GST

IS INPUT TAX CREDIT (ITC) AN ABSOLUTE RIGHT? ANALYSIS & VIEW OF JUDICIARY

INPUT TAX CREDIT UNDER GST

One of the key features of The GST Act is the introduction of Input tax credit (ITC). It was introduced in the Act to avoid cascading taxes, i.e., safeguard “tax on tax”.

ITC was introduced to reduce tax liability as it makes a sale by claiming the credit depending on how much GST was paid on the business purchases.

UNDERSTANDING THE TERM INPUT TAX CREDIT (ITC)

Input –

• It is defined under section 2(54) of the CGST Act.
• Use of goods by a supplier for making an outward supply in the course or furtherance of business.
• Input goods are those mentioned in the CGST Act.
• The capital Goods and others as specified in the Act are an exception to these.

Capital Goods-

• It is defined under the section 2(19) of the CGST Act
• Those goods, the value of which are capitalized in the books of account.
• The books of account should belong to the person claiming the input tax credit.
• These goods should be used for furthering the business

Input service

• Section 2(55) of the CGST Act defines input service
• Service used by the supplier
• Supply should be made an outward supply
• The objective behind this outward supply should be for the furtherance of business.

Input Tax

• It is defined under section2(57) of CGST Act
• IGST, CGST, and SGST, when charged on the supply of goods and services used, attract input tax
• Goods and services are to be used for the furtherance of business

CONDITIONS TO CLAIM ITC-

The eligibility to claim ITC is an important factor under the GST Act; section 16 of the GST Act explains the concept of ITC and eligibility to claim it.

These conditions are as follows-

Section 16(1) explains that-

• Only a registered person under the GST Act can claim an input tax credit
• The input tax credit claimed must be in relation to the supply of goods or services or both
• These goods and services supplied must be in furtherance of business and not for personal use
• The input tax credit will be credited to the electronic ledger of a person claiming it.

Section 16(2) explains that –

• Credit of the input tax will not be made to the claimant until and unless they
• Possess tax invoice or debit note issued by the supplier
• Must clarify if he used both goods and services
• Must clarify if they are the supplier or acting as an agent
• Must furnish the proof that the tax charged on the supply of the good has been paid to the government.
• If the goods received against an invoice are received in instalments, then the receipt of the last instalment will be used to claim the input tax credit.

Section 16(3) explains that-

• In the case if depreciation is claimed under the Income Tax Act, then input tax credit is not allowed.
• Depreciation is decreasing the value of the assets and allocating their cost to the periods in which they are used.

Section 16(4) explains that-

• The input tax credit is time-barred, i.e., it can be claimed only within the due date.
• The time period for Claiming is either the end of the current financial year or November 30 of the succeeding year.

CONDITIONS OF NON-AVAILABILITY OF ITC RETURN-

• Goods and services are used partly for business and partly for personal use.
• The goods supplied are within the category of exempt goods.
• Supply of the goods in which ITC is not specifically available.
• Motor Vehicles For transportation having a seating capacity of more than thirteen.
• Vessels and aircraft, except when they are used

CONCEPT OF BUSINESS UNDER THE CGST ACT-

The term ‘businesses under the CGST Act has been defined expansively to include any “trade, commerce, manufacture, etc., and any activity or transaction in connection with or incidental or ancillary” to the same.

• State of Tamil Nadu v. Binny Ltd. Madras; AIR 1980 SC 2038

The sale of provisions to workmen employed in the factory where textiles were being manufactured was incidental to the business of manufacture of textiles, and such sales fell within the definition of the term ‘businesses under the Tamil Nadu Sales Tax Act.

• Royal Talkies Hyderabad v. Employee State Insurance Corporation; (1978) IILJ 390 SC

 The test for an activity to be construed as incidental to the business, such work as is sought to be treated as incidental should not be extraneous or contrary to the purposes of the establishment. Still, it need not be integral or essential to it either. Applying this test, the canteen maintained by the cinema owner was held to be incidental to the business of exhibiting films.

• United India Insurance Co. Ltd. Vs. Commissioner of Commercial Taxes, Bangalore and Anr. 1986 (2) KarLJ107

The petitioner was carrying its business in General Insurance and was selling used goods received against the settlement of the claim. The activity of selling used goods was held to be ancillary to its main business.

• Citi Bank vs. Commissioner of Sales Tax 2016 IAD (Delhi) 581

The petitioner was engaged in the banking business and, in certain cases, would recover dues from the defaulters by auctioning the assets of the defaulters. The activity of selling assets hypothecated to the bank was held to be incidental to its business.

DOCUMENTS REQUIRED TO AVAIL INPUT TAX CREDIT

Fig. 2. Depicting documents required to claim ITC

Rule 36(1) of the GST Act illustrates the docua registered person needs person, including an input service distributor, to claim ITC.

These are –

• An Invoice (“a document that maintains a record of a transaction between the buyer and the seller”) issued by the supplier of goods or services or both as per the GST Rules
• Debit Note (“a confirmation document sent by a buyer for returning purchased goods or services to a seller”) issued by the supplier of goods or services or both in case of an increase in the agreed sales price
• An Invoice raised by the recipient of goods or services or both in case of inward supplies liable for tax under the Reverse Charge Mechanism, subject to payment of tax
• A Bill of entry (“a legal document or customs clearance agents file agents on or before the arrival of imported goods”) or similar document prescribed under the Customs Act, 1962
• Invoice or credit note (“a financial document issued by supplier companies to reduce the amount owed to them by the buyers”) issued by Input Service Distributor by rule 54(1) of CGST Rules, 2017

PROCEDURE FOR CLAIMING ITC UNDER GST

Fig.3. Depicting the procedure to apply for ITC

JUDICIAL ANALYSIS OF INPUT TAX CREDIT ISSUES

The petitions involving ITC revolve around the following questions-

• constitutional validity of the GST Act
• status of the dealer and his right to claim ITC
• ITC to be an absolute or vested right

NATURE OF ITC PETITIONS

Balancing the centre-state relations was one of the prior conditions before the formation of the GST Act to maintain the same dual GST was introduced, i.e., CGST Central Goods and Services Act for the centre and SGST State Goods and Services Act for the states, making it a subject matter of both resulting in equal division and distribution of the taxes.

One such subject matter within both is that of input tax credit, which is governed by the CGST Act and the local GST Acts of each state; the petitions involving the matters related to input tax credit are generally related to the contentions asking if ITC is an absolute and vested right, the constitutional validity of GST Act if ITC is time-barred and the effect of retrospective registration on ITC cases.

ITC IS A CONCESSION AND NOT A VESTED RIGHT

A vested right is an unconditional right given to a person, and it cannot be taken away from them without their consent; the question of whether or not ITC is a vested right has been raised many times, and the view of the judiciary clarifying the same is explained with the help of following judicial precedents.

• Gobinda Construction v. Union of India (civil writ jurisdiction case No. 9108 of 2021 dated September 08 2023)

FACTS OF THE CASE-

• Petitioner was a regular taxpayer and filed GSTR-1 (filing of monthly or quarterly returns) timely for each of the months of the financial year 2018-19.
• He delayed filing the GSTR-3B for February 2019 and March 2019 on October 23, 2019, and November 07, 2019.
• The revenue department issued a show cause notice on February 20, 2020, in order to disallow the ITC for February and March 2019.
• The reason for disallowing the ITC for this period was a breach of section 16(4) of the CGST Act.
• Aggrieved by the action of the revenue department, the petitioner filed an appeal before the appellate authority, which was dismissed, stating the petitioner conducted a practitioner under section 16(4), which is inadmissible.
• The petitioner then filed a writ petitioner before the Hon’ble High Court of Patna, raising the following contentions.

Contentions by the petitioner

• Denial of ITC under section 16(4) of the CGST Act is confiscatory in nature.
• ITC is a vested and absolute right under Article 300A (Right to property), which cannot be taken away on the grounds of a belated filing of a return.

Contentions by the respondent

• The benefits under the CGST Act can be availed only as per the scheme of the CGST Act, and nothing in the scheme violates or is arbitrary to the Indian constitution.

JUDGMENT-

• The court ordered against the petitioner because,
• The language of the scheme under section 16 is very clear, and ITC is dependent upon the fulfilment of the condition laid down in the provisions of the scheme of the Act.
• The concession provided under the Act is not a matter of right but just a concession given during trade, occupation, and business to aid the right to practice any profession and occupation under Article 19(1) (g) of the Indian constitution.
• Thus, section 16(4) of the CGST Act is constitutionally valid and not violative of any fundamental right guaranteed under the Indian constitution.

TIME LIMIT IS MANDATORY AND NOT DIRECTORY

The CGST and each SGST Act have included the time limit for filing the Input tax credit in their scheme, making it time-barred. Still, because tax return is a matter of right, at the time of the establishment of the Act, the time limit was the end of the current financial year or September of the succeeding year; this criterion is changed by the notification by the GST Council on February 2022 which extended it to November 30 of the succeeding year or the end of the current financial year. It is complicated in general to understand the time limit, resulting in confusion and delay in filing of input tax credit. Following judicial precedents raises the issue of whether or not the input tax credit is time-barred.

• ALD Automotive Pvt. Ltd. Vs. Commercial Tax Officer Civil Appeal Nos. 10412-10413 of 2018

This case raised questions about the statutory scheme of Karnataka value-added tax and the condition where the input tax credit is time-barred, to which the Supreme Court of India illustrated in favour of the designed scheme under the CGST Act and the SGST Acts of other states and said that the concessions granted under these schemes are to benefit the beneficiary but by the criteria stated in the statute and its scheme if the criteria of the scheme mention certain time limit for filing the return, that time limit should be adhered by the taxpayer to enjoy the benefits of concession provided under the Act.

• India Agencies (Regd.), Bangalore vs. Additional Commissioner of Commercial Taxes, Bangalore (2005) 2 SCC 129.

In this case, the petitioner failed to produce the specific documents necessary to take advantage of the concessional rate of tax under section 8(1) of the central sales tax (Karnataka) rules, 1957, to which the court said that furnishing original Form C within a particular time limit, to claim the concessional rate is a mandatory requirement under the Act and without the specified documents, dealers cannot claim the benefits.

• State of Karnataka vs. M.K. Agro Tech(P) Ltd.,(2017)16 SCC 210

In this case, the Hon’ble Court emphasized the literal interpretation of the laws related to taxes. The court stated that it is upon the will of the legislature to decide how much tax credit is to be levied. The court stated that the conditions laid down by the scheme make the scheme related to input tax credit time-barred under the CGST Act, and the SGST Acts of states will be the criteria for deciding input tax credits.

RETROSPECTIVE CANCELLATION OF REGISTRATION

A taxpayer who is no longer registered under the GST Act loses his rights to pay/collect GST, claim an input tax credit, and file a return.

Section 29 of the CGST Act gives the adjudicating authority power to cancel a supplier’s registration from a retrospective date, i.e., from any date of the past. Still, this power cannot be exercised arbitrarily.

The chain of input tax credit originates from a taxpayer and his inward and outward supply of goods and services and GST paid during such transaction; this chain is dependent upon the GST registration of the supplier and the taxpayer; generally, the cancellation of any one entity involved in the chain makes it difficult for the other to claim input tax credit. The judiciary tried to resolve this conflict, and the following cases explain their views regarding the same.

• Jinsasan distributors v. Commercial tax (2013) 59 VST 256 (Mad)

The issue raised before the court in this case was whether the purchasing dealers could be held liable for non-payment of tax by the selling dealers on account of retrospective cancellation of their registration certificates.

The court stated that the rights of assesses /petitioners could not be quashed because of the retrospective cancellation of the registration certificates issued to the selling dealer. The petitioner paid the tax based on the invoice and claimed benefit accordingly. His credit should be reversed by the scheme provided in the statute.

• State of Maharashtra through the secretary v. Suresh Trading Company, (1998)109 STC 439

This case was filed by respondents who were dealers under the Bombay Sales Tax Act, 1959, purchased goods from an enterprise situated in Maharashtra and then resold the goods and claimed certain benefits of input tax credit.

The sales tax officer disallowed this claim of the respondents on the grounds that the registration certificate of the enterprise they purchased goods from was cancelled retrospectively. The claim of the respondents was declined, and a penalty was imposed.

The Supreme Court, in this case, ordered in favour of the assessee and stated that the purchasing dealer would rely upon the certificate of registration of the selling dealer, and whatever the effect of retrospective cancellation is upon the selling dealer cannot affect the claim of the purchasing dealer.

CONCLUSION-

It is intrinsic for a legislature to make laws easy, but usually, the interpretative nature of Indian laws makes it difficult for the people to deduce their true meaning. The GST Act, up to a certain level, is contrasting in nature, and the rules and schemes laid down by the Act are transparent, easy to understand and make indirect tax uncomplicated. Yet certain subject matters like input tax credits require the judiciary’s interference to lay down the clear framework of the scheme imbibed in the Act. The judiciary deals with all the issues concerning input tax credits. It makes the return availed under ITC matter of concession, not a legal right vested in a person by the Indian constitution.