The Enigma Underlying Transitional Credit
[Sakshi is a student at National University of Study and Research in Law, Ranchi.]
In the sphere of indirect taxation, certain basic taxes are levied on every manufacturer and service provider in respect of his business of manufacturing or providing services. As the manufacture of goods is a multi-step process, there might be incidents where double taxation seems to be inevitable, i.e., where a person is made to pay taxes more than once. However, to ensure a smooth flow of payment of taxes and at the same time avoid over-burdening the taxpayers, the Indian tax regime follows a system that allows such taxpayer to claim the credit for the taxes/duties already paid by him.
In the pre-Goods and Services Tax (GST) era, the Central Value Added Tax Credit Rules 2004 (CENVAT) were operational for regulating the credit system. The CENVAT credit system allowed the manufacturers to avail the credit / set-off in relation to the inputs that they use to manufacture their products. Therefore, CENVAT was used to reduce the cascading effect of taxation and avoid double taxation of the taxpayer(s). But with the introduction of the GST regime, the CENVAT system of tax credit was abolished. Nevertheless, the credit mechanism was kept intact with the introduction of the concept of input tax credit under the Central Goods and Services Tax Act 2017 (CGST Act).
Transition into the GST regime
The introduction of GST marks the consolidation of multiple taxes into one, shifting from one tax mechanism to another which is certainly not a one-day process. It requires a gradual transition and a definite legal mechanism that facilitates such transition. The CGST Act introduced the much-needed transitional provision by way of Section 140. The provision aims at facilitating the transition from the erstwhile CENVAT credit system and also to provide a clear picture concerning the events that may have been incomplete as on the day of the CGST Act coming into operation.
Notably, Section 140 provides a mechanism of carrying forward of the credit due on the date of the CGST Act coming into force. It provides, to a registered taxable person (other than the one adopting for the scheme of composition levy under Section 10 of the CSGT Act), the benefit of carrying forward of the amount of CENVAT credit shown in his last return furnished under the pre-GST laws (then-existing law), i.e., the closing balance of the credit in the last returns. Under this scheme, such taxpayer is also entitled to claim the credit of the unavailed CENVAT credit in respect of capital goods, not carried forward in the last return furnished under the then-existing law. In this regard, 'unavailed CENVAT credit' refers to the amount of credit remaining after subtracting the amount of CENVAT credit already availed by such taxpayer.
Further, a registered person, other than a manufacturer or a service provider, having goods in the stock on which duty has been paid under the existing regime can also avail the credit for such goods under Section 140 of the CGST Act. It also allows a dealer to claim credit of duties payable under the CGST Act in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock where such inputs are used for making taxable supplies in the GST regime. Furthermore, the CGST Act also allows a manufacturer / dealer to claim credit for goods received by him after the day on which CGST Act became operative, if the tax on such goods has already been paid under the previously existing law.
Transitional credit: A concession or a vested right?
The CGST Act provides a framework regarding the transition from the erstwhile taxation regime to the GST regime. However, the Act does not provide for the detailed procedure for claiming the transitional credit after the introduction of GST. The CGST Rules 2017 (CGST Rules) have thus been introduced to supplement the transitional provisions contained in the CGST Act. Rule 117 therein lays down the procedure through which the right conferred by Section 140 of the CGST Act can be enforced. Further, Rule 117(1A) therein also conferred upon the Commissioner, the power to extend the period for claiming the transitional credit to a further date (not beyond 31 March 2019) on the satisfaction of the grounds mentioned thereunder.
However, despite these provisions in place, there has been a constant tussle between the taxpayers and the government in respect of the deadline for claiming transitional credit. The taxpayers have, on multiple occasions, demanded the extension of the said deadline. This has led to the unsettling of this disagreement concerning the deadline for claiming the transitional credit.
It is noteworthy that the root of this conflict lies within the disagreement regarding the nature of these transitional provisions, that is, whether it is in the nature of a vested right or a concession? Here, it is pertinent to understand that a vested right implies a substantive right conferred in the favor of a person categorically and absolutely and such that it cannot be taken away by a subsequent amendment. Whereas, a concession is a granted right that is amenable to subsequent alterations. Now, another question that comes up with it is, if they are in the form of a vested right, are they valid insofar Rule 117 of the CGST Rules places a deadline on the taxpayers for availing the credit. The courts seem to have adopted diverging opinions in this regard.
The Bombay High Court, in NELCO Limited v. Union of India, held that the reference to input tax credit in the CGST Act is not by way of a right, but as a concession. Such concession has been provided to the taxpayers to carry forward the credit for a limited period which would have otherwise lapsed on the upheaval of the taxation regime. Based on this reasoning, the court upheld the validity of the provisions specifying a time limit for availing the credit and held the time limit prescribed by way of Rule 117 as intra vires the CGST Act as it is well within the rule-making power of the government.
Interestingly, in Adfert Technologies Private Limited v. Union of India & Others, the Punjab and Haryana High Court adopted a different view regarding the question insofar it held that “unutilized credit arising on account of duty / tax paid under the erstwhile Acts is a vested right of the taxpayers which cannot be taken away only on procedural or technical grounds.” In this regard, the Supreme Court, while dismissing the special leave petition against the judgment, noted that the utilization of credit by the taxpayer does fall within the definition of a vested right and cannot be taken away by the government on procedural grounds.
In view of the judicial pronouncements, it can be inferred that despite the diverging opinions adopted by different courts, the position of law, as settled by the Supreme Court in Adfert Technologies is that the transitional provisions are in the nature of a vested right and not in the form of any concession.
Right to claim credit: as it stands today
The recent judgment of the Delhi High Court in Brand Equity Treaties Limited v. Union of India (Brand Equity) marks a significant development as regards the issue. The court read down Rule 117 of the CGST Rules 2017 and held it to be merely of a directory nature. This is owing to the fact that it prescribes the time-limit for availing the right of transitional credit which, if allowed, will have the effect of the forfeiture of the vested rights of the taxpayers if the credit is not availed within the period prescribed thereunder. Nevertheless, the court considered the fact that despite it being a vested right, the provisions are still transitory in nature and, therefore, the right to avail CENVAT credit must be exercised within a reasonable time. To fix reasonable time, the court resorted to the provisions of Limitation Act 1963 and fixed a period of 3 years from the appointed date as the maximum period for availing of such credit.
However, in response, the Central Government notified a retrospective amendment in Section 140 of the CGST Act. This has again given birth to a pool of questions concerning the validity of the retrospective nature of such an amendment. The amendment, as notified by the Central Board of Indirect Taxes and Customs, seeks to give effect to Section 128 of the Finance Act 2020 that grants power to the Central Government to bring retrospective amendment to Section 140. The said amendment thus allows the government to prescribe the time limit to carry forward the transitional credit. Pursuant to this, the amendment added the words 'within such time as may be prescribed' to Section 140 of the Act and made it retrospectively effective from 1 July 2017.
An important question in respect of the validity of the amendment is that while Section 140 of the CGST Act vests a right upon the taxpayers, can such a vested right be taken away by making a retrospective amendment to the provision? While pondering over the question, it is pertinent to look into the observation of the Bombay High Court in the case of Vishwas Bajirao Patil v. State of Maharashtra, wherein, while reiterating the Hon’ble Supreme Court’s stand on the issue, it observed that the government indisputably has the power to make laws and introduce amendments giving retrospective effect. However, no such retrospective amendments can take away the vested rights which have accrued.
In view of the judicial pronouncements, it is pertinent to determine the effect of the amendment taking into account its standing against the settled position regarding the nature of these transitional provisions. Further, the Delhi High Court, while reiterating its previous stand in the matter, also made it clear that the retrospective amendment cannot take away the right of the taxpayers to claim transitional credit that has been vested upon them by way of a statutory provision. Taking into account all the aspects discussed herein above, one might lead to an interpretation that, notwithstanding the validity of the retrospective amendment, the taxpayers’ right to claim credit with regard to the extended deadline remains unvaried.
 Brand Equity Treaties Ltd v. Union of India, W.P. (C) 11040/2018.