GST – Tug of war over interest rate – 18% vs 24%

The Goods and Services Tax (GST) is one of the biggest tax reforms in India that aims to simplify the taxation system and bring transparency in the tax structure. However, there has been a tug of war between the government and businesses over the interest rate on delayed payment of GST.

Currently, the GST Act mandates an interest rate of 18% per annum on delayed payment of tax. The government believes that this interest rate is necessary to ensure timely payment of taxes and to discourage businesses from delaying payment. However, businesses argue that 18% interest rate is too high and is hurting their cash flow.

In July 2019, the Central Board of Indirect Taxes and Customs (CBIC) issued a notification that increased the interest rate on delayed payment of GST to 18% from the earlier 12%. The notification was challenged in the Gujarat High Court by several businesses, arguing that the interest rate was too high and violated their fundamental rights. The High Court, however, upheld the notification and ruled that the government has the power to levy interest at the rate of 18%.

Despite the High Court ruling, businesses continued to demand a reduction in the interest rate. In March 2020, the GST Council, in its 39th meeting, announced a reduction in the interest rate on delayed payment of GST from 18% to 15% for taxpayers having turnover up to Rs.5 crore. This reduction was seen as a relief for small businesses that were struggling to cope with the high interest rate.

However, the issue of interest rate remained unresolved for businesses with turnover above Rs.5 crore. In June 2020, the Delhi High Court issued a ruling in the case of Federation of Indian Export Organisations (FIEO) that the interest rate of 18% on delayed payment of GST was excessive and arbitrary. The court directed the government to relook into the issue and come up with a reasonable solution.

Following the Delhi High Court’s ruling, the GST Council again met in its 40th meeting in July 2020 to discuss the issue of interest rate. The council proposed two options – one was to maintain the interest rate of 18%, and the other was to bring it down to 12%. The council members were divided on the issue, with some arguing that a high interest rate would discourage taxpayers from delaying payment, while others felt that a lower interest rate would encourage voluntary compliance.

Finally, in its 42nd meeting on October 5, 2020, the GST Council announced that the interest rate on delayed payment of GST would be reduced from 18% to 9% for businesses having turnover above Rs.5 crore. This decision was seen as a major relief for large businesses that were struggling to cope with the high interest rate. The new interest rate of 9% would be applicable for the period between July 1, 2017, and September 30, 2020. For the period starting from October 1, 2020, the interest rate would be reduced to 18%.

In conclusion, the issue of interest rate on delayed payment of GST has been a contentious one between the government and businesses. While the government argues that a high interest rate is necessary to ensure timely payment of taxes and discourage businesses from delaying payment, businesses argue that a high interest rate is hurting their cash flow. The reduction in interest rate from 18% to 9% for businesses with turnover above Rs.5 crore is a welcome move that would provide relief to large businesses. However, it remains to be seen if this reduction in interest rate would encourage voluntary compliance and increase revenue collection for the government.