1. Section 50 of the Central Goods and Services Tax Act, 2017 (henceforth the CGST Act) prescribes for liability of interest in case of delayed payment of tax upon failure of a person who is liable to pay tax as per the CGST Act but fails to pay the tax within prescribed period. The said provision further prescribes that such person shall on his own pay interest to the government. The said Section 50 is extracted hereunder for ready reference:

“50. 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.

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

(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 per cent., as may be notified by the Government on the recommendations of the Council.”

2. The above provision does not differentiate between tax paid vide ITC and tax paid by debiting cash ledger or in cash. In effect thereof, upon a plain reading of the provision it appears that liability of interest on delayed payment of tax shall arise on the entire tax liability including tax paid vide input tax credit.
3. The above referred provision runs contrary to the general financial logic that the ITC is nothing but tax collected by the supplier of input goods or services and tax already stands paid to the government. It is only the adjustment of tax paid prior to making of the supply i.e. at the input stage and adjusting the same at a later point of time, i.e. at supply stage for discharging tax liability.
4. Thus charging of interest on the amount of tax paid by eligible ITC would be arbitrary in nature as the said amount already exists with the govt in the form of tax paid at the time of purchase of input goods or services. Such imposition of interest appears to be running contrary to the concept of interest i.e. interest is charged on account of deprivation of due amount to the government.
5. However in case of ITC, the amount of tax already stands paid to the government.  It is only an adjustment exercise that the assessee does at the time of reflecting eligible ITC in the GST portal and setting it off with the assessee’s current tax liability.
6. Such provision also runs contrary to the long existing interpretation under the erstwhile indirect tax regime of considering a plausible difference between ‘credit availed’ and ‘credit utilised’.
7. Upon consideration of the above provision, its implication and it being contrary to general parlance of commerce, the trade has always highlighted the provision to be arbitrary and rather confiscatory in nature causing higher interest liabilities than what is naturally due.
8. The issue highlighted above was up for consideration before the Hon’ble Gujarat High Court in the case of Megha Engineering and Infrastructures Limited v. Commissioner of Central Tax (W.P. No. 44517 of 2018), wherein it was held that as per the existing provision interest was payable on the entire amount of delayed payment of tax irrespective of payment made in cash or by ITC. The court reasoned the above judgment by stating the following:

“37. In other words, until a return is filed as self-assessed, no entitlement to credit and no actual entry of credit in the electronic credit ledger takes place. As a consequence, no payment can be made from out of such a credit entry. It is true that the tax paid on the inputs charged on any supply of goods and/services, is always available. But, it is available in the air or cloud. Just as information is available in he server and it gets displayed on the screens of our computers only after connectivity is established, the tax already paid on the inputs, is available in the cloud. Such tax becomes an in-put tax credit only when a claim is made in the returns filed as self-assessed. It is only after a claim is made in the return that the same gets credited in the electronic credit ledger. It is only after a credit is entered in the electronic credit ledger that payment could be made, even though the payment is only by way of paper entries.”

9. In this case upon indicating the proposed amendment in Section 50 of the CGST Act wherein the 31^st GST council had recommended that interest should be charged only on net tax liability after considering admissible ITC, the court held that the then existing Section 50 could not be interpreted in the light of the proposed amendment/ recommendation of the GST council. Hence the court decided against the petitioner.
10. As a further development, the above referred proposed amendment was introduced in the Finance Bill 2019 as a proviso to Section 50(1). The said proviso is extracted hereunder for reference:

“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 S.39, except where such return is furnished after commencement of any proceedings under S.73 or S.74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.”

11. Though the newly introduced proviso to Section 50(1) forms part of the statute, the same has not yet been brought into effect till date.
12. The above discussed issue was considered by Hon’ble Madras High Court in the case of Refex Industries Limited v. Assistant Commissioner of CGST and Central Excise (W.P.No.23360 of 2019) wherein the entire dispute was succinctly framed and decided in Para 12 of the order extracted hereunder:

“12. The specific question for resolution before me is as to whether in a case such as the present, where credit is due to an assessee, payment by way of adjustment can still be termed ‘belated’ or ‘delayed’. The use of the word ‘delayed’ connotes a situation of deprival, where the State has been deprived of the funds representing tax component till such time the Return is filed accompanied by the remittance of tax. The availability of ITC runs counter to this, as it connotes the enrichment of the State, to this extent. Thus, Section 50 which is specifically intended to apply to a state of deprival cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. In my considered view, the proper application of Section 50 is one where interest is levied on a belated cash payment but not on ITC available all the while with the Department to the credit of the assessee. The latter being available with the Department is, in my view, neither belated nor delayed.”

13. The court also referred to the amendment brought to Section 50(1) by Finance Act 2019 (enacted on 1^st April 2019). In respect of the same the court observed as under :

“13…..The availment and utilisation of ITC are two separate events. Both are subject to the satisfaction of statutory conditions and it is always possible for an Officer to reverse the claim (of availment or utilisation) if they are found untenable or not in line with the statutory prescription.”

14. In view of the above discussion and recent orders of the Hon’ble Madras HC and the amendment introduced to Section 50(1) the current position of law is amply clear that interest in case of delayed payment of tax shall arise only on the portion of tax which is discharged by debiting the cash ledger and that no interest shall be applicable on the tax discharged by debiting ITC ledger.
15. Apart from the above legal discussion, the recent development in respect of this issue must be considered by the assessees and be wary of, i.e. the Central Board of Indirect Taxes and Customs (CBIC) communication F. No. CBEC-20/16/07/2020-GST dated 10^th February 2020 to the Principal Chief Commissioner and Chief Commissioners directing them to make recoveries of interest on the entire amount, including tax paid by ITC under recovery provision of the CGST Act.
16. In view of the above discussion and the recent development one can easily state that this issue will take some more time and litigation before settling for good.

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