Businesses must pay interest on entire tax liability: Telangana HC

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Businesses will have to pay interest on entire tax liability, including the part to be paid through Input Tax Credit (ITC), the Telangana High Court has ruled. The liability would mean taxes that are not paid by the due date.

Interestingly, the GST Council, in its 31st meeting in December last year, approved the amendment of Section 50 of the CGST Act to allow interest to be charged only on the net tax liability of the taxpayer, after taking into account the admissible input tax credit. Interest would be leviable only on the amount payable through the electronic cash ledger. It was said that this recommendation would be made effective only after the necessary amendments in the GST Acts are carried out. But “unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment,” the two-judge Bench said in its recent ruling.

The petitioner, Megha Engineering & Infrastructure Ltd, filed its returns after the due date and payment of tax was delayed. It paid 95 per cent of tax liability via ITC. Tax authorities demanded interest on the entire tax liability. But the petitioner claimed it should be only on liability paid in cash. When the matter did not get resolved, the company moved the High Court. It argued that interest to be calculated only on the net tax liability after deducting ITC from the total tax liability. It also said that it paid the interest. But the Tax Department issued notice for interest on the total tax liability.

Clarity on liability

The Bench took cognisance of Section 50 of the CGST Act which made it very clear that the liability to pay interest arises automatically when a person who is liable to pay tax but fails to do so within the period prescribed. The liability to pay interest is in respect of the period for which the tax remains unpaid. In fact, the liability to pay interest arises even without any assessment, as the person is required to pay such interest ‘on his own.’ The court made it clear that the liability to pay interest is self-imposed and also automatic, without any determination by one. Hence, the stand taken by the Department that the liability in compensatory in nature, appears to be correct.

Experts feel that since ITC can be used only once the return is filed, interest liability arises automatically when the tax is not paid by due date and it should be charged on the entire amount, including the part which will be paid via ITC. “The decision will make it necessary for businesses to very cautious on similar matters as levy of interest on ITC utilised was not contemplated in the erstwhile VAT legislation,” MS Mani, Partner at Deloitte India, said.

Anita Rastogi, Indirect Tax Partner at PwC, said: “Unfortunately since the said amendment has not yet been carried out, the Court is left with no option but to give such a ruling after more than 3 months have elapsed since the GST Council decision.”

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