by a public authority for public purposes, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Essentially, it is compensatory and different from penalty – which is penal in character.”
The issue before the Hon’ble Supreme Court in the case of Ind Swift Laboratories Ltd. (supra), was as to whether the aforesaid word “or” appearing in Rule 14, could be read as “and” by way of reading it down as has been done by the High Court. The Apex Court in this case held that once credit is taken, the beneficiary is at liberty to utilize the credit immediately thereafter. Therefore, there is no necessity to read the word “or” as “and”. In the above case the Hon’ble Supreme Court has analysed the facts on a different footing. Also, it is to be noted that the reference was not made to Pratibha Processors decision and the aspect of interest being compensatory in nature was not examined.
Post the decision of the Hon’ble Supreme Court in the matter of Ind-Swift Laboratories Limited, the said issue was considered by Hon’ble Karnataka High Court in the case of CCE v. Bill Forge (P.) Ltd.. [2012] 34 STT 92 and decided that where the assessee has wrongly availed CENVAT credit and reversed before utilizing the same, it is as if that the CENVAT credit was not availed. Therefore, the said judgment of the Apex Court has no application to the facts of this case. It is only when the assessee had taken the credit, in other words by taking such credit, if he had not paid the duty which is legally due to the Government, the Government would have sustained loss to that extent. The Chhattisgarh High Court in the case of CCE & C v. Vandana Vidyut Ltd. [Tax Case No. 24 of 2014, dated 1-12-2015] (Chhattisgarh) has disagreed with the view of Hon’ble Karnataka High Court in the case of Bill Forge Private Limited and held as follows:
“Since Learned Counsel for the Respondent has heavily relied upon Bill Forge Pvt. Ltd. (supra), we consider it proper to discuss the same also even though it is not binding on us. We regret our inability to concur with the discussion in paragraph 22 of the same that the mere taking of CENVAT credit wrongly by making entries would not invite liability for interest unless it had been utilised also. In our respectful opinion, that would be against the discussion and the law laid down in Ind-Swift Laboratories Ltd. (supra) that the liability for interest arises on the wrong taking, independent of utilisation.”
It is important to mention that the above decision of Chhattisgarh High Court is appealed before the Hon’ble Supreme Court and the matter is pending for disposal.
Section 73(1) and Section 74(1) of the Act provides for recovery of Input Tax Credit (‘ITC’) that was “wrongly availed or utilised”. The language of these sections is similar to Rule 14 of CENVAT Credit Rules before its amendment. Section 50 of said Act stipulate that interest would be required to be paid in two circumstances, i.e.
- Where a person liable to pay tax fails to pay the same [Section 50(1)]
- Where a person makes an undue or excess claim of input tax creditor there is excess reduction in output tax liability under the provisions relating to matching of ITC [Section 50(3)]
Section 50 is reproduced for ready reference:
Interest on delayed payment of tax.
(1) 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 may be notified by the Government on the recommendations of the Council.
Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.
(2) …………………………………………………………..
(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four percent, as may be notified by the Government on the recommendations of the Council.
It is important to analyse the exception given under proviso to section 50 of CGST Act. which states that, “,except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period,”
Section 50 (1) of the Act prescribes that if a person is liable to pay tax under the Act but fails to pay the tax, shall be liable to pay, on his own, interest at a prescribed rate i.e., Section 50(1) requires short payment of tax for levying interest. An amendment to section 50 was made by the Finance Act 2019 and a proviso to section 50(1) was inserted. The proviso to section 50(1) states that the interest will be payable on the amount debited to electronic cash ledger. It means interest is payable on net liability, paid in cash and not from credit ledger. However, there is an exception to this rule. In case, return is filed for making payment of such tax liability after initiation of proceedings under section 73 or 74 of the Act, interest will be payable on gross amount of tax liability whether paid in cash or by credit and not on the net liability. After reading section 49 and section 50 of the Act, it is clear that interest is payable on tax payable through electronic cash ledger subject to section 73 and section 74 of the Act. Now, the question arises whether there is a liability to pay interest on wrongly availed ITC if not utilised.
Section 73(1) of the act states that:
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.
Section 50(3) is relevant for our discussion. It prescribes that a taxable person, who makes an undue or excess claim of input tax credit under sub section (10) of section 42 ………, shall pay interest on such undue or excess. Sub section (10) of section 42 prescribes that the amount reduced from the output tax liability in contravention of sub section (7) of section 42 shall be added to the output tax liability. Sub section (7) of section 42 prescribe that the recipient shall be eligible to reduce, from the output tax liability, the amount added under section (5) of section 42.Sub Section (5) of section 42 prescribe that the amount in respect of which any discrepancy is communicated under sub section (3) of section 42 and which is not rectified by the supplier in his valid return shall be added to the output tax liability of the recipient. It means that any discrepancy notified in tax charged by the supplier and not rectified by the supplier, to the extent input tax credit reduced, the output tax liability of the recipient will be increased. In case, discrepancy noticed in ITC, the output tax liability will be increased or reduced as the case may be.
It is important to mention here that, tax paid via challan is not considered to be paid unless and until taxpayer files the prescribed return i.e., GSTR-3B although payment is debited to Electronic Cash ledger. Therefore, same treatment should also be applied in case of credit debited to Electronic Credit ledger but not utilised for making payment of output tax liability. If government is not providing interest on cash balance available in Electronic Cash ledger till filing of return, then why interest should be payable on credit amount availed but not utilised before reversal. Section 50(3) does not cover the cases where there is reversal of input tax credit other than the reversals prescribed u/s 42 and 43 of the act. Hence, where the taxpayer has wrongly availed ineligible ITC under Section 17(5) of CGST Act or in contravention of any other provision of the act but has not utilized such ITC for payment of outward tax liability, which shall not arise the situation of non-payment of tax or short payment of tax, interest is not payable on reversal of such input tax credit.
The Hon’ble Patna High Court in the case of Commercial Steel Engineering Corporation vs. State of Bihar 2019(28) GSTL 579 (Patna) held as under:
“Had it been a case where the credit shown in electronic ledger, was availed or utilized for meeting any tax liability for any year, there would be no error found in the action complained but it would be stretching the term ‘availment’ beyond prudence to treat the mere reflection of the transitional credit in the electronic credit ledger as an act of availment, for drawing a proceeding under section 73(1) of ‘the BGST Act’. The provisions underlying Section 73 is self-eloquent and it is only if such availment is for reducing a tax liability that it vests jurisdiction in the assessing authority to recover such tax together with levy of interest and penalty under section 50 but until such time that the statutory authority is able to demonstrate that any tax was recoverable from the petitioner, a reflection in the electronic credit ledger cannot be treated as an ‘availment’.”
The Patna High Court has considered the judgement of the Supreme Court rendered in the case of Ind Swift Laboratories Ltd. and has distinguished the same based on facts.
Conclusion:
It can be construed that the interest shall not be payable if the availment or utilization has not resulted in reduction of output tax liability and accordingly Section 73 and 74 cannot be invoked to recover interest in cases where ITC is wrongly availed but not utilised or reversed before utilising the same.
N.K. GUPTA |
MEDINI AGGARWAL: Sr Manager, S.S. Kothari Mehta & Co |
Source: Taxmann.com
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