Liability to pay interest – An interesting interpretation

By  Rahul Jain & Rohan Muralidharan

Under the GST regime, the rate of interest levied for failure on the part of the assessee to pay the tax within the due date is a staggering 18% as opposed to interest on delayed refunds at 6%. The issue which arises for consideration in the present article is whether interest is required to be paid on input tax credits which the assessee has availed but not utilized and which has been subsequently reversed by the assessees. 

The credits under CGST Act have accrued to taxpayers under two situations. The first being credit availed under the Cenvat Credit Rules, 2004 or the respective VAT legislations which have been transitioned into GST as CGST and SGST credits respectively. It is to be noted that many have transitioned cesses[Endnote 1] which were lying unutilized in their returns and the eligibility of such transitioning has been a subject matter of dispute due to interpretation of the provisions, the subsequent retrospective amendments and the confusing circulars issued from time to time purporting to clarify the eligibility. Many assessees are now saddled with notices which require them to reverse such credits.  Further, credits have accrued due to fresh procurements under the GST regime. In some cases here, it is seen that though all GST forms are not made active,[Endnote 2] few assessees have received notice alleging mismatch.[Endnote 3] While credits are being reversed by the assessee, the moot point which requires deliberation is whether interest is required to be discharged for such reversals in all scenarios or can interest be leviable only when the credits have been utilized for making payment of output liability.  

Under the erstwhile law, this issue is yet to be fully settled as courts[Endnote 4] have interpreted Rule 14 of Cenvat Credit Rules, 2004 differently.[Endnote 5] While the Supreme Court had held that interest would be payable on availment itself, subsequent High Court decisions that have considered the Apex Court judgement have held that mere taking of credit would not trigger interest liability unless the same has been utilized.

Taking into consideration these decisions, we shall analyse whether interest is payable on mere availment[Endnote 6] of credit under GST. Chapter X of the CGST Act, 2017 enumerates the provisions relating to ‘payment of tax’. Section 50 in this Chapter lays down the circumstances in which interest would be required to be paid. The Section provides for payment of interest in two circumstances: -

1. Where a person liable to pay tax fails to pay the same [Section 50(1)]
2. Where a person makes an undue or excess claim of input tax credit under the provisions relating to matching of ITC [Section 50(3)]

In appears that the first provision (a) would cover all cases where there is a shortfall in payment of tax which inter alia may be on account of payment of tax using irregularly availed credit. In other words, there may be short payment of tax by utilization of ineligible credits. Mere availment of credit, without utilization, may  not fall within the scope of this provision at it would get triggered only due to failure to pay the tax.

The second provision provides for levy of interest where undue or excess claim of input tax credit has been made because of mismatch in the returns.[Endnote 7] This provision would not cover a scenario wherein an ineligible credit has been availed by an assessee for reasons other than that of excess availment. For example, credit in relation to purchase of motor vehicles has not been allowed under Section 17(5) of the CGST Act, 2017. If an assessee avails such credit, though the credit is ineligible, it will not be covered under the provision (b) above.  In respect of actual mismatch cases also, one can argue that in the absence of the non-availability of returns, the provision itself is unworkable and hence, there would be no requirement to reverse any credit.  

Having discussed the relevant provision pertaining to interest under GST law, the specific scenario involving recovery of wrongly availed credit requires discussion. Section 73 of the CGST Act, 2017 contains the machinery provision which empowers the department to demand irregularly availed credit. . For better appreciation of the legal issue involved, this provision is reproduced below: - 

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason, other than the reason of fraud or any willful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder;

As per the above provision, the proper officer can issue a notice for wrongly availed credit and demand interest only where interest is payable under Section 50.  From the above discussion, it can be said that Section 50 does not provide for payment of interest for mere wrongful availment of credit. Once there is no interest payable under section 50, an argument can be advanced that the CGST Act does not provide for a provision to demand interest in cases where availment of credit is irregular. 

At this juncture, reference can be made to the settled jurisprudence on this issue.  In India Carbon Ltd. v. State of Assam, [(1997) 6 SCC 479], the Supreme Court was examining whether the provisions of the CST Act authorized imposition of interest for delayed payment of central sales tax. Based on the relevant provision, as it existed during that time the Court held that the provision relating to interest in the latter part of Section 9(2) can be employed by the States' sales tax authorities only if the Central Act makes a substantive provision for the levy and charge of interest on central sales tax. The principle which one can infer from this decision is that unless the law clearly provides for a provision for recovery, no interest can be recovered.

As the provisions relating to recovery of interest under CGST Act does not envisage the scenario of irregular availment of credit, it appears there cannot be any levy of interest on mere wrongful availment of credit for reasons other than those covered under Section 50(3) viz. wrongful availment on account of mismatch. 

 [The authors are Joint Partner and Senior Associate respectively in GST practice, Lakshmikumaran & Sridharan, Chennai]