Eicher Motors verdict: Unravelling the endless tale of interest liability on delayed payment of tax in GST

The levy of interest on delayed payment of tax is essentially compensatory in nature, distinct from penalty, which has a punitive character. Section 50 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) lays down the provisions for the imposition of interest on delayed payment of tax and for wrongful utilisation of Input Tax Credit (“ITC”).

Section 50(1) states that every person who fails to pay tax or any part thereof to the government within the prescribed period is liable to pay interest on such belated payment of tax. The proviso to Section 50(1) was retrospectively amended [the proviso to Section 50(1) of CGST Act was substituted vide Finance Act, 2021 dated March 28, 2021 with effect from July 1, 2017] to clarify that where GSTR-3B is filed after the due date, interest is payable only on the output tax liability that is paid by debiting the Electronic Cash Ledger (“ECL”).

The rationale for waiving the interest liability on the tax paid through Electronic Credit Ledger (“ECRL”) appears to be that such amount was available all along to the government and there was no deprivation of such revenue.

Although this amendment was a welcome change, there still exists a controversy where the amount is deposited within the prescribed time-limit in the ECL for discharge of tax liability, but the monthly return is filed belatedly.

In a significant development, a single member bench of the Hon’ble Madras High Court has, in the case of Eicher Motors Limited, held that the assessee is not liable to pay interest on the amount deposited in the ECL, within the time-limit for payment of tax, even where GSTR-3B is filed belatedly, since such amount gets credited to the government account on the date of deposit of cash in the ECL.

This decision is in stark contrast to the decision of the division bench of the Hon’ble Jharkhand High Court in the case of RSB Transmissions India Limited, wherein it has been held that deposit of cash in ECL does not amount to discharge of tax liability till such amount is debited from ECL by way of filing GSTR-3B.

In this article, we will examine the varied interpretation of the relevant legal provisions, in both the aforesaid decisions.

Section 49 of the CGST Act states that any amount deposited into the ECL, shall be credited in the ledger, which may be used for making payment towards tax, interest, penalty, fees or any other amount. In order to deposit cash in the ECL, a challan must be generated in Form GST PMT-06 [Rule 87 of CGST Rules, 2017]. A literal interpretation of the provision implies that the deposit of cash in the ECL does not amount to discharge of any liability till the ECL is debited by filing GSTR-3B.

The Hon’ble High Court in RSB Transmissions relied upon the provisions of Section 49 to conclude that the amount deposited in ECL is merely a deposit and it does not amount to discharge of tax liability.

On the other hand, the Hon’ble Madras High Court in Eicher Motors has placed reliance on the Explanation to Section 49, which states that the date of credit to the account of the government in the authorized bank shall be deemed to be the date of deposit in the ECL. The Court has also referred to GST PMT-06, which shows that the cash deposited is being received in the government account.  

The above reasoning has force since the nature of the amount deposited into the ECL can be ascertained as soon as the deposit is made through GST PMT-06. This is because in GST PMT-06, the details of deposit have been demarcated into major (CGST, IGST, State Tax, Cess) and minor heads (interest, penalty, fee, others) and the amount being deposited shall be reflected in the appropriate head.

At this juncture, reference can be made to Rule 61(2) of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) which states that every registered person is required to discharge liability towards tax, interest, penalty, fees or any other amount by debiting the ECL and include the details in GSTR-3B. Based on this provision, an inference was drawn in  RSB Transmissions that discharge of tax liability occurs when GSTR-3B return is filed. While making this observation, it appears that the Court has overlooked Section 39(1) of the CGST Act, which specifies that the details of, inter alia, tax paid must be declared in GSTR-3B. This itself indicates that tax can be paid prior to furnishing of GSTR-3B.

It is settled law that the rule cannot override the provisions of the Act, under which the rule has been framed. A view can be taken that Rule 61(2) is inconsistent with Section 39 to the extent the said rule prescribes for payment of tax by debiting ECL.

The question of payment of interest would arise only when tax has been paid beyond the prescribed time-limit. Section 39(7) provides that an assessee shall pay the tax due to the government not later than the last date of filing Form GSTR-3B i.e., 20th day of the succeeding month. Hence, the provision itself assumes that payment of tax is distinguishable from filing of the return.

However, when we look into the proviso to Section 50(1) of the CGST Act, the provision states that interest would be levied only on that portion of the tax which is paid by debiting the electronic cash ledger. The manner in which this proviso is worded indicates that tax can be paid only after debiting the ECL.

In Eicher Motors, it was held that the proviso to Section 50(1) cannot go beyond the scope of the provision itself. The Court has further observed that in RSB Transmissions, the interpretation of the proviso to Section 50(1) is such that the proviso overrides the provision and thereby alters the date for payment of tax to the government, which is not permissible and thus, the same is contrary to the provisions of Section 50(1).

In our view, the findings given in Eicher Motors will have widespread ramifications in as much as it asserts the understanding that GSTR-3B is only a reporting mechanism in GST and not the mode of payment of tax to the government.

It appears that Section 50(1) intends to impose interest only on the tax amount which is paid beyond the prescribed period. A view can be taken that there is no deprival of funds when such funds are already in the possession of the State on deposit being made in the ECL.

In this regard, it is pertinent to refer to the Central Government Account (Receipts and Payments) Rules, 2022 (“CGA Rules, 2022”) which have been enacted in exercise of powers laid down in Article 283 of the Constitution of India, 1950.

Rule 4 of the CGA Rules, 2022 states that money due to the government may be deposited by the public directly in authorised banks through challans as per the relevant instructions under various laws. Rule 10 further clarifies the date of receipt of government revenues will be the date on which such payment is cleared and entered in the receipt scroll by the bank of the department for crediting the money to the Government Account at the RBI.

On a combined reading of the above provisions, it is clearly established that on deposit of cash in ECL by generating challans viz. Form GST PMT-06, the amount in fact gets credited to the RBI in terms of the CGA Rules, 2022. Thus, it is a fallacious assumption that there is deprivation of revenue to the government till the filing of GSTR-3B.

It is pertinent to note that in the GST regime, the ECL is not equivalent to a cash wallet. This position is reinforced by the provisions of Section 54(10) of the CGST Act, which allows withholding of refund in case of short payment of tax or default in furnishing of returns.

It is evident that the legal provisions, as they exist today give contradictory interpretations regarding the discharge of tax liability.  The government should align the proviso to section 50(1) of the CGST Act, with section 39(7) and Explanation to section 49 to avoid imposition of interest on amount that is deposited in the ECL within the prescribed period. In the meantime, it remains to be seen whether the Department will challenge the order passed in Eicher Motors before the Hon’ble Supreme Court.

About the authors: Priyanka Kalwani is an Associate Partner, Devanshi Sharma and Aanchal Kesari are Senior Associates at Lakshmikumaran & Sridharan Attorneys.