Manufacturers across the country may soon be staring at credit reversal notices from the tax department—thanks to a recent Supreme Court ruling in a case related to UltraTech Cement Ltd.
The apex court directed India’s largest cement maker to reverse the input credit availed since 2008 for transportation of finished goods. And experts say the tax department may soon extend this treatment to all manufacturers.
What’s This All About?
For transporting goods from factory to a customer’s location, manufacturers use services of Goods Transport Agencies or GTA on which service tax was applicable prior to GST coming into force. The service tax was applicable on 25 percent of the freight value on a reverse-charge basis—i.e. the tax was paid by the manufacturer on behalf of the transport agency on which input credit was availed. Input credit simply means that the amount of tax that needs to be paid by the manufacturer on the output is reduced to the extent of tax paid on inputs.
Badri Narayanan, a partner at law firm Lakshmikumaran and Sridharan, explained how the input credit worked. Let’s say the freight amount is Rs 100; so Rs 25 (25 percent of Rs 100) will be the assessable value on which a 10 percent service tax was applicable. The manufacturer paid this Rs 2.50 (10 percent of Rs 25) on a reverse-charge basis. And this went up depending on the applicable service tax rate. This amount, Rs 2.50 in the example, was considered as an input by manufacturers and the issue was whether this input— services provided by the GTA to the manufacturer—is available as credit.
“Many manufacturers ended up delivering goods to customers’ premises and also bear the risk of loss during this period of delivery. So, they used to include value of freight in the assessable value for payment of excise duty,” he said.
Since freight was included in the value of excise duty paid, manufacturers took a view since I have included the freight in the value of payment of my excise outward duty, I will avail credit of this GTA service received by me.Badri Narayanan, Partner, Lakshmikumaran & Sridharan
Enter Tax Department
This understanding was challenged by the tax department in the UltraTech case.
In 2010, UltraTech had availed credit on service tax paid on ‘outward transportation of goods through a transport agency’ from its premises to a customer’s premises. The commissioner of central excise, Bangalore issued a showcause notice and imposed a total penalty of over Rs 26 lakh under the central excise rules. UltraTech appealed against the judgment, and won in the Customs, Excise and Service Tax Appellate Tribunal and the Karnataka High Court.
“The high court had relied on a circular which was issued by the government, and that circular said if a manufacturer is responsible to deliver goods to a customer’s place and if they’re carrying the risk of damage till the goods are delivered and if the price they’re charging includes freight component, in those circumstances you will continue to get credit,” Pratik Jain, partner and national leader of indirect tax at PwC India, explained. The high court, however, did not consider the change in the law that happened in 2008, he said.
The change in law referred to by Jain is to the definition of ‘input service’. In March 2008, the definition was amended to say that credit on clearance of final products can be availed up to the place removal. The earlier language allowed for credit to be availed from the place of removal. And this change in definition lead to the tax department’s victory against UltraTech in the Supreme Court.
The apex court pointed out the change in the definition and concluded that UltraTech cannot avail credit for goods transport agency services.
Jain pointed out that the circular which was issued by the tax department was in the context of the law pre-April 2008 but the high court did not make that distinction and held that even after April 2008, credit can be claimed.
The Supreme Court has reversed that and said this circular is valid only till March 2008. The Supreme Court said it is very clear that department does not want to give you credit because up to means up to the factory; from the factory to customer’s place is not covered because that is not up to the place of removal, and on that ground, Supreme Court has said that from April 2008 onwards, you cannot claim the credit.Pratik Jain, Partner and National Leader of Indirect Tax, PwC India
Manufacturers In A Tax Pickle?
Soon after the Supreme Court ruling, the Central Board of Indirect Taxes and Customs prepared an internal note that has been reviewed by BloombergQuint. The note points out that taxpayers across the country would’ve availed this credit which now it needs to be reversed. If companies have carried forward this credit in the GST regime, that too will need to be reversed. Jain said that April 2008 onwards, companies who have claimed credit for service tax for the freight component from the factory to customer’s premises, will have to reverse the credit.
“The real issue is if suppose there was no notice which was pending and the government now issues the notice after the Supreme Court judgment has come, then, in my view, they can only go back up to 24 or 30 months depending on how the credit was claimed. So, if you’re issuing a notice in April 2018, then they can go up to April 2016. From April 2008 to early April 2016, the government cannot claim this back from the industry because there is a limitation that applies.”
In India, the outward freight is a quite large amount considering the distance involved between the factory and place of consumption, said Badri Narayanan. “The implications can be quite extensive for manufacturers,” he added.
Experts say that the Supreme Court ruling will compound the problem in cases where companies carried forward the credit in the GST regime and used it against their output liability. Though UltraTech has filed a review petition before the Supreme Court seeking certain clarifications, the tax department seems determined to go after the manufacturing industry.