Interest under GST can only be levied on the net tax liability and not on the gross tax liability

The Hon’ble Gujarat High Court in M/S. Rajkamal Builder Infrastructure Private Limited v. Union of India [R/Special Civil Application No. 21534 of 2019, dated March 23, 2021] quashed and set aside the order issued by the Revenue Department in Form GST DRC-01 for recovery of interest on delayed payment of tax on gross liability and held that, the interest on delayed payment of tax is to be charged on net tax liability and the notice for the same should have been issued in Form GST DRC-07.

Issue

1. Whether interest under Section 50 of the Central Goods and Service Tax Act, 2017 (for short, “the CGST Act, 2017”) is to be levied on the net tax liability or on the gross tax liability?
2. Whether issuance of DRC 01 under Section 50 of the CGST Act, 2017 is legal and proper?

Facts

• The show cause notice dated 19.07.2019 issued to the Petitioner in Form GST DRC 01 under Rule 142(1) of the Central Goods and Service Tax Rules, 2017 (hereinafter referred to as “the Rules”) to point out that the notice has been issued in relation to section 50 of the Central Goods and Service Tax Act, 2017 (hereinafter referred to as “the Act”).
• Reference was made to rule 142 of the Rules to point out that the same nowhere contemplates issuance of notice thereunder in respect of section 50 of the Act. It was submitted that therefore, the impugned show cause notice has been issued without any authority of law.

Findings

The following amendment has been proposed in Section 50 of the CGST Act, 2017 vide clause 103 of the Finance Bill, 2021.  “103. In section 50 of the Central Goods and Services Tax Act, in subsection (1),for the proviso, the following proviso shall be substituted and shall be deemed to have been substituted with effect from the 1st  day of July, 2017, namely:­ “Provided that the interest on tax payable in respect of supplies made during   a   tax   period   and   declared   in   the   return   for   the   said   period furnished after the due date in accordance with the provisions of Section 39, except where such return is furnished after commencement of any proceedings under Section 73 or Section 74 in respect of the said period, shall be payable on that portion of the tax which is paid by debiting the electronic cash ledger.”

Thus, it is clear that the interest under Section 50 of the CGST Act, 2017 can only be levied on the net tax liability and not on the gross tax liability. In such circumstances, the demand raised by the respondent is not in accordance with law.

Rule 142(1)(a) of the Central Goods and Service Tax Rules, 2017 (for short, “the CGST Rules, 2017”) reads thus: “142. Notice and order for demand of amounts payable under the Act. ­ (1) The proper officer shall serve, along with the ­ (a) notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC­01.”

Thus, Form GST DRC 01 can be served by the proper officer along with the notice issued under Section 52 or Section 73 or Section 74 or Section 76 or Section 122 or Section 123 or Section 124 or Section 125 or Section 127 or Section 129 or Section 130 and that too, electronically as a summary of notice.

Judgement

Gujarat HC held that the notice should have been issued in Form GST DRC 07. The Notice should specify the amount of tax, interest and penalty payable by the person chargeable with tax. The Form GST DRC 01 could be said to have been issued without any authority of law.  In the result, this writ application succeeds and is hereby allowed. The impugned order issued in GST DRC 01 is hereby ordered to be quashed and set aside. We reserve the liberty for the respondents to initiate fresh proceedings against the writ applicant in accordance with law.