The government vide Section 100 of the Finance (No. 2) Act, 2019, inserted a proviso in Section 50(1) of the CGST Act, 2017 to provide that in case of belated filing of returns, interest shall be levied only on the tax liability paid in cash, i.e., the net tax liability after adjusting input tax credit (ITC) available with the taxpayer. The said proviso was, however, to be made effective from a notified date.  Now vide Notification No. 63/2020-Central Tax dated 25 August 2020, CBIC has notified the said amendment from 1 September 2020.

It is worth noting that the amendment has been notified prospectively, and not retrospectively as recommended in the press release issued after the 39th GST Council meeting. However, the CBIC has issued a press release clarifying that the notification has been issued prospectively due to a technical limitation, and no recoveries would be made for the past period. It is also worth noting that the amended proviso covers only cases where the filing of return for the period is delayed and not a scenario where the tax liability is not reported in the relevant month's return.

The legislative and judicial history of the said amendment is as follows: 

Date Development Remarks
22 December 2018 Amendment to Section 50 recommended by the 31st GST Council meeting GST Council recommends providing that interest should be charged only on the net tax liability of the taxpayer, after taking into account the admissible ITC.
18 April 2019 Telangana High Court rules that interest is to be calculated on the gross liability [Megha Engineering Infrastructures versus Commissioner of Central Tax, Hyderabad [2019 (4) TMI 1319] The HC holds that the recommendation of the 31st GST Council meeting is only on paper, and therefore, Section 50 cannot be interpreted in light of the proposed amendment.
1 August 2019 Finance (No. 2) Act, 2019 amends Section 50 The Finance (No .2) Act, 2019 amended the CGST Act as recommended by the GST Council, but the amendment was to come in force from a notified date.
6 January 2020 Madras High Court rules on the retrospective operation of the amendment to Section 50 [Refex Industries Limited Versus the Assistant Commissioner of CGST & Central Excise [2020 (2) TMI 794] The HC holds that the amendment clearly seeks to correct an anomaly in the law and therefore, should be read as clarificatory and to operate retrospectively. It also observes that when the judgment in the case of Megha Engineering was delivered, the amendment was only at the stage of a press release. However, now that the amendment has been enacted, it will come to the aid of the assessee.
14 March 2020 GST Council recommends a retrospective amendment to Section 50 The GST Council, in its 39th meeting recommends that the amendment to Section 50 should be done retrospectively from 1 July 2017.
25 August 2020 Section 100 of Finance (No. 2) Act, 2019 notified with effect from 1 September 2020 CBIC notifies amendment to Section 50 of the CGST Act to come in force from 1 September 2020
26 August 2020 CBIC issues press release clarifying its stance CBIC clarifies that the amendment has been made prospectively in view of technical limitations. Also explains that no recoveries will be made for the past period to provide retrospective relief as decided by the GST Council

Our Comments

Based on the developments on this aspect as well as the nature of the amendment itself the following key points are worth noting:

  • Benefit should be available to the taxpayers retrospectively
    Initially, when the government issued the notification giving a prospective effect to the amendment, it was being feared for becoming a breeding ground for avoidable litigation for the past periods in case of taxpayers who have calculated the interest on the net liability by relying on the High Court and the GST Council decisions. However, it is worth appreciating that the government has proactively issued a press release clarifying its stance that no recoveries will be made for the past periods.
  • Scenarios excluded from the beneficial amendment
    Based on a plain reading of the amended provision, it appears that the benefit of paying interest on the net cash liability should be available only in the case of delayed filing of GST return. The benefit may not be available in a scenario where GST liability has been completely missed out in GSTR-3B of a particular tax period and is being paid in GSTR-3B of a subsequent tax period. Such a scenario may remain litigative based on the myriad of divergent rulings on the issue.
    Also, it is worth noting that this benefit will not be available in respect of any tax and interest payable at the time of proceedings initiated under Section 73 and 74 of the CGST Act. 
  • Options for taxpayers who have already paid interest on a gross basis
    The government has clarified in the press release that the amendment could not be made retrospective due to technical limitations. However, it does not mention about correcting the anomaly to give it retrospective effect. In case this amendment is not made retrospectively in law, then technically, the taxpayers who have already paid interest on gross basis may not be allowed refund of excess interest. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.