A ruling not in the interest of GST collection

Finance Bill 2019-20 amended the Central Goods and Services Tax (CGST) Act with retrospective effect by inserting a new proviso in section 50(1) to calculate the interest on delayed GST payment.

This amendment has created an arbitrary and unlawful differentiation — when arriving at the net GST cash tax liability — between the balance in the electronic cash register (ECR) due to input tax credit (ITC) and the balance in the electronic credit register (ECrR) due on cash paid to the exchequer’s account.

It is illogical that the interpretation of the words ‘net cash tax liability’ excludes cash already received but includes cash yet to be received (input tax credit) by the exchequer.

The GST delayed payment interest clause is one-sided and varies greatly from the Income Tax Act. For example, if you deposit any income tax, even part payment, with challan, it is considered tax paid. Unfortunately, this is not valid in GST. First you must deposit the tax due in full, file the monthly return GSTR 3B, and adjust the cash deposited in the GST portal, and only then is the GST liability seen to be discharged. Till then, the cash deposited by the taxpayer to the exchequer is considered interest-free deposit. The government gets to have the cake and eat it too.

The Jharkhand High Court delivered a crucial judgement on October 18, 2022, on a writ filed by RSB Transmissions (India) Pvt Ltd, and confirmed that under the current scheme of the CGST Act, any cash deposit in the ECR prior to the due date of filing GSTR 3B return does not amount to discharge of tax liability.

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This is the correct interpretation of GST laws, aligned with the judgement of the Madras High Court in the Yamaha Motors case.

However, the judgement has dealt wrongly with the petitioner’s prayer to declare the provisions of section 50(1) of the CGST Act as contradictory, arbitrary, unreasonable and violative of article 14 and article 19(1)(g) of the Constitution and wrongly concluded, based on incorrect facts.

Para 15 of the judgement says, “there is a distinction, so far as ITC available in the ECrR and cash deposit in ECR is concerned. As such, cash is in the nature of deposit in the ECR, whereas ITC is available in favour of the assessee on account of tax already paid.”

This is incorrect as the facts are exactly the opposite. ITC or credit in the ECrR is available to the assessee (buyer) as soon as the monthly GSTR 1 is filed by the supplier and, thereby, automatically appears in the GSTR 2B of the assessee. At this point, there is no requirement for the supplier to pay the tax but only admit to his outward liability. In fact, as per CGST Act, the supplier has 180 days to file his GSTR 3B return and pay the tax. Thus, the tax payment by the supplier is not connected to the ITC claim of the assessee. On the other hand, tax deposited cash is in the hands of the government and cannot be withdrawn easily.

Article 14 of the Constitution demands a reasonable classification and a rational nexus to the objectives. In this case, there is no rational basis for including ITC but excluding cash already received. Hence, the court should have struck down the section 50(1) proviso as arbitrary, irrational and, therefore, unconstitutional. But it did exactly the opposite.

It is in the interest of the government to issue a new amendment, with retrospective effect, to treat cash deposit on par with ITC because it will encourage (not discourage) early payment of GST by micro, small and medium enterprises.

(The writer is past chair, FICCI Telangana State Council)

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