GST: CGST Act Amendment May Lead To Reversal Of Credit Availed On Cess Paid

Taxpayers may have to pay extra tax or reverse the credit they availed for the cess paid before the Goods and Services Tax was rolled out.

The government has excluded the credit that taxpayers could avail at the time of transitioning to GST for the cess paid in the previous indirect tax regime, according to amendments in the Central Goods and Services Tax Act moved in the Lok Sabha. The change in the amendment bill has been made effective from from July 1, 2017 ie retroactively.

Prior to the amendment, Section 140 (1) didn't place a bar on transition of various cesses which were part of the Central Value Added Tax credit ledger of companies, said Badri Narayanan, partner at law firm Lakshmikumaran & Sridharan. Krishi Kalyan Cess and Swachh Bharat Cess were included in the CENVAT credit ledger of companies.

The retroactive amendment made in the proposed law seeks to limit the credit available for transition only to “eligible duties” defined in the section. They are:

• Additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957.
• Additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975.
• Additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975.
• Additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978.
• Excise Duty specified in the first schedule of the Central Excise Tariff Act, 1985.
• Excise duty specified in the second schedule of the Central Excise Tariff Act, 1985.
• National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001.

The government had made its stand clear in a frequently-asked-questions document by stating that credit on cess paid cannot be transitioned in the GST regime, Abhishek Jain, an indirect tax partner at EY India, told BloombergQuint.

However, as there was no specific restriction for transition of this credit under GST, many taxpayers took a view that the cess paid can be carried forward in the GST regime, Jain said.

The Impact

Since businesses or taxpayers aren’t eligible to transfer the credit of various cesses, they may be required to reverse the credit they have availed, said Narayanan. “This will be a major point of scrutiny by the tax department in their audits.”

Taxpayers may question the retroactive applicability of the proposed amendment and this may lead to litigation, Jain said.

Bigger Problem?

Amendment to Section 140 (1) may have greater ramifications if the tax department takes a narrow view of the term “eligible duties”, Narayanan said. Section 140 (1) was amended to include the term “eligible duties”, covered in the explanation of the CGST Act.

The term was used in the context of inputs used by a taxpayer and doesn’t include service tax as one of the components, Narayanan said. He said the move creates ambiguity over eligibility of credit transitioned for service tax paid in the pre-GST regime.

The amendment creates ambiguity over whether the transition credit for service tax paid in the pre-GST regime also requires a review, he said.