Relaxation for the availment of ITC for the FYs 2017-2021

Introduction

Due to various factors, including financial constraints, lack of knowledge on the part of taxpayers or their accountants/tax consultants, and the cancellation of GST registrations for multiple reasons, etc., registered persons could not file their statutory returns i.e. FORM GSTR-3B under Section 39 the Central Goods and Services Tax Act, 2017 ("the CGST Act"), within the prescribed time. Consequently, when such returns were filed belatedly with payment of late fees and interest on the delayed tax liability, but after the statutory period for claiming Input Tax Credit ("ITC") under sub-section (4) of Section 16 of the CGST Act, the GST has issued demand notices, denying availment of GST Credit beyond specified time limit and demanded recovery of ITC, along with interest and penalties. This has caused considerable distress among taxpayers, particularly small and medium enterprises with limited access to expert legal counsel and constrained financial resources.

The stated issue got escalated through a Special Leave Petition (SLP) to the Supreme Court, following decisions by various High Courts. The SLP concerning the constitutional validity of sub-section (4) of Section 16 is currently pending before the Hon'ble Supreme Court. While certain High Courts have opined that ITC is not a vested right, this stance appears inconsistent with the general principles articulated, which assert that any procedure laid down by law must not only be legally prescribed but also fair, rational, logical, and in accordance with the principles of justice and equity.

Legal Jurisprudence in GST

Constitutional validity of S. 16(4) of the CGST Act is held valid in the following judgments: -

The Hon'ble Chhattisgarh HC in Jain brothers v. Union of India [Writ Petition (T) No. 191 of 2022 dated 11.12.2023] held that provision contained in sec 16(4) of the CGST Act is violative of neither article 14 of the Constitution nor articles 19(1)(g) and 300A of Constitution.

In the case of ThirumalakondaPlywoods v. Assistant Commissioner [W.P. No. 24235 of 2022 dated 18.07.2023], the Hon'ble Andhra Pradesh HC held that the return in Form GSTR 3B for the period March 2020 was filed on 27.11.2020, and no relief was provided. It was held that, mere acceptance of GSTR-3B returns with late fee will not exonerate the delay in claiming ITC beyond the period specified under Section 16(4) of the CGST Act and stated that Sections 16(2)(c) and 16(4) are constitutionally valid.

The Hon'ble Calcutta High Court in the case of BBA Infrastructure Ltd. v. Senior Joint Commissioner of State Tax [MAT No. 1099 of 2023 dated 13.12.2023] dismissed the writ petition and held that, Section 16(1) of the CGST Act is an enabling provision allowing Input Tax Credit and sec 16(4) of the CGST Act, imposing restriction on the filing belated returns for availing credit is valid in nature. The Court relied on the judgment of TirumalakondaPlywoods v. Assistant Commissioner-State Tax [supra].

The Hon'ble Patna High Court in Gobinda Construction v. Union Of India, State Of Bihar, Principal Chief Commissioner of CGST and Central Excise, Patna, Principal Commissioner Patna 1, CGST and Central Excise, Patna Addl. Commissioner of State Tax (Appeal), Patna, Asst. Commissioner of State Tax, Patna [2023 (77) G. S. T. L. 483 (Pat.)] held that Section 16(4) of the CGST Act is constitutionally valid and is not violative of Article 19(1)(g) and Article 300 (A) of the Constitution of India and is not inconsistent with or in derogation of any of the fundamental right guaranteed under the Constitution of India.

However, in some cases, the Hon'ble High Court has provided relief to the taxpayers such as,

In the case of Tvl. Kavin HP Gas Gramin Vitrak v. The Commissioner of Commercial Taxes & Ors. [W.M.P. (MD) Nos. 6764 and 6765 of 2023 dated 24.11.2023], the Hon'ble Madras High Court granted relief to the Assessee in case the ITC was claimed belatedly after the prescribed period under Section 16(4) of the CGST Act, asForm GSTR-3B was filed beyond the prescribed period due to financial difficulty and Form GSTR-2 was not notified until 01-10-2022, which was stated to be Credit Statement under Section 38 read with S. 42 and 43 of the CGST Act.

The Hon'ble Kerala High Court in M/s M. Trade Links v. Union of India [W.P. (C) NO. 31559 of 2019 dated 04.06.2024] has upheld the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act. After acknowledging the difficulties during the initial implementation years of GST, this Court has relieved the Petitioners by retrospectively extending the time limit to avail ITC to November 30 from the F.Y 2017-18 onwards. The case was further relied on in the case of M/s Super Décor v. Deputy Commissioner of State Tax Kannur and Ors. [WP (C) 23062 of 2024 dated 27.06.2024].

Important recommendations of the 53rd GST Council Meeting

The 53rd GST Council Meeting held on June 22, 2024 recommended relaxation in conditions of Section 16(4) of the CGST Act, as follows:

1. The time limit to avail Input Tax Credit ("ITC") in respect of any invoice or debit note under Section 16(4) of the CGST Act, through any return in FORM GSTR 3B filed upto November 30, 2021 for the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, may be deemed to be November 30, 2021. For the same, requisite amendment in Section 16(4) of the CGST Act, retrospectively, w.e.f. July 01, 2017, was recommended; and

2. To conditionally relax the provisions of Section 16(4) of the CGST Act, retrospectively, w.e.f. July 01, 2017, in cases where returns for the period from the date of cancellation of registration/ effective date of cancellation of registration till the date of revocation of cancellation of the registration, are filed by the registered person within thirty days of the order of revocation.

Effective Changes proposed in the Union Budget, 2024

The Finance (No.2) Bill, 2024 proposes the insertion of new sub-sections (5) and (6) to Section 16 of the CGST Act, immediately following sub-section (4). These amendments intend to regulate the availment of ITC beyond the limitation period stipulated under sub-section (4) of Section 16. Sub-Section (5) addresses the delayed filing of returns by regular taxpayers, who have claimed ITC in FORM GSTR-3B, while sub-section (6) pertains to taxpayers whose registrations were cancelled under Section 29, but subsequently revoked under Section 30.

Recommendation of 54th GST Council Meeting

In the 54th GST Council Meeting held on September 9, 2024, it was recommended that Sections 118 and 150 of the Finance (No. 2) Act, 2024, which provides for the insertion of sub-section (5) and sub-section (6) in Section 16 of the CGST Act, retrospectively with effect from July 01, 2017, may be notified at the earliest.

Procedure to Provide Stated Relief

The Council also recommended that a special procedure for rectification of orders may be notified under Section 148 of the CGST Act, to be followed by the class of taxable persons, against whom any order under Section 73 or Section 74 or Section 107 or Section 108 of the CGST Act has been issued confirming demand for wrong availment of input tax credit on account of contravention of provisions of sub-section (4) of Section 16 of the CGST Act, but where such input tax credit is now available as per the provisions of sub-section (5) or sub-section (6) of Section 16 of the CGST Act, and where appeal against the said order has not been filed.

The Council also recommended the issuance of a circular to clarify the procedure and various issues related to the implementation of the said provisions of sub-section (5) and sub-section (6) of section 16 of the CGST Act.

Notified Section 16(5) and Section 16(6) of the CGST Act

The effective changes as made under sub-section (5) and (6) of the CGST Act in GST Law has officially been notified from September 27, 2024retrospectively from July 01, 2017.

Now, through Notification No. 17/2024-Central Tax dated September 27, 2024, the Ministry of Finance announces the commencement dates for various provisions of the Finance (No. 2) Act, 2024. The provisions of sections 118, and 150 will take effect from the date of the notification's publication in the Official Gazette.

• Section 118 of the Finance Act (No.2), 2024 belongs to Section 16 - Eligibility and Conditions for taking ITC by inserting sub-section (5) & sub-section (6) retrospectively with effect from the 1st day of July 2017, after sub-section (4), in Section 16 of the CGST Act notified from September 27, 2024.-
• Section 150 of the Finance Act (No.2), 2024 - No refund of tax paid or input tax credit reversed. The said section is reproduced below:

"No refund shall be made of all the tax paid or the input tax credit reversed, which would not have been so paid, or not reversed, had section 118 been in force at all material times."

Relevant Sections

Eligibility and conditions for taking input tax credit

(5) Notwithstanding anything contained in sub-section (4), in respect of an invoice or debit note for supply of goods or services or both pertaining to the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, the registered person shall be entitled to take input tax credit in any return under section 39 which is filed up to the thirtieth day of November, 2021.

(6) Where registration of a registered person is cancelled under section 29 and subsequently the cancellation of registration is revoked by any order, either under section 30 or pursuant to any order made by the Appellate Authority or the Appellate Tribunal or court and where availment of input tax credit in respect of an invoice or debit note was not restricted under sub-section (4) on the date of order of cancellation of registration, the said person shall be entitled to take the input tax credit in respect of such invoice or debit note for supply of goods or services or both, in a return under section 39,--

(i) filed up to thirtieth day of November following the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier; or

(ii) for the period from the date of cancellation of registration or the effective date of cancellation of registration, as the case may be, till the date of order of revocation of cancellation of registration, where such return is filed within thirty days from the date of order of revocation of cancellation of registration, whichever is later.

Meaning thereby:

Section 16(5):

As per Section 16 (5), which starts with non-obstante clause to override the provision of Section 16 (4) of the CGST Act, so as to relax the time limit to avail ITC as per Section 16(4) in respect of an invoice or debit note for the supply of goods or services or both pertaining to the Financial Years 2017- 18, 2018-19, 2019-20 and 2020-21, the registered person shall be entitled to take ITC in any return i.e. FORM GSTR-3B under Section 39 which is filed upto the 30th day of November, 2021.

This amendment carves out an exception to sub-section (4) of Section 16, allowing registered persons to avail ITC for invoices or debit notes pertaining to Financial Years 2017-18, 2018-19, 2019-20, and 2020-21 through any return i.e. FORM GSTR-3B filed under Section 39 by November 30, 2021.

Section 16(6):

Further, as per sec 16(6) of the CGST Act, where registration of a registered person is cancelled under Section 29 and subsequently the cancellation of registration is revoked by any order, either under Section 30 (revocation of cancellation of registration) or pursuant to any order made by the Appellate Authority or the Appellate Tribunal or court and where availment of ITC in respect of an invoice or debit note was not restricted under sub-section (4) on the date of order of cancellation of registration, the said person shall be entitled to take the ITC in respect of such invoice or debit note for supply of goods or services or both, in a return under Section 39,-

(i) filed upto 30th day of November following the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier; or

(ii) for the period from the date of cancellation of registration or the effective date of cancellation of registration, as the case may be, till the date of order of revocation of cancellation of registration, where such return is filed within thirty days from the date of order of revocation of cancellation of registration, whichever is later.

Who will get benefit U/S 16(5) & (6) of the CGST Act

Taxable persons, against whom any order under section 73 or section 74 or section 107 or section 108 of the CGST Act has been issued, confirming demand for wrong availment of input tax credit on account of contravention of provisions of section 16(4) of the CGST Act, but where such input tax credit is now available as per the provisions of sub-section (5) or sub-section (6) of section 16 of the CGST Act, and where appeal against the said order has not been filed.

Detailed Procedure & Mechanism to follow under Section 16(5) & (6) of the CGST Act

1. Special procedures for rectification of orders will be notified under Section 148 of the CGST Act.

2. Circular will be issued to clarify the procedure and various issues related to the implementation of the said provisions of sub-section (5) and sub-section (6) of section 16 of the CGST Act.

Disputes persist

1. Section 16(5) allows the assessee to avail the ITC only if the ITC was availed in FORM GSTR-3B upto 30thNovember, 2021. However, it is pertinent to note that if the assessee has not availed credit in FORM GSTR-3B but may have availed credit in FORM GSTR-9/9C or only in Books of Accounts, this provision does not grant the benefit, which will continue to be a matter of litigation.

2. Section 16(6) is contingent upon the condition that such a return is filed within 30 days of the date of the revocation order, may be a subject matter financial constraint for taxpayers.

3. Further, vide Section 150 of the Finance Act, 2024, it is stated that "No refund shall be made of all the tax paid or the input tax credit reversed, which would not have been so paid, or not reversed, had section 118 been in force at all material times."

Conclusion

The relaxation provided by the amendments to Section 16 offers significant relief to taxpayers by extending the time limit for availing ITC. However, certain issues such as restrictions to FORM GSTR-3B and the non-refund provision pose challenges that may lead to continued litigation. Taxpayers should keep an eye on forthcoming clarifications from the government regarding the procedural aspects under Section 148 of the CGST Act.

Way Forward

The introduction of sub-sections (5) and (6) to Section 16 of the CGST Act, as part of the Finance (No. 2) Act, 2024, provides much-needed relief for taxpayers regarding the availment of ITC for the Financial Years 2017-2021. However, several issues and challenges still need to be addressed to ensure the smooth and effective implementation of these provisions:

1. Issuance of a Clarifying Circular: The CBIC should promptly issue a circular to clarify the procedure for availing the benefits under Section 16(5) and Section 16(6). This circular should also provide detailed guidelines on addressing issues related to the retrospective application of these provisions, particularly where taxpayers have already paid taxes or reversed ITC.

2. Clarification on Availment of ITC through Annual Returns and Books of Accounts: The government should consider issuing a clarification or amendment to allow taxpayers who have availed ITC in their Annual Returns (Forms GSTR-9 or GSTR-9C) or have recorded ITC in their books of accounts, but did not claim it in Form GSTR-3B filed up to November 30, 2021, to benefit from the relaxation provided under Section 16(5). This would ensure that taxpayers who have substantively complied with the requirements are not denied relief due to procedural lapses.

3. Extension of Time Limit under Section 16(6): Recognizing the practical difficulties faced by taxpayers in filing returns within 30 days of the revocation of cancellation of registration, the government could consider extending this time limit.

4. Reconsideration of Prohibition on Refunds: Under Section 150 of the Finance Act, 2024, there is a specific prohibition on refunds of taxes paid or ITC reversed due to the retrospective application of Section 118. This provision may need re-evaluation to avoid unfair treatment of taxpayers who paid taxes or reversed ITC without knowing that relief would eventually be provided.

5. Facilitation of Dispute Resolution: Tax authorities should proactively identify cases where demands were raised due to the time limit under Section 16(4) and facilitate their resolution in light of the new amendments. This includes withdrawing or rectifying notices and orders that are no longer tenable, thereby reducing unnecessary litigation and fostering a more cooperative tax environment.

6. Awareness and Capacity Building Initiatives: To ensure that taxpayers are fully informed about the new provisions and the steps they need to take, the government should undertake extensive awareness campaigns. This includes:

a. Conducting workshops and seminars for taxpayers and tax practitioners.

b. Issuing FAQs and explanatory notes on the new provisions.

c. Providing assistance through helpdesks or support centres to address taxpayer queries.

7. Stakeholder Consultation: Engaging with industry associations, professional bodies, and other stakeholders can help identify practical difficulties and areas where further clarification is needed. Such consultations can inform future policy decisions and ensure that the law is implemented in a manner that meets the needs of taxpayers while safeguarding revenue.

By addressing these areas, the government can enhance the effectiveness of the relief measures provided under sub-sections (5) and (6) of Section 16 of the CGST Act. This will not only reduce litigation and compliance burdens but also foster a more equitable and efficient tax system, thereby bolstering taxpayer confidence and promoting voluntary compliance.