Government Notifies Amendment To Limit Pre-GST Tax Credits

The government has notified a retrospective amendment to the Central Goods and Services Tax Act to limit transitional credit to taxpayers. In doing so, the government has also negated the impact of court rulings that had granted relief to taxpayers on this front.

Companies affected by this amendment can challenge its validity, Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., told BloombergQuint. While the government has the power to make retrospective amendments, it can be challenged if a vested right ts being taken away, or is arbitrary and not reasonable, he said. “Such amendments are subject to judicial scrutiny if they infringe on rights under the Constitution.”

When GST was introduced, businesses were allowed to carry forward accumulated tax credits under the erstwhile indirect tax laws like value added tax and service tax. After several extensions, businesses were asked to file form TRAN-1 by Dec. 27, 2017. Those facing technical difficulties were given time till March 31, 2020. This was done by the department by using its powers under Rule 117 of the Central GST Act.

Taxpayers across the country challenged this rule. Broadly, they argued that Rule 117, which allows the department to prescribe a time limit to file the form, is ultra vires—or beyond its legal authority. And that input tax credit is a right, and not a concession given to taxpayers.

Recently, the Delhi High Court had allowed utilisation of input tax credit to those assessees who had filed or attempted to file TRAN-1—the electronic return for claiming the credits. While doing so, the court had observed that the timelines prescribed under the CGST Rules are directory in nature. Accumulated tax credit is a “property” and vested right and cannot be taken away through time limits under the CGST Rules, it had held. Similar relief was given by high courts of Haryana, Calcutta, Karnataka and Madras.

The Bombay High Court, however, had upheld the time limits and restricted taxpayers’ ability to claim transitional credit.

The Retrospective Move

The litigation around TRAN-1 had prompted the government to introduce a provision in the Finance Act, 2020, to make way for a retrospective amendment. It allowed the government to provide a legal basis, at an appropriate date, to the timelines prescribed under the CGST Rules for the utilisation of transitional credit. The amendment has now been notified to say:

• Businesses can utilise accumulated cenvat credit as on July 1, 2017, only if they had filed the prescribed forms within the time limits specified in the CGST Rules.
• This also applies to businesses manufacturing exempted goods, providing exempted services or engaging in provision of works contract services.
• This timeline is also applicable to businesses who paid tax at a fixed rate under the erstwhile service tax regime.

Abhishek Rastogi, partner at Khaitan & Co., pointed out that the amendment has been notified after the decision of the Delhi High Court and it needs to be challenged at an appropriate time.

“The amendment is bad in law,” he said. “It will have to test the constitutional validity as any retrospective amendment after the court order needs to pass various tests.”

There is no stay on the Delhi High Court order and hence taxpayers who have taken the benefit of the court’s order before May 16 i.e. the date of government’s notification are in the safe zone, Rastogi added.

The government, however, may rely on the notification making this retrospective amendment to challenge the Delhi High Court’s decision before the Supreme Court, Jigar Doshi, partner at TMSL LLP, said.

A ruling by the apex court would address the prevailing inconsistencies—whether the government can deny transitional credit on the basis of procedural lapses or law of limitation as it has been held that input tax credit is a substantial right, Doshi said.