ITC: A Missing Case of Interpretation and Precedents
[Ishika is a student at NALSAR University of Law.]
In a recent ruling, the High Court of Andhra Pradesh has reiterated the idea that the input tax credit (ITC) available under the Central Goods and Services Tax Act 2017 (CGST Act) and the corresponding state laws are a mere concession or benefit granted by the law to the taxpayers and not a statutory right. The statement was made in light of the challenge to Section 16(4) of the said statutes which restricts the taxpayer from availing ITC on failing to submit the requisite documents within the prescribed time limit. While the court decided the issue in favour of the government that ITC cannot be claimed beyond a certain time period, it justified the decision basis the nature of ITC as a concession for which all the conditions mentioned in the statute must be complied with.
This piece aims to argue to the contrary by characterizing ITC as a statutory right granted to taxpayers by the CGST Act upon the application of rules of interpretation and precedents.
Concession v/s Right
The word ‘concession’ evokes the impression of being a favour bestowed by the government on the taxpayer. As has been discussed in the jurisprudence involving direct as well as indirect taxation, ‘concession’ is a privilege, a grant or a gesture made “by an authority in recognition of a demand or prevailing standard”, or “a reduction in price for a certain category of person”. These concessions are granted upon fulfilment of certain criteria laid down by the authority. They are incentives given to entities and individuals to promote economic or social objectives.
On the other hand, a statutory right is one which emanates from a statute passed by the legislature. Since the legislature is the creator and granter of the right, it can also impose conditions or criteria to avail the right. This would make the right a conditional or qualified one, but a right nonetheless. Furthermore, statutory rights are not discretionary in the hands of the authority enforcing them once the requisite criteria are complied with, while concessions may be revoked or modified.
A taxpayer is entitled to ITC under Section 16 of the CGST Act. The provision uses the phrase “shall be entitled to the credit of input tax credit”. From the plain reading of the text and giving effect to the ordinary and natural meaning of the word ‘entitled’, it seems that Section 16 gives the taxpayer the legal claim over ITC subject to the conditions prescribed therein. Additionally, the use of ‘shall’ precludes the element of beneficial discretion of the authorities in granting ITC to the taxpayer. Rather, ‘shall’ assures the taxpayer that they can claim ITC from the government. This would make it a conditional statutory right emanating from a law passed by the Parliament. It may be argued that in multiple cases, courts have interpreted ‘shall’ as ‘may’, however, that is not the case for tax statutes.
Here, it is imperative to discuss the rule of strict interpretation in tax statutes which states that laws which impose a monetary burden have to be strictly construed. As discussed above, the plain and narrow meaning of the phrase “shall be entitled to the credit of input tax credit” when strictly interpreted leads to the inference that ITC is a taxpayer’s right. By terming ITC as a concession, the courts are interpreting ‘shall’ as ‘may’ in the provision which is contrary to the rule of strict interpretation.
The use of mischief rule of statutory interpretation may also be employed here whereunder the legislative intent behind the statute is determined and used to contextualize the provision. The Statement of Objects and Reasons accompanying the 122nd Constitution Amendment Bill stated that the GST regime intends to remove the cascading effect of indirect taxes and streamline the indirect taxation framework. Furthermore, the Ministry of Finance has claimed mitigation of cascading effect of taxes and reduction in prices of goods and services as one of the benefits of this law. This is achieved by the implementation of ITC. The GST is a value-added tax wherein the excess tax paid by a taxpayer on the inputs he uses is credited to his account, in effect levying tax only on the value addition made by this particular taxpayer. This also avoids double taxation on the same goods or services and reduces their final prices.
It is logically apparent that ITC is an integral component of the scheme of GST without which the intention behind the reformed regime would be incomplete and unfulfilled. In order to effectuate this legislative intent, ITC under Section 16 must be characterized as a statutory right which the taxpayer is entitled. The rationale of GST is dependent on ITC being an uninterrupted flow of credit. The court terming it as a concession brings its status down to that of a favour or benefit the government is granting out of generosity which may be taken away or its scheme modified. Instead, if it is characterized as a conditional statutory right, the taxpayer can claim the ITC upon compliance with all the requirements as a matter of right.
ITC as a Vested Right
There are judicial precedents both in the pre-GST as well as post-GST regime that characterize the ITC as a vested right upon compliance with the statutory requirements. The Supreme Court of India has stated that vested rights are those which create a fixed right to the enjoyment of a property and are independent of contingencies.
The jurisprudence surrounding transitional credit immediately after the GST regime came into place sheds some light on this subject. The impugned ITC in that litigation was related to the central value added tax credit unavailed under the pre-GST laws as of the date of effect of the CGST Act. Courts have held that the taxpayer had a vested right in that ITC that cannot be taken away on procedural grounds. Further, the Supreme Court has termed credit under the then modified value added tax (MODVAT) scheme, which is similar to the ITC under the CGST Act, as an indefeasible right which cannot be reversed or taken away unless it had been irregularly claimed.
The ITC model under GST is similar to the abovementioned credit schemes. The characterization of that credit as a vested right should bear weight in the present-day jurisprudence. While there are additions to the ITC model under GST in terms of the time limit to claim the ITC and the requirement of cross-verification of invoices with the supply chain, these procedural requirements cannot alter the nature of the claim from a vested right to a concession. In an order as recent as 2018 involving the classification of services provided by Café Coffee Day, the Authority on Advance Rulings in Karnataka implicitly acknowledged that while the ITC is not an absolute right, it is a conditional right nonetheless.
In another judgement involving MODVAT credit, the Supreme Court had reasoned that as soon as a taxpayer pays the tax on raw materials or input services, the right to avail credit thereafter accrues to him. If this line of reasoning is adopted, then whether or not a taxpayer claims ITC, the right to claim thus accrues to him as soon as he pays the GST on inputs. The statutory requirements laid down in Section 16 are merely the criteria which need to be complied with in order to activate this right to claim that has already accrued. This argument further branches out into the property right claim wherein the accrued credit is in the nature of property which the taxpayer has a constitutional right to under Article 300-A of the Constitution of India.
If these judgements are reconciled with those calling ITC a concession, it would mean that until the time conditions are complied with for claiming ITC under Section 16, it remains a concession which turns into a vested right thereafter. Clearly, this is a logical fallacy inconsistent with the basic tenets of statutory interpretation. Moreover, all the judgements declaring ITC to be a concession involve a challenge to one of the statutory requirements for availing ITC. In a bid to counter such challenges, the courts make the blanket statement of characterizing ITC as a concession which cannot be granted without complying with the mandatory criteria. Instead, courts should term ITC as a statutory right which accrues upon paying GST on the inputs and activates into a vested right upon fulfilment of criteria under Section 16.
The overarching declaration of ITC as a concession instead of a statutory right is contrary to the legislative intent behind the GST regime in its entirety. Characterizing ITC as a right does not have the repercussion of it being an unbridled right out of the control of the legislature that the courts and the government caution against. The requisite criteria for availing ITC will remain intact while its nature is construed as a conditional statutory right vested in the taxpayer upon fulfilment of the same. The biggest implication of terming ITC as a concession lies in the extent of entitlement a taxpayer has and the government acknowledges. If ITC continues to be termed as a concession, it might turn into ammunition for the government in the form of an argument for eliminating ITC from the scheme of GST or significantly altering its framework. While the nomenclature is insignificant in making a tax-related claim, the terming of ITC as a statutory right does justice to the intent behind provisioning for the same.