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Compensatory character of interest
The previously mentioned amendments can be welcomed as initial steps in the right direction for rationalising interest provisions. Further amendments are required to make interest liability under GST truly compensatory as opposed to punitive. Some of these changes are discussed below.
Extension of the benefit of proviso to Section 50(1)
The proviso to Section 50(1) waives the liability to pay interest on delayed payment of self-assessed tax by an assessee before initiation of recovery proceedings, only to the extent the same is paid through electronic credit ledger (ECRL). The rationale behind such waiver is that the tax paid using the ECRL was all along available to the revenue authority, and any ‘belated’ payment of tax would not per se deprive the revenue authority of what is legally due to them. In contrast, GST paid belatedly through the electronic cash ledger (ECL) would suffer interest despite carrying sufficient balance.
Such waiver of interest should arguably also be extended to cases where tax is paid belatedly from the ECL in cases where ECL had sufficient balance on the day tax became due. This is because waiving interest on GST paid using ECRL is equally extendable to tax paid using ECL, assuming the moneys deposited in the ECL are also under the control of the revenue authority.
This view is plausible considering the statutory matrix and precedential framework surrounding the ECL, ECrL and the mandate for paying GST:
Explanation (a) to Section 49 deems the date of credit to the account of the government in the authorised bank is the date of deposit in the ECL. Further, Section 49(6) stipulates that any balance in the ECL or ECrL (after payment of tax, interest, etc.) is refundable under Section 54 of the CGST Act. This shows that amounts lying in ECL are already with the government and thus there is no warrant for compensating the revenue authority by paying interest. When the ECL and ECrL so closely mirror one another, there is no reason to restrict the waiver of interest only to GST paid through ECrL when both ECL and ECrL balances lie with the government; and
Under the old tax regime, interest liability was waived on tax paid through a personal ledger account (PLA) balance (an equivalent of ECL balance in the previous regime). Notably, the Supreme Court of India in Commissioner of Income Tax-II v. Modipon Ltd., held that a deposit in a PLA implied that the tax had been credited to the revenue authority with the assessee having no domain over the tax.
Granted, there is little room for interpretation when the current law categorically holds interest as payable on belated payment of GST using ECL. Yet, the specific waiver of interest liability on GST paid belatedly using ECrL (via the introduction of the proviso to Section 50(1)) is telling of a larger policy framework that justifiably ought to be applied even to GST paid belatedly using ECL. For one, the interest liability is seemingly triggered upon belated filing of GST returns. When the entire ecosystem of GST Returns was clouded and subjected to frequent amendment, it appears inequitable to saddle an assessee with interest liability for delayed filing of GST returns.
The Supreme Court in CIT v. J H Gotla, 1985 AIR SC 1698 attempted to bridge the gap between equity and taxation, observing that if a construction results in equity rather than injustice, then such construction should be preferred to the literal construction. At the very least, this is a ripe opportunity for policy interventions clarifying that interest liability need not befall a situation of belated filing of GST returns, in a case where sufficient balances are maintained in ECL and ECrL.
Considering principles of equity, the Supreme Court may exercise its power to do complete justice under Article 142 of the Constitution and direct a waiver of interest on delays in paying tax through ECL balance which was available with the government when the liability to pay tax arises. For example, in CST v. Hindustan Aluminium Corpn., (2002) 127 STC 258, discretion was exercised to hold that interest cannot be levied in respect of a dispute like a classification dispute which is resolved only by assessment.
Further rationalisation of interest rates
As interest rates applicable to taxpayers are required to be a few points above commercial lending rates, the same can explicitly flow from the law like in the case of the UK, instead of fixing the interest rate as a particular standard figure. This would ensure that interest rates are automatically increased/reduced whenever commercial lending rates fluctuate.
Tax holiday for interest liabilities emanating during early stages of GST
Many taxpayers are grappling with interest liabilities for alleged short-payment or delayed payment of GST, specifically due to teething troubles in the initial stages of GST. Considering the scale of implementation of the GST regime, it may be worth exploring if a ‘tax holiday’ can be announced, albeit for interest and penal liabilities that may have been imposed during the early stages of GST implementation. This magnanimity would be a welcome policy decision, in the best interest of all parties.
Conclusion
The GST Council’s dedicated efforts at improving the tax regime have greatly benefitted the industry, and it is apparent from the buoyant GST collections and consistent compliance under GST. Therefore, there is is a fervent hope in the tax-paying diaspora for the GST Council to take notice of the difficulties plaguing assessees and take proactive steps towards further rationalisation of interest provisions. This would tie up the loose ends for boosting the business-enabling environment in India.
