GST: Madras High Court Allows Benefit Of TDS Credit From VAT Regime
Concrete mixer trucks at a flyover construction site in Patna, Bihar, India. (Photographer Anindito Mukherjee/Bloomberg)

GST: Madras High Court Allows Benefit Of TDS Credit From VAT Regime

In a judgment that will benefit small and medium businesses, the Madras High Court has allowed transition of input credit arising from tax deducted at source under the value added tax into the GST regime.

Taxpayers can now set off such unutilised credit against their output tax liability.

More than 23 petitioners, including those engaged in the construction sector, had challenged the Tamil Nadu goods and services tax department’s move to deny transition of VAT TDS credit into the new indirect tax regime.

A bench comprising Justice Anita Sumanth observed that GST allows a taxpayer to transition credit obtained under the VAT regime. As any amount of tax collected or deducted at source is mentioned in the returns filed under the VAT law, all such amounts will also be included for transition purpose into the new regime, the court has observed.

The decision will be useful especially for taxpayers engaged in providing works contract services, Nand Kishore, partner at DSK Legal, said. The benefit, however, can be availed by only those taxpayers who filed the electronic form TRAN-1 within the prescribed time, he said.

The Controversy

With the introduction of GST, the government allowed taxpayers to carry forward unutilised tax credits under the erstwhile indirect tax regime. Businesses were allowed to carry forward accumulated input tax credits from the pre-GST era by filing form TRAN-1—an electronic form capturing details of the dealer and invoice, amount of unutilised tax credit, etc.

While the government intended an easy transition, disputes arose relating to credits arising from the amount deducted as TDS under the VAT regime, especially in Tamil Nadu.

For works contract services, the state’s VAT law required a person availing works contract service to deduct tax before making payments. Dealers would get a TDS certificate for this and could adjust their final tax liability against it at the end of the financial year. In case, TDS exceeded the total tax liability, a dealer was entitled to refund.

Using this base, the tax department contended that TDS is an “approximate amount”. It assumes the character of a “tax” only after the final adjustment. However, the central and state GST laws only allow transition of “tax” and not an approximate amount. As such, there was no entitlement for transition of such credit, the department argued.

The taxpayers contested this saying:

  • TDS is nothing but a tax and hence any credit arising from it can be transitioned.

  • Deduction of tax is only a method by the tax department to plug revenue leakage.

  • A person availing services also deducts tax at source due to the requirement under the VAT law, failing which they are deemed to be an “assessee in default.”

Reading into the various statutory requirements, the court noted that it cannot go by the mere description used in the VAT law. A person availing works contract services deducts tax under the authority of law. As such, TDS assumes the character of tax and hence a dealer will be entitled to transition the credit.

Claiming Benefit Will Not Be An Easy Task, Experts Say

According to experts, the judgment will bring relief to small and medium enterprises having large amount of unutilised tax credit from the pre-GST era.

The judgment will help taxpayers in two cases.

First, where the GST department had issued show cause notice specifically denying the transition. Second, where the department initially approved the form TRAN-1 filed but later denied the benefit due to any reason and demanded back an equivalent amount, Kishore explained.

What comes out of the judgment is that transition provision cannot be used to deprive taxpayer of a benefit that has already accrued in its favour earlier.
Nand Kishore, Partner, DSK Legal

Jigar Doshi, partner at TMSL LLP said the judgment will be beneficial not just for taxpayers in Tamil Nadu.

We can easily anticipate a slew of writ petitions being filed in states where similar TDS provisions existed during VAT era such as Maharashtra, Andhra Pradesh and Telangana.
Jigar Doshi, Partner, TMSL LLP

But taxpayers intending to claim the benefit of this judgment may face technical limitations.

Despite the relief being granted, the machinery provisions to enable the taxpayers to avail the credit in their electronic credit ledger under GST would be important, Doshi said.

As the TRAN-1 window closed long back, procedurally, how a taxpayer will actually avail such credits is a challenge. Ideally, the HC (high court) should have directed the department to open the window for re-filing of TRAN-1 for a limited period.
Jigar Doshi, Partner, TMSL

The revenue department may likely move the Supreme Court against this decision, he said.

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