Interest On Delayed Payments Applicable Only On Net Liability, Says GST Council

In a big relief for businesses, the Goods and Services Tax Council has said that interest on delayed payments of GST would be applicable only on the net cash tax liability after deduction of available input tax credits. This change will apply on a retrospective basis with effect from July 1, 2017, the date on which GST law came into force.

This puts to rest the vexing question that had became a bone of contention between the tax department and businesses since the inception of GST. The question arose due to ambiguity in interpretation of Section 50 of the CGST Act, which says that businesses must pay interest up to 18 percent on unpaid taxes. However, the law did not clarify whether the interest has to be applied on a gross or net basis.

While taxpayers insisted that the interest must be on a net basis — after set off of available input tax credit, tax officials issued notices insisting calculation of interest on a gross basis.

The government will introduce suitable amendments to incorporate the proposed recommendations, Finance minister Nirmala Sitharaman said today.

Impact On Business

The government amended Section 50 of the CGST Act in 2019 to clarify that interest would apply on a net basis. However, it didn't clarify whether the change would apply on a prospective or retrospective basis. This ambiguity has now been removed.

The council's decision to impose interest liability on a net basis retrospectively is a panacea for Indian companies with significant input tax credits, Mahesh Jaising, partner in Deloitte India, told BloombergQuint.

The proposed changes come at a time businesses are grappling with a slowing economy. “Interest for delays in payment of GST on net liability basis with retrospective effect will provide significant relief to taxpayers and bolster taxpayer confidence,” Jigar Doshi, an independent GST consultant told BloombergQuint.

According to EY's Abhishek Jain, the recommendations would help ease immediate cash flow burden for companies as recovery notices were issued demanding interest on gross liability.

The recommendations in their present form do not clarify about the tax already paid in response to notices received from the tax authorities. According to Anish Tripathi, an independent GST consultant, authorities will have to issue a separate notification to clarify the position on tax already paid. “It, however, would be safe to assume that excess interest paid in the past can be netted off against future payments,” he said.