A case for interest to be ‘compensatory’ under India’s GST law – part one
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

A case for interest to be ‘compensatory’ under India’s GST law – part one

Sponsored by

Logo JPG.jpg

In the first of a two-part series, Raghavan Ramabadran, Krithika Jaganathan and Derlene Joshna of Lakshmikumaran and Sridharan review the GST Council’s recent efforts to improve India’s tax regime and make it a business-friendly jurisdiction.

In the six years following the introduction of the goods and services tax (GST) regime in India, the GST Council has been proactive in initiating and aligning the GST laws to international best practices and engendering trade and industry. The question of interest liability is a saga, that witnessed protracted policy efforts and sustained judicial interest.

India’s GST law levies interest at 18% per annum on delayed payment of tax and utilisation of wrongfully availed credit. In addition to interest, India’s GST law also provides for a simultaneous levy of penalty when tax is recovered from an assessee through recovery proceedings.

Through this article, the authors will analyse the rationale for levying interest, consider the GST council rationalising interest rates and provisions, and make a case for further changes to the law through amendments or judicial interpretation to make interest ‘compensatory’ under India’s GST law.

Rationale for levying interest

The IMF has issued working papers/notes analysing the key issues which have to be considered when designing interest and penalty regimes. Stressing how interest and penalties serve very different objectives, it was observed:

It is common for the rate of interest for underpayment or late payment of taxes to be higher than commercial lending rates. At a minimum, the rate of interest that is charged on an underpayment or late payment needs to compensate the government budget for the lost time value of the money had the payment been made on the relevant due date. While the interest rate should not be set so low so as to encourage taxpayers to use the government as a lending institution (for instance by using tax arrears as alternative form of finance), the rate should also not be set so high so as to be punitive.

In alignment with above observations, the UK’s national taxing authority has set interest rates by linking it to the Bank of England base rate. The late payment interest is set at base rate plus 2.5%.

Thus, it appears that interest around the world is intended to be compensatory in nature and not punitive. Interest rates are set higher than commercial lending rates only to deter taxpayers from using tax arrears as alternative form of finance, albeit not so high a rate that it becomes punitive.

GST council on ‘interest’

The GST Council has extensively deliberated on the rate of interest to be imposed on taxpayers for delayed payment of tax. The Council in its discussions recognised the need to fix interest rates applicable for delayed payment of tax at a few points higher than prevailing bank rates and considered a proposal to levy interest at 16% per annum. Finally, the Council decided on fixing interest at 18% per annum in all cases where interest is payable at the hands of the taxpayers’. When GST was introduced, the rate of interest per annum applicable for utilisation of wrongfully availed input tax credit (ITC) was 24% and pursuant to the Council’s decision, it was reduced to 18% retrospectively. The GST council’s discourse on rationalising interest rates considering the bank rates, indicates an intention of treating interest as ‘compensatory’ under GST law.

The Council has also deliberated on the following amendments which have rationalised interest provisions:

  1. Amendment to Section 50(3): Section 50(3) of the Central Goods and Services Tax (CGST) Act was substituted retrospectively from July 1 2017 by Section 111 of the Finance Act, 2022, to provide for interest only on utilisation of wrongfully availed ITC. Prior to this amendment, interest was levied not only on utilisation of wrongfully availed ITC but also on mere wrongful availing of ITC; and

  2. Insertion of proviso to Section 50(1): A proviso was introduced to Section 50(1) of the CGST Act with retrospective effect from July 1 2017, to provide for payment of interest only on net cash liability in case of delayed payment of self-assessed tax by an assessee before initiation of recovery proceedings.

Click here to read part two of this two-part series

more across site & bottom lb ros

More from across our site

New requirements for advisers to inform clients of any relevant matters that might impact their relationship have raised concerns from a raft of professional bodies
The fallout from PwC China’s Evergrande audit has reportedly hit the firm hard; in other news, the US and Turkey look to reform their corporate tax rates
Canada risks inflaming US trade relations in a presidential election year and increasing costs for consumers, according to local experts
Dudbridge, ForrestBrown director and head of its advisory practice, FB Consulting, tells ITR about the joys of tax advisory work, what he finds most exciting about the role and what makes tax cool
A UK court rejected Tills Plus’s claim for R&D tax credits due to a lack of technological advancement
View the Social Impact EMEA Awards 2024 shortlist and join us on September 12 at The Waldorf Hotel in London
The announcement is due to be made during the country’s Union Budget statement next week, according to reports
Around 30 roles are to be cut as the firm’s tax controversy and disputes practice will be incorporated into its tax division
The Labour Party has made ambitious commitments to close the UK’s ‘tax gap’, but how can they do it, and what will it mean for business?
The refreshed leadership team does not include Paddy Carney, who previously made headlines for her dual role on PwC Australia’s and PwC International’s boards
Gift this article