Govt plans differential rates for delayed GST

NEW DELHI: The government may levy differential rates of interest on taxpayers for delayed payment of Goods and Services tax (GST) in an attempt to prod businesses to pay their taxes on time and to boost revenue collection, two officials said.

The interest levied could be 18% for the first three months and 24% thereafter. The government will charge the interest on the net GST amount and not on the gross amount as has been the case so far, said the officials cited above, requesting anonymity. Taxpayers have so far been paying interest on the full amount without adjusting for the input tax credit.Under the existing law, late payment of tax attracts a flat rate of 18% interest.

The proposal to levy a differential rate of interest has been referred to the Law Committee of the GST Council before it is considered by the Council, which oversees the indirect tax regime introduced in July 2017. The decision on charging interest on net amount of GST has been taken already and the law has been amended accordingly. The amendment will be notified soon, the officials said.

The Law Committee has an advisory body, which has about two dozen members, mainly tax officials representing the Centre and states.Email queries sent to

the Central Board of Indirect Taxes and Customs (CBIC) and the Union finance ministry did not elicit any responses.

The proposed move is aimed at prodding businesses to pay tax on time and to boost revenue collection, officials said. Goods and Services Tax (GST) collection in August this year dropped by 3.8% to ~98,202 crore compared to the previous month, the lowest monthly collection in first five months of the current financial year.

Pratik Jain, partner and leader of the indirect tax practice at PwC India, said interest is charged in cases of delayed payment of tax or reversal of credits in certain cases.

“The proposed differential interest rate system seems to be a measure to curtail extent of tax evasions/delayed payment (as interest rate would be higher post a specified period of time) as well as a method of {inducing an} increase in revenue collections,” he said, adding that the move would also raise expectations of the industry to get a higher rate of interest in case of a delay in refunds by the government.

Experts sounded a note of caution on the proposed differential interest rate regime.

“This would not be the first time that the government is considering levying differential interest rates on delayed payments,” said Mekhla Anand, a partner at the law firm Cyril Amarchand Mangaldas. “An interest rate corresponding to the period of delay was introduced under the erstwhile service tax regime as well. However, this experiment was rolled back in 2016 and a uniform interest rate was introduced again.” The differential tax was rolled back due to operational reasons, officials quoted above said.

The government would be required to amend the law to put in place a differential interest rate regime, said Vishal Raheja, deputy general manager of the tax research and consulting firm Taxmann.

“Currently, there is cap of maximum 18% interest for delayed payment of GST. If the government wants to impose higher rate of interest for delay exceeding three months, there would be requirement of amendment to GST Act,” he said.

Experts said the move to charge interest on net instead gross amount of GST was a relief to businesses. “Currently, the interest on delayed payment is charged on gross GST amount. In terms of the Finance Act, 2019, the GST legislations have already been amended to levy interest on the net tax liability only i.e. the amount which is paid by debiting the electronic cash ledger after setting off the input tax credit. However, this amendment has not yet been operationalised,” said Anand.

Raheja said, “This amendment is very logical as it is very harsh to charge interest even if a taxable person has ITC [input tax credit] balance in credit ledger.”