For any law to be effective, it is important that persons should comply with the legal requirements specified in the law. A fear of interests and penalties instills timely compliances and adherence to the legal requirements mentioned in the law. Here we will try to decipher the provisions laid down for interests and penalties under GST laws along with the applicable rules.
Definition Of Interest
- It is important to note the both the terms ‘interest’ and ‘penalty’ have not been defined anywhere in the GST law. But from a general meaning, it can be understood that interest is paid for non-compliance to the provisions of the law while payment of penalty arises only in case of intentional non-compliance.
- The primary function of the interest charged is to put the injured party as far as possible in the position in which he would have been had the payment of tax been made as intended by the law.
- So the moot question that arises is whether payment of interest is compensatory or penal in nature?
- Judicial jurisprudence has over time taken a view that interest on delayed payment of taxes is compensatory in nature and not penal.
- Under GST law, interest is triggered automatically and no separate notice or proceedings have to be initiated to recover interest, therefore it can be understood that interest under GST is compensatory in nature and not penal.
Interest On Delayed Payment Of Taxes (Section 50(1))
- Interest under GST: Every person who is liable to pay tax in accordance with the provisions of the law but-
- Payment of interest on net cash liability basis: The interest shall be levied on that portion of the tax that is to be paid by debiting the electronic cash ledger.
|Particulars||Before Amendment||After Amendment|
|Tax amount on which interest shall be levied||12 Lakhs||2 Lakhs (=12 Lakhs-8 Lakhs-2 Lakhs)|
- Time Period for Interest Calculation (section 50(2))
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Interest On Undue Or Excess Claim Of ITC (Section 50(3))
- A taxable person who makes an undue or excess claim of ITC under section 42(10) or undue or excess reduction in output tax liability under section 43 (10), shall
→ Pay interest on such undue or excess claim of ITC or reduction in output tax liability, as the case may be
→ The Government has notified to levy interest at the rate of 24%.
The above provision of the law deals with specific mismatches with GST returns specified under the law. Due to indefinite deferment of GSTR 2 and GSTR 3, and give effect to provisions of section 42(10) and section 43(10), Rule 36(4) has been introduced to give effect to matching concept which has been the backbone of GST.
→ ITC to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under section 37(1), shall not exceed 10% of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under section 37(1)
→ The restriction of 110% of eligible credits has been relaxed for the period between February-August, 2020, and shall be adjusted on a cumulative basis in the return in FORM GSTR-3B for the tax period September 2020.
(vide Notification No. 30/2020-Central Tax, dated 03rd April 2020.)
The rules restrict availment of ITC by a registered person to 110% of ‘eligible credit’ available in respect of invoices or debit notes the details of which have been uploaded by the suppliers.
Interest On Delayed Payment Of TDS & TCS (Section 52 (6) & Section 53 (6))
- The amount of TDS deducted and TCS collected by the deductor and operator as notified by the government
→ And not deposited within 10 days from the end of the month in which such deduction/collection is made then,
→ Interest, as notified under section 50(1) i.e. @ 18%, shall be payable from the date of default till the date of actual payment.
Click to have a better understanding of TDS & TCS provisions under GST.
Interest On Non-payment To Vendors (Section 16(2)
- Where the recipient of supply fails to pay to the supplier of goods or services(other than the supplies on which tax is payable on reverse charge basis by the recipient) the amount towards the value of supply along with tax
→ Within a period of 180 days from the date of issue of invoice by the supplier, then
→ An amount equal to the ITC availed by the recipient shall be added to the output tax liability of the recipient, along with interest
- The recipient shall be entitled to re-avail ITC once the payment is made by him towards the supply of goods or services along with tax.
→ The interest at the rate notified under section 50(1), at the rate of 18% for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability is paid.
→ The time limit of claiming an input tax credit under section 16(4) shall not apply to the re-availing of any credit that had been reversed earlier.
The above-discussed provision has been introduced to put a check on all those suppliers availing ITC without making actual payment to the suppliers. In such cases of failure to pay to the vendors within the specified timeline, interest shall be applicable on the defaulting party from the date of availing ITC till the date of payment as output tax liability to the government at the rate of 18% (under section 50(1)).
Interest On Taxes Paid Under Wrong Head (Section 77)
GST being a new law, people might get confused as to which tax is applicable on a particular transaction, CGST/SGST or IGST. It can happen that a taxpayer has considered any transaction as interstate instead of intrastate and paid IGST on the same. Later on, when he realized the mistake, he can take a refund of the wrong tax paid and pay tax under the correct head.
In all these cases where IGST has been paid mistakenly instead of CGST+SGST and vice versa, the amount paid under the wrong head can be claimed as refund and no interest shall be charged if the same has been properly adjusted.
Interest On Delayed Refund Of Taxes (Section 56)
Interest shall be payable in cases where a refund has been ordered but not refunded by the department within a prescribed time period. The rate of interest on delayed refund is 6%, except in those cases where a refund is on account of any order by the authorities, then interest applicable shall be at the rate of 9%.
Definition Of Penalty
- Penalties are imposed to punish the assessee for his or her conduct & to provide a deterrent to the future commission of such conduct. Non-compliance of law under a genuine belief or without a guilty mind should not generally invoke penalties.
- ‘Men’s rea’ which is Latin for a guilty mind. Therefore, when an act is committed with the intention of wrongdoing or guilty mind, then it is said that men’s rea is present in the act. Although the establishment of men’s rea is not a requirement for levy of penalty its absence is unmistakable and its existence cannot be presumed.
- For any penalty to be imposed a notice has to be issued to the assessee, thereby, the imposition of penalty is not automatic.
- Where a taxable person who indulges in specific offenses. Below are a few generally seen practices when such a penalty is levied – → supplies goods or services or both without the issue of any invoice or issues an incorrect or false invoice → issues invoice or bill without supply of goods or services or both
- Any registered person who supplies any goods or services or both on which any tax has not been paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilized, shall be liable to —
|For reason other than the reason of fraud or any willful misstatement or suppression of facts||For the reason of fraud or any willful misstatement or suppression of facts|
|Rs. 10,000/- or 10% of tax due, whichever is higher||Rs. 10,000/- or 100% of tax due, whichever is higher|
|Nature of offense||Penalty amount||Analysis|
|Where the person is not directly involved in any evasion of tax but helping others in tax evasion or if he does not attend summons or produce documents.||Upto Rs. 25,000/-||Example: A transporter knowing that the taxable person is GST non-compliant and still engaged in transportation service|
|Failure to furnish information return under section 150||Rs. 100/day, Subject to the maximum penalty of Rs. 5,000/-||Section 150 requires a certain class of persons to maintain records and furnish information return (IR) within a stipulated time, failing to which penalty shall be imposed|
|Failure to furnish information or return under section 151||Rs. 10,000/- For continuing default, an additional fine of Rs. 100/- per day subject to the maximum of Rs. 25,000/-.||Persons required to submit return or information fails to do so or provides false information intentionally shall be penalized in the section|
|General penalty||Rs.25,000/-||If no separate penalty is prescribed anywhere in the law for any contravention of provisions of the law|
|Residuary provision||Relevant section||Where an officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings he may issue an order levying such penalty after giving a reasonable opportunity of being heard to such person.|
→ No penalty shall be imposed for minor breaches (tax involved< Rs. 5,000/-) or any omission or mistake apparent on the record and made without fraudulent intent or gross negligence.
→ No penalty shall be imposed on any person without giving him an opportunity of being heard.
→ Penalties shall be levied depending on the facts and circumstances of each case.
The Government may, by notification, waive in part or full, any any late fee for such class of taxpayers and under such mitigating circumstances as may be specified therein on the recommendations of the Council.
- Transport of any goods or stores any goods while they are in transit
- Where the person transporting any goods or the owner of the goods fails to pay the amount of tax and penalty as provided within 14 days of such detention or seizure, further proceedings shall be initiated in accordance with the provisions of section 130.
- The above condition of 14 days may be reduced in case of goods which are perishable or hazardous or are likely to depreciate in value with the passage of time.
- If any person with the intent to evade payment of tax –
→ Supplies or receives any goods
→ Does not account for any goods on which he is liable to pay tax under this Act
→ Supplies any goods liable to tax under this Act without having applied for registration
→ Uses any conveyance as a means of transport for carriage of unless the owner of the conveyance proves that it was so used without the knowledge
• Shall be liable to confiscation or fine in lieu of confiscation within 3 months from the date of confiscation.
- Fine Amount:
→ The fine shall not exceed the market value of goods before tax
→ The fine in lieu of confiscation of goods or conveyance shall be over and above tax, penalty, and charges payable.
→ Also where goods are transported, the owner of the conveyance shall be given an option to pay fine equal to the tax payable on the goods being transported thereon.
- Whoever commits, or causes to commit and retain the benefits arising out of, any of the specific offenses mentioned under this section shall be punishable –
- Every prosecution proceeding initiated requires the prior sanction of the Commissioner
|Cognizable Offence: Under section 154 Criminal Procedure Code (CrPC), a police officer is bound to register an FIR in case of a cognizable crime. He can also conduct some kind of preliminary inquiry before registering the FIR. In these offenses, a convict is arrested and produced before the magistrate in the stipulated time.|
- Any offense may either before or after the institution of prosecution can be compounded by the Commissioner on payment of such compounding amount by the person accused of the offense.
- The interests and penalties amount shall be paid by Electronic cash ledger and ITC available in the Electronic credit ledger cannot be used to offset the liability
- As per Section 49(4), the amount available in the electronic credit ledger may be used for making any payment towards output tax.
|Output Tax: As per Section 2(82) of means the tax chargeable on the taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis.|
- Some relevant case laws in relation to interests and penalties have been summarised below:
|Sr. No.||Case law details||Brief facts & ruling|
|No. 3517 of 2019 Mahadeo Construction Co. Vs. Union of India Jharkhand High Court||Liability of Interest under section 50 can be disputed and hence not final Facts: The petitioner was served with a directing the petitioner to make payment of interest on the ground of delay in filing of GSTR-3B return for the months of February and March 2018. The petitioner argued that if the amount of interest is not admitted by an assesse, the same requires determination through an adjudication process to be initiated as per the detailed provisions contained under Section 73. Ruling: The liability of interest under Section 50 is automatic, but the said amount of interest is required to be calculated and intimated to an assesse. If an assesse disputes the liability of interest i.e. either disputes its calculation or even the leviability of interest, then the only option left for the Assessing Officer is to initiate proceedings either under Section 73 or 74 of the Act for adjudication of the liability of interest.|
|No. 2246 of 2019 Shree Nanak Ferro Alloys Pvt. Ltd. Vs. Union of India Jharkhand High Court||No interest if taxes paid under wrong head Facts: The petitioner Company had discharged their tax liability under the IGST head, but inadvertently or otherwise, the petitioner deposited the amount under the CGST head. The petitioner has been saddled with the liability to pay the short paid IGST along with due interest within a period of one week. Ruling: It was held that this is not the case that the petitioner Company has concealed the transaction or has committed any fraud in discharging its tax liability. It is a plain case in which the tax has been paid by the petitioner to the Central Government, but not under the IGST head, rather under the CGST head. The petitioner is directed to deposit IGST amount within 10 days without any Interest and excess CGST paid can be refunded to the assesse or adjusted against future liabilities, as the assesse may choose.|
|No.23360 of 2019 M/s Refex Industries Limited Vs. Assistant Commissioner of CGST & Central Excise Madras High Court||Levy of interest on net cash liability basis Facts: The petitioners have admittedly filed returns of income belatedly for the period 2017-18. The petitioners were asked to pay interest on the gross outstanding liabilities ignoring the balance available of input tax credit available in electronic credit ledger. Ruling: It was held by the Court that under section 50, interest is levied on belated cash payment but not on ITC available all the while with the Department to the credit of the assesse. Therefore, interest only on the net cash liability is to be paid.|
|No. 2125 of 2019 Commercial Steel Engineering Vs. State of Bihar Jharkhand High Court||Application of interest on the basis of a balance of electronic credit ledger or availment Facts: The petitioner transitioned the disputed ITC in form Tran-1 to be carried forward in the electronic credit ledger. The petitioner was asked to pay interest on the total amount transitioned though he did not utilize the credits towards discharge of any liabilities. Ruling: It was held that it is only if such tax availment is for reducing liability, gives power to the officers to recover such tax along with interest and penalty on the same. A mere reflection in the electronic credit ledger cannot be termed as an ‘availment’.|
|1921-1923 OF 2003 CCE Chandigarh Vs. Pepsi Foods Ltd. Supreme Court||Men’s rea is as an essential requirement for the penalty Facts: According to the Department penalty provision should be read as a penalty for statutory offenses; that the executing authority had no discretion in the matter of penalty and that the adjudicating authority in such cases was duty-bound to impose a penalty equal to the duty so determined. Ruling: It was held that an accused person cannot be convicted without proof of men’s rea, unless from a consideration of the terms of the statute and other relevant circumstances it clearly appears that that must have been the intention of Parliament. Therefore penalty can not be imposed unless there is a deliberate deception by the assessee with the intent to evade duty.|
Advance Ruling Order No.
|Brief facts & ruling|
No. 26 of 2018
Venkata Rao Tirupathi
|AAR cannot decide applicability if interest Facts: The advance ruling is sought for interest is payable from the date of payment of the wrong head and to the payment of the right head under section 77(2). Ruling: The issue of applicability of interest for the intervening period in the context of payment done under one Head i.e., Head of Cess instead of the other i.e., under the Head of CGST is outside the purview of the Advance Ruling Authority as per Section 97(2.|