Interest at 18% and Penalty up to 100% under GST: Re-Examining Proportionality in Fiscal Jurisprudence By Adv. G. Jayaprakash (Former Central Excise Officer)

The statutory scheme of interest and penalty under the Central Goods and Services Tax Act, 2017 reflects a deliberate legislative intent to secure revenue discipline. Section 50 prescribes interest at the rate of eighteen per cent per annum for delayed payment of tax. Sections 73 and 74 provide for penalty at ten per cent in cases not involving fraud, and up to one hundred per cent of tax where fraud, wilful misstatement or suppression is alleged. These provisions are explicit and leave little discretion in their application. Yet, as GST jurisprudence evolves, the proportionality of their quantum invites closer doctrinal scrutiny.

Interest in fiscal law has consistently been characterised as compensatory in nature. In Pratibha Processors v. Union of India - 1996 (10) TMI 88 - Supreme Court, the Supreme Court held that interest is compensatory and is levied for the deprivation of the use of money belonging to the State. It is not a penalty. The conceptual foundation of interest, therefore, rests upon economic equivalence: the State is compensated for the time value of money lost due to delay. The difficulty arises when the statutory rate substantially exceeds prevailing economic indicators of borrowing or investment returns. In the present financial environment, public sector banks such as State Bank of India and Punjab National Bank operate within a range of approximately six to seven per cent for deposit returns, with lending benchmarks correspondingly moderated. An eighteen per cent statutory interest rate, fixed and uniform across economic cycles, raises the question whether the provision remains purely compensatory or has assumed a deterrent character.

The inquiry does not suggest that the Legislature lacks competence to prescribe a higher rate. Fiscal statutes frequently incorporate deterrent elements to discourage delay. However, once interest travels beyond compensatory equivalence and enters the terrain of deterrence, the distinction between interest and penalty becomes less clear. Such blending of categories invites constitutional evaluation under Article 14, which prohibits arbitrariness in State action. A statutory rate disconnected from prevailing economic realities may withstand challenge, but it must nevertheless be examined through the lens of proportionality.

The penalty regime under Sections 73 and 74 presents a parallel concern. Section 73 contemplates a penalty of ten per cent of tax in cases not involving fraud. Section 74, by contrast, permits penalty equal to the tax amount where fraud, suppression or wilful misstatement is alleged. The differential is substantial. The Supreme Court in Hindustan Steel Ltd. v. State of Orissa - 1969 (8) TMI 31 - Supreme Court emphasised that penalty should not be imposed merely because it is lawful to do so, and that it should not be levied for technical or venial breaches absent deliberate defiance of law. Although the statutory framework of GST contains specific ingredients for invocation of Section 74, the practical application of these provisions in interpretational disputes occasionally narrows the conceptual gap between error and evasion. Where classification, valuation or input tax credit eligibility is debatable, the characterisation of the dispute assumes decisive importance in determining whether exposure is ten per cent or one hundred per cent.

Another dimension of proportionality emerges in the comparative treatment of delayed refunds. Judicial pronouncements in indirect tax matters have often sanctioned interest at rates substantially lower than eighteen per cent where the State delays repayment. The asymmetry between the rate imposed on the taxpayer and the rate typically granted against the exchequer does not, per se, invalidate the statutory scheme. Nevertheless, it raises questions of fiscal balance and systemic symmetry. If interest is compensatory in both directions, coherence would suggest a rational relationship between the two.

GST was introduced as a structural reform aimed at simplification, uniformity and transparency. As the regime stabilises, re-evaluation of quantitative parameters does not undermine legislative authority; rather, it strengthens institutional credibility. Linking interest to a dynamic benchmark such as the repo rate with an appropriate statutory margin, or calibrating penalties more carefully in cases turning purely on legal interpretation, would preserve deterrence while enhancing proportionality.

The issue, therefore, is not whether interest at eighteen per cent and penalty up to one hundred per cent are legally sustainable. The issue is whether their continued application in all contexts reflects a measured equilibrium between revenue protection and constitutional fairness. Fiscal discipline is indispensable. So too is proportionality. A mature tax system must harmonise both.