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Consequences of Incorrect GST Payments and Non-Deposit

This article clarifies the implications of erroneous GST payments and the strict penalties for failing to deposit collected taxes in India. It explains that honest mistakes in paying the wrong type of GST (e.g., CGST/SGST instead of IGST) are treated leniently, with provisions for refunds and no interest or penalties. Conversely, the non-deposit of collected GST, regardless of the supply's taxability, incurs severe penalties and interest, reflecting the government's firm stance against tax evasion.

📖 3 min read read🏷️ GST Payment Errors

The Goods and Services Tax (GST) introduced novel concepts such as 'place of supply' and revised tax frameworks. As a consumption-based tax, GST applies in the state where goods or services are ultimately consumed. This can lead to ambiguity, particularly in complex situations. For instance, if a seller in Mumbai (Maharashtra) sells to a Delhi buyer who then instructs delivery to Pune (Maharashtra), this transaction is considered an inter-state supply, despite the goods remaining within Maharashtra. Such scenarios often cause confusion, making GST calculations susceptible to errors where taxpayers might inadvertently pay the incorrect tax type. Fortunately, GST legislation includes specific provisions to manage these situations.

Incorrect Tax Payment and Deposit with Government

Generally, no penalties apply in these specific instances. Let us explore the different scenarios.

Misclassifying an Inter-State Sale as Intra-State

If a taxable individual mistakenly applies CGST/SGST to an inter-state supply, which should have been subject to IGST, they must subsequently pay the correct IGST. Concurrently, they are entitled to claim a refund for the CGST/SGST initially paid.

Misclassifying an Intra-State Sale as Inter-State

Conversely, if a taxable person incorrectly remits IGST for an intra-state supply, where CGST/SGST was the appropriate tax, they are required to pay the correct CGST/SGST. A refund can then be sought for the IGST previously paid in error.

Notably, no interest is imposed when the taxpayer subsequently remits the correct tax in these situations, and no penalties are levied. Refunds for these incorrect tax calculations are processed through a distinct procedure, separate from the standard GST refund mechanism, specifically to reclaim the erroneously paid tax. The GST Bill explicitly includes a provision stating that interest will not apply if the correct tax is paid at a later stage. This approach acknowledges that businesses, particularly small and medium-sized enterprises (SMEs) with limited resources, are susceptible to errors during the initial phases of GST collection. The GST Council considers it unduly severe to charge interest on genuine mistakes where there is no intent to evade tax, thereby offering significant relief to small entrepreneurs who inadvertently pay the wrong tax.

Ramifications of Collected Tax Not Being Deposited

In this instance, the answer is unequivocally 'Yes'. Let's delve into the specifics.

Failure to Deposit Collected Tax with Authorities

While the law shows leniency for errors in the type of tax paid, GST regulations are stringent concerning collected taxes that are not subsequently deposited. Any individual or entity collecting GST is legally bound to remit it to either the Central or State government. This obligation holds true regardless of whether the underlying supply for which GST was collected is taxable or exempt. Therefore, a taxpayer cannot collect GST and then assert that because their goods or services were exempt, they are not required to deposit the tax with the relevant authorities. No party is permitted to benefit from unjust enrichment under any legal framework, including GST. Penalties for non-deposit apply irrespective of any judicial or tribunal order. The designated officer will issue a show-cause notice, and if requested in writing, the taxpayer will be granted an opportunity for a personal hearing.

Issuance of Payment Order and Penalties

The procedure for issuing an order requiring payment of outstanding tax and applicable penalties involves several steps:

  • First, the appropriate officer will issue an order instructing the individual to pay the outstanding amount along with any penalties.
  • The individual is required to remit the collected GST amount, in addition to interest for delayed payment.
  • Interest accrual will be calculated from the date the tax was collected until the date of its actual payment. Specific interest rates will be determined subsequently.
  • This payment order must be issued within one year from the date the show-cause notice was initially served.
  • Should a Tribunal or court issue a stay order, the duration of this stay will not be included when calculating the one-year period.

Handling Surplus Funds

Any remaining surplus funds, after all due payments have been made, will either be reimbursed to the original payer (i.e., the buyer) or transferred to the GST Consumer Welfare Fund. Buyers are eligible to apply for such refunds within six months following the public notice issuance.

Summary

In conclusion, GST legislation includes stringent measures to combat tax evasion, aligning with government policy. Nevertheless, acknowledging the novelty of GST for all stakeholders, the laws concerning incorrect or erroneous tax payments have been designed to alleviate transitional burdens and avoid imposing unnecessary stress on taxpayers.

Frequently Asked Questions

What is the difference between CGST, SGST, and IGST?
CGST (Central GST) and SGST (State GST) are levied on intra-state supplies, while IGST (Integrated GST) is levied on inter-state supplies and imports. CGST goes to the central government, SGST to the state government, and IGST is collected by the central government, which then apportions the state's share.
How is the 'place of supply' determined under GST?
The place of supply determines whether a transaction is intra-state or inter-state. For goods, it's generally the location where the goods are delivered. For services, rules vary based on the nature of service and recipient's location, with specific provisions for different service types.
Can a taxpayer claim input tax credit (ITC) for all GST payments?
No, not all GST payments are eligible for Input Tax Credit. While ITC is generally available for taxes paid on inputs, input services, and capital goods used for business, certain goods and services are 'blocked' from ITC claims under Section 17(5) of the CGST Act, such as personal consumption items or services used for non-business purposes.
What happens if a GST return is filed late?
Late filing of GST returns attracts late fees and interest. A daily late fee is charged for each day of delay until the return is filed, capped at a maximum amount. Additionally, interest is payable on the tax liability for the period of delay.
Are there any specific provisions for small businesses under GST?
Yes, small businesses can opt for the Composition Scheme under GST, which allows them to pay GST at a lower, fixed rate on their turnover instead of the regular tax rates. This scheme simplifies compliance by requiring fewer returns and maintaining less detailed records, but it comes with restrictions, such as not being able to claim Input Tax Credit.