Transitional credit claims of past- Disentitled now under GST?

Introduction:

GST laws contain Transitional provisions inter alia Section 140 of CGST Act, 2017 (similar provision in State GST laws) enables the taxpayer to carry forward the unutilized input credit under the pre-GST regime and allow the credit of taxes paid on the stock as on 30.06.2017 as GST credit. For this, Rule 117 of CGST rules, 2017 as amended inter alia requires the taxpayers to file Form GST TRAN-1 electronically.

This was to ensure a smooth transition from old laws (Central Excise, service tax, VAT) into GST, avoid the double taxation by way of cascading of taxes. The philosophy was that since the GST rate was calculated to consider the new tax rate and the tax credits under the earlier regime which needed also to be transited.

The plain reading of the provisions makes it clear that the provisions are designed with the stated objective of avoiding double taxation and ensuring the smooth transition. However, practically the aforesaid purpose & objective was not achieved specifically the filing of Form GST Tran-01. Various petitions had/are been/ being filed across the country and the Hon'ble High Courts have time & again directed the Government either to reopen the portal or to allow the manual filing of the forms. Some courts have suggested the Government to set up a redressal committee.

Setting up IT Redressal Committee:

In light of these developments and acknowledging the genuine problems faced by the Taxpayers, the Government had provided a window enabling the taxpayers to file the Form Tran-1 till 31.03.2019 and which was now extended till 31.03.2020. This facility is available only to the persons who have digital evidence to prove the technical glitches while filing their Form GST Tran-1 online. However, the Government has not given the opportunity to the taxpayers who could not file form Tran-01 for various other reasons such as:

• Attempted filing online but did not take the digital evidence like screenshots, help desk correspondence, etc as they/ their consultants were not tax savvy and the awareness of the massive implication on a procedure not followed was not known.
• Lack of awareness about the due date [ which changed frequently]
• Mandatory e-filing system being new or Lack of computer system in place.
• Mistakes committed while filing online.
• Ignorance with the hope that due date would be extended (which is very frequent in GST) etc.,
• Missed for other reason-someone else should do

All these categories of the taxpayers who lost out ITC do not have any option but to approach the High courts.

HC decisions:

In recent times, the series of decisions are delivered by the various High courts most of the times, allowed the taxpayers to claim the Transitional Credit. The noted decisions are as follows:

1. Brand Equity Treaties Ltd v. UOI 2020-TIOL-900-HC-DEL-GST
2. Adfert Technologies Pvt Ltd v. UOI 2019-TIOL-2519-HC-P&H-GST
3. Siddharth Enterprises Vs The Nodal Officer 2019-TIOL-2068-HC-AHM-GST
4. Tara Exports v. Union of India - 2019 (20) G.S.T.L. 321 (Mad.)
5. Uninav Developers Pvt. Ltd. v. UOI 2019-TIOL-1661-HC-DEL-GST

And a host of many other. The summary of the decisions is given below:

• The Introduction of Rule 117(1A) & Rule 120A and absence of any time period prescribed under Section 140 of the CGST Act, 2017 indicates that there is no intention of the Government to deny carry forward of unutilized credit of duty/tax already paid on the ground of time limit.
• The right to carry forward credit is a right or privilege, acquired and accrued under the repealed Central Excise Act, 1944 (1 of 1944) and it has been saved under Section 174(2)(c) of the CGST Act, 2017 and, therefore, it cannot be allowed to lapse under Rule 117 of the CGST, 2017, for failure to file declaration form GST Tran-1 within the due date
• The pre-GST ITC which stood accrued and vested is the property of the assessee and is a constitutional right under Article 300A of the Constitution. The same cannot be taken away merely by way of a delegated legislation by framing rules without there being any overarching provision in the CGST Act, 2017
• The time limit prescribed under Rule 117 to allow the availment of the ITC with respect to the purchase of goods and services made in the pre-GST regime and post-GST regime is arbitrary, irrational and unreasonable and, therefore, it is violative of Article 14 of the Constitution;
• By not allowing the right to carry forward the CENVAT credit for not being able to file the form GST TRAN-1 within the due date may severely dent the writ-applicants working capital and may diminish their ability to continue with the business and such action violates the mandate of Article 19(1)(g) of the Constitution;
• The liability to pay GST on sale of stock carried forward from the previous tax regime without corresponding input tax credit would lead to double taxation on the same subject matter and is, therefore, arbitrary and irrational;
• The phrase “technical difficulties on the common portal” should be given a liberal interpretation because it is a settled principle of law that an interpretation unduly restricting the scope of a beneficial provision should be avoided so that it may not take away with one hand what the policy gives with the other;
• The due date contemplated under Rule 117 of the CGST Rules to claim the transitional credit is procedural and thus merely directory and not a mandatory provision;
• The GST System is still in a 'trial and error phase' as far as its implementation is concerned and the Government cannot adopt different yardsticks while evaluating the conduct of the taxpayers, and its own conduct, acts and omissions.
• GST is an electronic-based tax regime and most of the people of India are not well conversant with electronic mechanisms.
• Technical glitches on the common portal have to be read widely and not limited to facing tech filings online. It would be an erroneous approach to attach undue importance to the concept of "technical glitch" only to that which occurs on the GST Common portal, as a pre-condition, for an assessee/taxpayer to be granted the benefit of Sub- Rule (1A) of Rule 117.
• There were many steps and columns in TRAN-1 forms thus the possibility of mistake cannot be ruled out.

It is important to note here that there are contrary decisions from some HC's.

Retrospective amendment vide Finance Act, 2020:

Section 128 of Finance Act, 2020 amends section 140, ibid to insert the words ‘within such time' (w.e.f 01.07.2017). Notification No. 43/2020- Central Tax dated 16.05.2020 was issued notifying the effect of aforesaid retrospective amendment though it was not warranted in terms of Section 2 of Finance Act, 2020. The consequence of the amendment is that the Government has the power to prescribe the time limit for claiming Transitional Credit through the rules. Earlier such delegation to prescribe rules was missing in the Parent Statute (CGST Act, 2017).

Retrospective amendment - valid?

When indirect tax reforms were undertaken about 5 years back FM made an announcement that no retrospective amendments would be made which impacted the tax payer. Unfortunately this EXCELLENT PRACTICE has not been followed and the PROMISE BY GOVERNMENT not kept up. We are gone back and followed very poor practices which increases the uncertainty of the law and unfair method of rectifying all the errors of drafting and just rights of the tax payer, objective of avoiding cascading thrown to the winds.

No doubt, the Government has the power to make the retrospective amendment though it is unfair and creates uncertainty. Sufficient to mention the retrospective amendments can be struck down if such amendment creating any unreasonable restrictions which violate the right to carry on business or the right to hold & dispose of the property. The instant case of retrospective amendment shall pass through this judicial test.

Further, the Hon'ble SC in Eicher Motors Ltd v. UOI 1999 (106) E.L.T. 3 (S.C.); Jayam & CO. vs. Asst. Commr 2018 (19) G. S. T. L. 3 (SC) held that accrued ITC is vested right and cannot be taken by the Retrospective amendment. These decisions have been followed in the various HC decisions (cited supra) rendered in the context of Transitional Credit under GST.

Whether Retrospective amendment overcomes the above HC decisions?

Further, it is interesting to find out whether the present retrospective amendment annuls the rationale of the above cited decisions and restrict the transitional ITC particularly for the taxpayers who do not have the evidence to show the technical glitches on the common portal. In this regard, as seen from the rationale of the above cited HC decisions (summarised supra), the Hon'ble HC decisions are not merely based on legal infirmity that Rule 117, ibid lacks the power to prescribe time limit but various meritorious reasons. Thus, the Retrospective amendment would not overcome the above rationale of HC decisions and it attempts to cure the defect in the delegation alone. Therefore, in the view of the paper writers the taxpayers still have a chance to claim the Transitional Credit and rely on the above cited decisions.

Be that as it may, it is settled law that retrospective amendment specifying the new law of limitation cannot suddenly extinguish the vested right of action by providing for a shorter period of limitation. Similarly, the retrospective operation should not be given to a statute to take away or impair an existing right. Based on this legal principle, the claims filed before 18.05.2020 (notifying the retrospective amendment) would not get impacted by such retrospective amendment and stands in a better position compared to the claims made after 18.05.2020.

Conclusion:

In the author's view, the retrospective amendment merely validates the timelines prescribed u/r. 117 which was missing previously. It would be incorrect to give the effect of the retrospective amendment beyond this point and is insufficient to nullify the rationale of the above-cited HC decisions, which would still hold the field. Therefore, the taxpayers who have missed claiming transitional credits even now can claim the same. The suggested course of action is as under:

• Apply to the Nodal officer for enabling the filing of Form GST Tran-1 online, preferably on or before 30.06.2020
• If the application is rejected or not acted in a reasonable time, file a writ petition before the Jurisdictional HC for necessary directions.

The authors can also be reached at madhukar@hiregange.com, venkataprasad@hiregange.com