After lots of efforts, the Goods and Service Tax Act was introduced in India with effect from 1st July 2017. GST- Being a major indirect tax reform GST replaced many indirect tax laws that were prevalent and under which tax was levied by both the Centre Government and the State Government.

Indirect Taxes that existed in the pre-GST regime at Centre and State level, which were subsumed in GST are as follows:

CENTRAL TAXES STATE TAXES
Central Excise duty State VAT / Sales Tax
Additional duties of excise Central Sales Tax
Excise duty levied under Medicinal & Toilet Preparation Act Purchase Tax
Additional duties of customs (CVD & SAD) Entertainment Tax (other than those levied by local bodies)
Service Tax Luxury Tax
Surcharges & Cesses Entry Tax (All forms)
Taxes on lottery, betting & gambling
Surcharges & Cesses

Granting Transitional Credits

India has adopted a dual GST model in view of the federal structure of the country. Centre and states simultaneously levy GST on the taxable supply of goods or services or both which, takes place within a State or Union Territory. The objects sought to be achieved by GST were as follows:

  • Reduction in multiplicity of taxes
  • Mitigation of cascading effect /double taxation
  • More efficient neutralization of taxes especially for exports
  • Development of common national market
  • Simpler tax regime-fewer rates and exemptions

The rates under GST were decided by the ‘Fitment Committee’ on the basis of the rates existing on the goods and services in the earlier regime and also by keeping in mind the earlier tax structure. In the pre-GST regime, tax rates were levied after considering the effect of input tax credit. To ensure a smooth transition from old laws to GST and to avoid double taxation, it was imperative that credit of taxes already paid by a registered person on the stock held by him as on 30.06.2017 was allowed to him. The Government also acknowledged this fact and accordingly, transitional provisions were provided in Chapter-XX of the CGST Act.

Besides, other transitional provisions, transitional provisions for input tax credit were provided in section 140 of the CGST Act. Section 140 of the CGST Act, 2017 enabled a registered person to claim credits of the different taxes paid by him either directly or indirectly and which were related to the stock held by him on the appointed day i.e. 01.07.2017. In other words section 140 of the CGST Act, 2017 enabled the taxpayer to carry forward the unutilized input credit of the pre-GST regime and allowed the credit of taxes paid on the stock as on 30.06.2017 as input tax credit under GST. The objective of this was that if the new rate of taxes was to be applied on such stock, then the credit was also to be allowed, to avoid cascading effect.  Section 140 of the CGST Act, 2017 reads as follows:

Section 140(1) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit [of eligible duties] carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law [1][within such time and] in such manner as may be prescribed 

It is worthwhile to note that the words “within such time and” were not there in section 140 of the CGST Act in its original form but have been introduced retrospectively w.e.f. 01.07.2017 by the Finance Act, 2020 and the said amendment has been made effective vide Notification No. 43/2020- Central Tax dated 16.05.2020. We shall be discussing the effects of this amendment in the latter part of this article but before that, it is important to understand the genesis of this amendment.

The manner for claiming the input tax credit available under Section 140 of the CGST Act, 2017 has been prescribed in Rule 117 of the CGST Rules, 2017.  As per Rule 117, every registered person entitled to take credit of input tax under Section 140 was required to submit, within ninety days of the appointed day, a declaration electronically in FORM GST TRAN-1, duly signed on the common portal specifying therein, separately, the amount of input tax credit of eligible duties and taxes, to which he is entitled under the provisions of the said section. That for claiming the credit under section 140(3) of the CGST Act, besides furnishing FORM GST TRAN-1, a registered person was also required to furnish FORM GST TRAN-2. The relevant provision of Rule 117 of the CGST Rules, 2017 reads as follows: 

Rule 117(1) Every registered person entitled to take credit of input tax under section 140 shall, within ninety days of the appointed day, submit a declaration electronically in FORM GST TRAN-1, duly signed, on the common portal specifying therein, separately, the amount of input tax credit [2][of eligible duties and taxes, as defined in Explanation 2 to section 140,to which he is entitled under the provisions of the said section 

Provided that the Commissioner may, on the recommendations of the Council, extend the period of ninety days by a further period not exceeding ninety days 

[3][(1A) Notwithstanding anything contained in sub-rule (1), the Commissioner may, on the recommendations of the Council, extend the date for submitting the declaration electronically in FORM GST TRAN-1 by a further period not beyond [4] [31st March, 2020 ] in respect of registered persons who could not submit the said declaration by the due date on account of technical difficulties on the common portal and in respect of whom the Council has made a recommendation for such extension.]

Thus, rule 117 of the CGST Rules provided a time limit of 90 days for furnishing the prescribed form i.e. FORM GST TRAN-1. That there were numerous technical glitches on the common portal, the portal being in its nascent stages, and the forms GST TRAN-1 and GST TRAN-2 itself were enabled on the portal much later than the appointed day. That the factum of technical glitches on the common portal was evident and the insertion of sub-rule (1A) and, thereafter, extensions being granted for filing of GST TRAN-1, notwithstanding the period envisaged under sub rule (1) of Rule 117, demonstrates that even the Government recognize the fact that the registered persons were not able to upload GST TRAN-1 due to technical difficulties on the common portal.

That the insertion of rules 117(1A), instead of solving the problems added to the problems in as much as there were no parameters defined for ascertaining as to what tantamounts to a “technical glitch” and the assessees were left to the mercy and whims and fancies of the officers, with no mechanism to represent or explain their grievances. Further, the persons entrusted with the implementation of rule 117 (1A) expected very high standards of ‘evidence leading’ and gave a very narrow interpretation of the term ‘technical glitches’. 

It is pertinent to mention here that under transitional provision a registered person was only availing credits of the taxes already paid by then under the pre-GST laws and were not asking for any additional benefits. It was also not seeking any new credits. The transitional provisions can be equated with a simple analogy. It is like where a person has an FDR in a bank and the said bank is getting merged with another bank from a particular date. The bank issues a circular that all FDR holders are required to furnish the details of their entire FDR online by a particular date. If a person fails to furnish such a detail online or furnishes a detail thereby missing some of his FDRs, then the credit of FDR’s will not be allowed to such person. The interpretation of the bureaucrats in respect of the transition credits is exactly the same. In our humble opinion, such an interpretation is not expected out of either any bank or the Government. To sum up, various persons could not claim credit primarily on following counts:

  • The main reason behind the inability of the taxpayers to file the claim was due to a lot of technical glitches on the common portal in furnishing FORM GST TRAN-1.
  • GST being a new law a lot of people was not aware of the transitional provisions and other procedures for claiming credit of pre-GST regime. Professionals were also facing problems in understanding GST in its beginning stage due to which even large corporate houses could not claim their credits.
  • In certain cases, the claim of credit was filed but there were errors in the details furnished and initially, there was no mechanism for revising the said form. Later on, only one revision was permitted but for that also the due date coincided with the last date of furnishing the form.
  • In some of the cases inadvertently the claim was not made.

However, it is pertinent to mention here that no taxes were to be paid while furnishing FORM GST TRAN-1 and one cannot fathom any reason whatsoever where a person would intentionally or deliberately delay the furnishing of FORM GST TRAN-1.

That since the taxpayers could not claim their eligible credit, they were left with no other option but to knock the doors of the court for seeking justice. Courts all across the country were flooded with such petitions due to the loss of genuine credit which could not be claimed by the taxpayers. Some of the grounds taken up before various courts were as follows:

1. The petitioners have a vested right to carry forward the eligible credit and such vested right of the petitioner cannot be denied due to lapse on the part of the respondents.

2. Rule 117 and rule 120A of the CGST Rules, 2017 are ultra vires to the provisions of sections 140 and 174 of the CGST Act, 2017 in as much as there is no period prescribed under the CGST Act particularly section 140 of the CGST Act for claiming the credit on the inputs held on the appointed day and, therefore, the period prescribed in Rule 117 is ultra-vires the parent Act.

3. It was also stated that in the alternative, that the time period stated in rule 117 was not mandatory but directory in nature.

4. The input tax credit as on 30.06.2017 was the property of the registered person and by virtue of Article 300A of the Constitution of India the registered person cannot be deprived of his property save by the authority of law.

5. Denial of credit also affects the fundamental right of the people i.e. Article 19(1)(g) of the Constitution of India that provides right to practice any profession or to carry on any occupation, trade, or business to all citizens.

By and large, all the Courts across the country allowed the petitions and various Hon’ble High courts have time and again directed the Government either to reopen the portal or to allow the manual filing of the forms. It has been held in various cases that credit is a vested right of the taxpayer under article 300A of the Constitution of India and the taxpayers could not be deprived of the same, without the authority of law.

The decisions are taken by various High Courts and Supreme Court by allowing transitional credits are discussed as follows:

Brand Equity Treaties Limited & Ors vs. The Union of India and Ors. (2020 (5) TMI 171 – Delhi High Court): In this case, it was held by the Hon’ble Court that provisions of Rule 117 of the CGST Act are directory in nature insofar as it prescribes the time-limit for transitioning of credit and therefore, the same would not result in the forfeiture of the rights, in casethe credit is not availed within the period prescribed. It was also observed in this case that:

In above noted circumstances, the arbitrary classification, introduced by way of sub Rule (1A), restricting the benefit only to taxpayers whose cases are covered by “technical difficulties on common portal” subject to recommendations of the GST Council, is arbitrary, vague and unreasonable. What does the phrase “technical difficulty on the common portal” imply? There is no definition to this concept and the respondent seems to contend that it should be restricted only to “technical glitches on the common portal”. We, however, do not concur with this understanding. “Technical difficulty” is too broad a term and cannot have a narrow interpretation, or application. Further, technical difficulties cannot be restricted only to a difficulty faced by or on the part of the respondent. It would include within its purview any such technical difficulties faced by the taxpayers as well, which could also be a result of the respondent’s follies.

A. B. Pal Electricals Pvt. Ltd. versus Union of India & Ors. (2019 (12) TMI 1002 – Delhi High Court): In this case it was held by the Hon’ble Court that the credit standing in favour of an assessee is “property” and the assessee could not be deprived of the said property save by authority of law in terms of Article 300 (A) of the Constitution of India. There is no law brought to our notice which extinguishes the said right to property of the assessee of the credit standing in their favour.

Adfert Technologies Pvt. Ltd. versus Union of India and Ors. (2019 (11) TMI 282 – Punjab and Haryana High Court). In this case, Hon’ble Punjab & Haryana High Court passed a detailed order accepting the claims of the petitioners. It is pertinent to mention here that the SLP filed by the Government against this order was rejected by the Hon’ble Supreme Court. [2020] 115 taxmann.com 29 (SC)

M/S. Blue Bird Pure Pvt. Ltd. versus Union of India & Ors. (2019 (7) TMI 1102 – Delhi High Court)

Bhargava Motors versus Union of India & Ors. (2019 (5) TMI 899 – Delhi High Court): It was observed by the Hon’ble High Court that the GST system is still in a ‘trial and error phase’ as far as its implementation is concerned. Further, the Petitioner’s difficulty in filling up a correct credit amount in the TRAN-1 form is a genuine one which should not preclude him from having his claim examined by the authorities in accordance with the law. A direction is accordingly issued to the Respondents to either open the portal so as to enable the Petitioner to again file TRAN-1 electronically or to accept a manually filed TRAN-1. (argued by the authors of this article)

Tara Exports versus The Union of India. 2019 (20) G.S.T.L. 321 (Mad.)

Sare Realty Pvt. Ltd. vs Union of India 2018 (9) TMI 373 (Del) (argued by the authors of this article)

Kusum enterprises vs Union of India 2019 (7) TMI 945 (Del) (argued by the authors of this article)

Siddharth Enterprises Vs. The Nodal Officer 2019 (9) TMI 319.

However, Hon’ble Bombay High Court in the case of Nelco Limited Vs Union of India & Ors 2020 (3) TMI 1087 have taken a different stand and have stated that Rule 117 is not ultra-vires the Act.

Notification No. 43/2020- Central Tax dated 16.05.2020 has enforced the retrospective amendment made in section 140 of the CGST Act vide The Finance Act 2020. This amendment shall take effect retrospectively from the 1st day of July, 2017. This amendment has now inserted the words “within such time and” in the section itself. This may imply that the ground raised by the petitioner before various courts challenging vires of Rule 117 of the CGST Act, 2017 stands exhausted. After the amendment in section 140 of the CGST Act, 2017 the petitioners may not be succeeding on this ground unless the validity of the retrospectivity is also challenged. However, it shall be open to the registered person to claim its credits on various other grounds. As a matter of abundant caution, all such claims should be filed before 30.06.2020, the limitation period stated by Hon’ble High Court in the case of Brand Equity Treaties Limited & Ors vs. The Union of India and Ors (2020 (5) TMI 171 – Delhi High Court)

In the present article, the objective is not to debate upon the merits or demerits of the cases. The aim of this article is also not to discuss the legal and technical nuances involved in the matter, some of which have been plugged by making retrospective amendments in section 140 of the CGST Act. We are also not endeavoring to comment upon the power of the Government to make retrospective amendments in the tax laws. Such discussions should be left to be argued within the four walls of the courtroom.

The larger question that the authors want to address is whether such an amendment was at all required, especially making it enforceable during this tough COVID-19 pandemic period. The bringing into force of this retrospective amendment is reflective of the mindset of the Government and its adamancy to take up this litigation to the highest level and to contest it tooth and nail.

The Government must appreciate that the credit being sought by the registered person, may be even belatedly, is nothing but the credit of taxes already paid by him. It must also understand that admittedly there were problems on the common portal which exist even today and all these litigations were not in the nature of adversary litigation. These litigations could have been easily avoided by simply permitting a person to claim what was legally due to him. On the contrary instead of bringing the matter to an end, the Government has gone to the extent of making a retrospective amendment in the Act only to plug the legal loophole and to ensure that the credit is denied to the registered person.

The author does appreciate that all procedures must be completed in a time frame manner and the claiming of credit could not have been left open-ended (although there will be no loss to the Government even if the claiming of credit is left open-ended because by delaying the claiming of transitional credit, a registered person will be deferring his claim). However, if genuine problems are being faced by the assessee, the Government must come forward and should assist the assessee in claiming his legitimate credits, rather than trying to whittle away his legitimate claim by plugging the legal loopholes.  This assumes all the more importance if the law is new and in such cases, the Government in itself should treat the limitations as directory. The approach of the government in not granting credit, which is a vested right of the taxpayers, is not expected of this present pro-active, progressive, and positive Government.  The Government should be sensitive to its taxpayers, especially the honest ones. Object and purpose of the transitional arrangements made under Section 140 of the CGST Act require to be taken to its logical end.

It appears to the authors that the present amendment is a result of some egoistic bureaucrats ill advising the Government. It appears to the authors that by projecting some fancy numbers and a huge loss to the exchequer (which would be factually incorrect) the Government has been wrongly led into in carrying out the present amendment. Such an amendment is not expected out of the present positive, progressive, and forward-looking Government, which is very considerate about the welfare of its citizens. By the present amendment, the objective which the Government wants to achieve can be only one i.e. to deny a registered person of the credit of taxes already paid by him, only because he failed to apply for the same within the prescribed period.

However, all is still not lost and despite the present amendment it just need a simple policy decision on the part of the Government to project that it is not adamant in denying the rightful claim of the applicant and is indeed more than willing to help its honest taxpayers. All that is needed to be done is that (by following the directions of the Hon’ble Delhi High Court or may be even on its own) the Government gives a window frame of 3 to 6 months to the taxpayers to claim their eligible credits. It is obvious that the merits of such claims can always be verified under rule 121 of the CGST Rules. Just by a simple decision all the pending cases in various High Courts and Supreme Courts etc. can come to an end. We sincerely hope that the Government, Ministry of Finance, or CBIC shall take such a policy decision.

[1]  Inserted by the Finance Act, 2020 w.r.e.f. 1-7-2017.

[2]  Inserted by the Central Goods and Services Tax (Third Amendment) Rules, 2017, w.e.f. 1-7-2017.

[3]  Sub-rule (1A) inserted by the Central GST (Ninth Amendment) Rules, vide Notification No. 48/2018-CT dated 10.09.2018

[4]  Substituted for “31st December, 2019” by the Central Goods and Services Tax (Amendment) Rules, 2020,    w.e.f. 31-12-2019 prior to its substitution said words were amended by the Central Goods and Services Tax (Sixth Amendment) Rules, 2019, w.e.f. 9-10-2019.

Author- Advocate Vineet Bhatia and CA Shradha Agarwal

Advocate Vineet Bhatia and CA Shradha Agarwal

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional. Please refer to the complete Terms & Disclaimer here. Terms & Disclaimer

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2 Comments

  1. CA Om Prakash Jain says:

    It has been correctly mentioned that inspite of no loss to the Government,
    the amendments in S.140, is a result of some egoistic bureaucrats adopting only revenue oriented approach. They are adamant in denying the rightful claim of the assessees. Every time, the fair judgments of various courts in GST are being turned down by bringing amendments in Act and/or rules. Govt. is wasting lot of public money in unwanted litigations, which lead to harassing the public at large.

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