Smaller companies to be biggest beneficiaries of GST penalty, interest waiver

53rd GST council meet held on Saturday, the government decided to exempt both penalty and interest provided they pay the principal tax demand by 31, March 2025.

The GST Council's decision to waive off interest and penalty under Section 73 will bring in a much-awaited relief for smaller companies facing steep Goods and Services Tax (GST) demand.

The development assumes significance as the interest and penalty put together in many cases was far exceeding the tax demand itself, say legal experts.

In the 53rd GST council meet held on Saturday, the government decided to exempt both penalty and interest provided they pay the principal tax demand by March 31, 2025. The notices covered under this exemption are for tax escaped during the period between FY18 and FY20. The exemption will only apply to cases where there was tax shortfall and doesn’t cover the cases which involve fraud or misstatements like fake Input Tax Credit (ITC) claims.

“MSMEs and start-ups will be the principal beneficiaries of this recommendation. A host of showcause notices have been issued by authorities with respect to FY18 to FY20 under Section 73 of the CGST Act” said  Gunjan Prabhakaran, partner, indirect tax at BDO India. “The waiver will not be available in case of erroneous refunds and Section 74 cases entailing fraud or willful misstatement.”

According to Mahesh Jaising, partner at Deloitte India, the primary focus of announcements by the Council has been on easing the burden for SMEs. “The amnesty in the form of the waiver of interest and penalties on Section 73 demand notices is a pragmatic move. This will relieve SMEs of historical burdens and encourage timely compliance.” he added.

Tax experts say this is a positive development for smaller companies since even if they pay up the tax demand, they would be able to avail ITC on the same. However, if they had to pay penalty and interest, ITC is not available for those components.

For smaller companies, the relief would also ease the balance sheets which have been adversely impacted due to the high tax liability.

“This is much needed relief for small taxpayers. The payment of tax is available as ITC, however, payment of interest and penalties are not. This should also provide a relief on the working capital requirement of small business units.” Said Amit Singhania, founder of Areete Law Offices.
 

Any tax demand received from GST department is now subject to an annual interest of 18 percent and oldest notices in the category are from FY18. A back-of-the-envelope calculation shows a company having an outstanding tax demand from FY18 would have to pay nearly 100 percent of the tax demand as interest. The latest notices covered under the exemption are from FY20 where the interest could go up to 70 percent of the tax demand.

The rate of penalty varies depending on the type and quantum of the violation, however, industry estimates suggest it could be anywhere in the range of 10 percent to 25 percent of the tax demand.

Following the announcement, the smaller companies will have greater incentive to pay up the tax than litigate, say legal experts. “Smaller companies will get relief. SMEs would not want to litigate and interest and penalty is an additional burden on them. It would always be better for them to close these demands.” Said Abhishek Rastogi, founder of Rastogi Chambers.

Refund for companies that have complied

The government has also proposed insertion of a special section in the law that would enable the GST department to provide refunds to companies who have already complied with the notices and paid interest, penalty on the same.

“The GST Council's recent decision to waive interest and penalties on tax demand liabilities for the period July 2017 to March 2020 would be a welcomed move for businesses. However, there is some ambiguity surrounding the application of this waiver to orders issued under Section 73 and any appeals filed against those orders. Clarification on this point is expected once the specifics of Rule 128A are released,” said Saurabh Agarwal, tax partner at EY.