Friday, November 17, 2023

Late fees and interest of GST return is allowed as an Expense in Income Tax

Late filing of GST returns often incurs additional charges in the form of late fees and interest, raising questions about their treatment under the Income Tax Act. This article explores the nuances of whether GST late fees and interest are allowable as expenses in the computation of income chargeable under the head "Profits and gains of business or profession," as per Section 37(1) of the Income Tax Act.

1. Allowability under Section 37(1) of Income Tax Act:

According to Section 37(1) of the Income Tax Act, any expenditure incurred wholly and exclusively for the purposes of business or profession is allowed as a deduction. However, expenses related to offenses or activities prohibited by law are expressly excluded from this provision. It's crucial to note that GST late fees fall outside this purview and should be considered a legitimate business expense.

2. GST Late Fees:

Late fees imposed under the GST law for delayed filing of returns are compensatory in nature and not penal. Section 40(a)(ii) of the Income Tax Act, which deals with non-deductible amounts, does not encompass GST late fees. Therefore, as per the Income Tax Act, the late fees paid for GST returns are eligible for deduction.

3. GST Interest:

Similar to late fees, GST interest paid for delayed GST payments is also compensatory and not penal. This aligns with the provisions of the Income Tax Act, allowing for the deduction of amounts laid out for the business's smooth operation.

4. Case Study - Manglam Arts v. Pr. CIT:

A recent case, Manglam Arts v. Pr. CIT [2023] 155 373, decided by the Income Tax Appellate Tribunal (ITAT), Jaipur, sheds light on the allowability of late GST payments in income tax. In this case, the taxpayer, engaged in manufacturing and exporting wooden handicrafts, faced a proposed disallowance of Rs. 46,666/- for fines and penalties.

5. Analysis of the Case:

The ITAT, in its decision, emphasized that late fees for filing TCS/GST Returns do not constitute offenses prohibited by law. The tribunal rejected the Principal Commissioner of Income Tax's assertion that the amount should be disallowed under Section 37, emphasizing that late fees and interest on late deposits are not expenses incurred for illegal purposes.

6. Conclusion:

In conclusion, the case of Manglam Arts v. Pr. CIT establishes a precedent that late GST payments are allowable as deductions under Section 37 of the Income Tax Act. This decision provides a significant relief to taxpayers grappling with the financial implications of delayed GST filings, reaffirming the compensatory nature of late fees and interest. As businesses navigate the complexities of GST compliance, this ruling serves as a beacon of clarity regarding the tax treatment of associated expenses.

Understanding the interplay between GST regulations and the Income Tax Act is crucial for businesses to optimize their financial planning while ensuring compliance with tax laws. The decision by ITAT Jaipur sets a valuable precedent, offering guidance for future cases and providing businesses with a clearer understanding of the tax implications associated with GST late fees and interest.