GST: Madras High Court Narrows Scope Of Transitional Credit
A customer withdraws a stack of rupee notes at a bank branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

GST: Madras High Court Narrows Scope Of Transitional Credit

Unutilised cess credit from the erstwhile indirect tax regime cannot be used to set off goods and services tax liability, the Madras High Court has held. Taxpayers were hoping for some relief from the high court but now this might lead to notices to those who have already utilised the cess credit against GST dues, experts said.

The case arises from an appeal by the GST department against a single-judge bench ruling which allowed Sutherland Global Services, a consulting firm, to transition the unutilised credit arising from the Krishi Kalyan cess, education cess as well as the secondary and higher education cess into the GST regime.

But a division bench of Justice Vineet Kothari and Krishan Ramasamy set aside the earlier ruling and observed that transition is permitted only for those taxes and duties which were subsumed into the GST. As cesses haven’t been subsumed, no transition will be allowed, the court said in its order.

Dead Claims Of Cess Cannot Be Revived: High Court

Counsel for the tax department had objected to the transition of cess credit on following grounds:

  • Education cess was withdrawn by the government in 2015, which meant that its credit couldn’t be utilised even under the earlier indirect taxes. As such, Sutherland’s move to transition it after a gap of two years into the GST regime is time-barred and thus a “dead claim”.
  • Cess cannot be compared to a levy or duty. As the CGST Act only allows transition of certain duties, cess credit, which is excluded, is ineligible for the transition.
  • Further, a cess arising from duties like Cenvat or Excise cannot be cross-utilised against the GST tax. Thus, there is an implied lapse of the credit once it remains unutilised.

Relying on past Supreme Court rulings, Sutherland mainly argued that Cenvat credit is a vested and indefeasible right which cannot be taken away from a taxpayer.

But the the Madras High Court didn’t accept this argument and observed:

  • Even under the old tax system, cesses were in the nature of standalone levies and cross-utilisation was not permitted.
  • Thus, the cross utilisation of education cess credit will be disallowed under the GST regime as it became a “dead claim” once the cess was withdrawn in 2015.
  • Mere entry in the electronic ledger will not entitle Sutherland to utilise the cess credit.

Impact On Taxpayers

Experts said while the court has a given a substantial ruling, certain unanswered questions remain.

Ajinkya Gunjan Mishra, partner at L&L Partners, said the high court has not gone into the legality of the provision limiting the transitional credit as the same was not under challenge before the court.

The purpose of the transitional provision was to ensure that there is no double taxation of goods or services procured in the earlier indirect tax regime and statutory rights available to taxpayers in the earlier regimes are protected, he said.

Denial of transitional credit on cess by the legislature goes against the very purpose of eliminating cascading effects of taxes and ensuring the continuation of vested rights after the transition into the GST regime.
Ajinkya Gunjan Mishra, Partner, L&L Partners

Thus, the vires of the provision must be challenged to the extent it seeks to deny the transition of cess into the GST regime, Mishra said.

Jigar Doshi, a partner at TMSL LLP, agreed but also pointed out that the high court’s observation that an accounting entry cannot alone make credit a vested right is a pragmatic view.

A question that arises from the ruling is what will happen to those assesses who have not only recorded such cesses in their electronic credit ledger but have also utilised it? It may be interesting to see if they can expect notices from the GST department along with interest exposure.
Jigar Doshi, Partner, TMSL LLP

While the proportion of such unutilised credit can vary across businesses depending on their operations, uncertainty around its utilisation affects business functions and tax planning, Nirmal Singh, partner at Nangia & Co. LLP, said. With no relief in sight and the increasing maze of questions surrounding transitional credit, these substantial issues will only attain finality through a Supreme Court ruling, he said.

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