GST: Bombay High Court Restricts Taxpayers’ Ability To Use Credits
The Bombay High Court building, with the BSE building behind it, in Mumbai. (Photographer: Adeel Halim/Bloomberg)

GST: Bombay High Court Restricts Taxpayers’ Ability To Use Credits

The tax department has the power to impose a time limit for use of accumulated credits from the erstwhile indirect tax regime, the Bombay High Court has held.

Since high courts of Haryana, Calcutta, Delhi, Karnataka, Madras and Himachal Pradesh have dismissed such restrictions on taxpayers, the matter will now need to be settled by the Supreme Court, experts told BloombergQuint.

The Bombay High Court judgment comes as a setback for companies that, for some reason or the other, were not able to upload details through form Tran-1 and transition the credit balance to the GST regime, Rajat Bose, partner at Shardul Amarchand Mangaldas, said.

Transitional Credit: Story So Far

When the goods and services tax was introduced in June 2017, it had allowed taxpayers to carry forward accumulated input tax credits.

Input tax credit is the tax paid on inputs. Businesses get a credit for this to deduct from the tax on the output so as to avoid double taxation and pay tax only on the value added.

After several extensions, businesses were asked to file form TRAN-1 by Dec. 27, 2017. Those facing technical difficulties have been given time till March 31, 2020. This was done by department by using its powers under Rule 117 of the Central GST Act.

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

But the department’s stance has been that this credit could’ve been disallowed under the older regime but it was allowed to carry forward as a concession. Input tax credit is in the nature of an exemption. It’s not a matter of right — this fact has been affirmed by courts through various judgments. And finally, the department can accommodate cases where the failure to file the form is attributable to technical difficulty.

Transition Credit: Bombay High Court View

The Bombay High Court agreed with the tax department’s stance and upheld the legal validity of the time limit imposed for filing of form TRAN-1. The reference to input tax in the CGST Act is in nature of a concession. It is not by way of a right. The credit, which might have lapsed due to change in tax regime, was in fact, allowed to be carried forward by the tax department, the high court has said.

Input tax credit can be regulated through time limits, which are required for efficient administration of the tax system in public interest. Transitional provisions would become unworkable if no time limit was prescribed. – Bombay High Court

A registered business can file TRAN-1 under extended timelines—March 31, 2020—only if the delay is on account of any ‘technical difficulty’. The delay, however, must be attributable to the GST portal and issues like ‘lack of internet connectivity’ or power failure are not technical difficulties, the court has said in its order.

The high court has held so in the case Nelco Ltd., which had challenged the constitutional validity of time limits for filing TRAN-1. Nelco had argued that it could not file the form due to “technical difficulties” and would lose out on availing the accrued CENVAT credit if it was not allowed to file.

But the high court dismissed the company’s arguments on grounds that its failure to file form TRAN-1 cannot be traced to a ‘technical difficulty’.

The judgment will impact existing cases, especially if businesses are unable to prove that technical glitches faced were on behalf of the GST portal, Anish Tripathi, an independent GST consultant, told Bloomberg Quint. “In effect, this ruling has shut the door for taxpayers who have been unable to transition the outstanding credit to the new GST regime,” Tripathi said.

The Retrospective Amendment Twist

Bose pointed to a contrary ruling by other high courts who have held the right to transition CENVAT credit into the GST regime as an ‘indefeasible right’, which cannot be curtailed by providing a time limit. But the government has brought in a specific retrospective amendment under Budget 2020 to negate these precedent, he said.

Section 140 of CGST Act has been amended effective July 2017 to say that CENVAT credit has to be furnished by taxpayers “within such time and in such manner as may be prescribed”. This has been done to give statutory backing to the department’s stance, experts said.

The GST department is likely to rely on the Bombay High Court ruling to issue notices for recovery of credits, especially in light of the amendment to section 140, Bose said.

Companies adversely affected due to the retrospective amendment can approach the court and challenge the amendment as there are precedents where it has been held that vested rights cannot be taken away by retrospective amendments.
Rajat Bose, Partner, Shardul Amarchand Mangaldas

Taxpayers are likely to lose out on rightly accrued input tax credit in any case, either due to denial or an expensive and prolonged litigation, Tripathi said.

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