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Now, interest to apply only on net cash liability of unpaid GST
July, 24th 2019

The Union Budget 2019 has provided relief to GST-registered taxpayers with several new updates. One such amendment relates to the interest on the delayed payment of GST liability. This is a big relief for taxpayers, because, until this amendment was passed, interest has always been charged on the entire amount of tax paid after the due date.

The present rate of interest on the delayed payment of tax liability is 18% per annum on unpaid GST. Such interest is charged on all modes of payment of tax, even when actual cash has not been paid, but input tax credit has been used instead. This provision is harsh if the taxpayer had ITC to set off a tax liability. ITC credit arises when tax has already been paid to the government and credit is eligible. A simple fact that input purchases by a business are made well before the final products are ready for sale and if the tax on these sales has been accounted for and paid, credit on purchases must be available. Hence, charging interest on the entire amount, including such portion paid by utilising input tax credit, seemed unreasonable and unfair.

Two months ago, a writ petition was filed in the Telangana High Court, challenging the levy of interest on the gross amount of tax payable. The petitioner appealed against interest being charged on the input tax credit portion of the tax due, as the GST portal does not allow a return to be filed unless the liability due in cash has also been paid off. While experts were of the opinion that this rule by the Government is against its objectives and established practices, the Law did not clarify the extent of liability interest should be levied on. Hence, an order was passed validating the interest charge by the tax authorities, and thus dismissing the writ petition.

The 31st GST Council meeting recommended changing this Law to provide that only the net liability of a taxpayer would hereafter be subjected to interest. This amendment to the Central Goods and Services Tax Act, was presented under the Finance Bill, 2019. Under this new amendment governing section 50 of the Act, interest will now be charged on only that portion of the GST liability which is paid by debiting the electronic cash ledger. In other words, the portion paid using cash, bringing much desired relief to taxpayers.

To understand this amendment in simpler terms, let us look at two illustrations of taxpayers making belated payments under GST, both before and after the update:

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