A Sigh of Relief for Taxpayer – The FM Proposes Insertion of New Sub Sections in Section 16 of CGST ACT
1. The Budget 2024 proposes to insert new Sub-Sections 16(5) and (6) after sub-section (4) of Section 16 in the CGST Act, 2017, thereby intending to regularize the Input Tax Credit taken after the limitation period as prescribed in Section 6(4) of the CGST Act, 2017. Sub Section (5) deals with the late filing of the Returns by normal taxpayers while sub Section (6) deals with the taxpayers whose registration was cancelled under Section 29, but restored later on under Section 30.
2. Section 16 of the Act lays down the lays down the law related to the eligibility and conditions for availing the input tax credit. Among the various other conditions, the sub-section 4 of Section 16 lays down that :
“(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the [thirtieth day of November] following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.
[ Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]”
3. Therefore, under sub section (4) supra, the taxpayer was allowed to take credit of input tax paid on the inward supplies of goods and services for a particular financial year only till the last day of November of the following financial year. However, this period was extended further for the financial year 2017-18 by inserting a proviso above thereby allowing the further extended period till the filing of the return under section 39 for the month of March, 2019 ( GSTR-3B).
4. However, due to the various reasons ranging from the financial crunch to lack of knowledge on the part of the taxpayers or their accountants/taxation consultants, and to the cancellations of the GST registrations due to various reasons, the taxpayer could not file their statutory returns under Section 39 (GSTR-3B) on time. Therefore, when such returns were filed with late fee and with interest on the delayed payment of tax after the maximum statutory period for availing the input tax credit under sub section (4) supra, the Departments of Central and State Tax issued demand notices proposing the recovery of such input tax credit along with interest and penalty on the ground of irregularity in the availing of such input tax credit beyond statutory period allowed. This has created panic among the taxpayers, especially the small and medium enterprises having limited access to the expert legal advice and limited finances.
5. The matter went up to the Supreme Court after divergent decisions of the various High Courts. The SLP regarding the constitutional validity of the sub-section 4 supra is pending with the Hon’ble Supreme Court. With due deference to the opinion of the different High Court holding that the input tax credit is not vested right, this appears to be not in consonance with the general principles laid down in the various rulings of the Apex Court holding that the procedure should not only be laid down by law, but ought also to be fair, rational, logical, as per the principles of justice and equity.
6. Meanwhile due to the various representations from the Trade to the Central and State Government functionaries, the GST Council in its 53rd meeting proposed amendment in Section 16 that the ITC on the invoices and other eligible documents for availing such ITC for the FY 2017-18, 2018-19 and 2019-20 may be allowed up to 30.11.2021. The present proposal for insertion of sub section (5) appears to have been driven by that recommendation of the GST Council. The said proposal is going to be shortly notified after the budget receives the assent of the President after clearance by the Parliament.
7. It may be added that even without this amendment, the mandate of sub section (4) was against the principles of GST Act itself, which has the avowed object to avoid the cascading effect of the taxes paid on the inward supplies during the supply chain and to provide seamless flow of the input tax credit in respect of taxes paid at each stage of the supply chain. Moreover, from the legal point of view also, it appears that the demand of the Departments of Central and State Tax were not valid as the entitlement of input tax credit in respect of the taxes paid on the inward supplies and payment of taxes on the outward supplies are two different aspects. Further, when there was no facility of filing the statutory GSTR-3B returns (summary return in lieu of regular return under Section 39) without payment of the additional tax component of cash portion due to the value addition on the onward supplies, the eligibility and entitlement of the input tax credit and filing of the statutory return GSTR-3B is also not interlinked. The taxpayer is entitled to take credit of the input tax credit in respect of the taxes paid on the inward supply of goods and services in the account books as soon as the goods and services are received provided the other conditions laid down in Section 16 are fulfilled. Therefore, the merely depiction of the input tax credit in the statutory return GSTR-3B is merely declatory in nature. This procedural lapse cannot be valid and sole ground for depriving the substantial benefit of input tax credit paid by the taxpayer. Further, when the taxpayer has filed the returns belatedly with the deposit of regularization fee for late filing and also paid the interest under Section 50 of the Act for late deposit of the tax, the Department is precluded from demanding the input tax credit portion as it would amount to double taxation on the value portion equivalent to the inputs and input services. Firstly, the taxpayer has already paid the tax on the inward supplies to the supplier of such supplies and secondly the department is demanding the tax by disallowing the input tax credit of such already paid tax while deniying the input tax credit to the taxpayer. This also amounts to violation of Article 300A of the Constitution, which lays down no person can be deprived of his property by anyone including the State except in accordance with the procedure established by law. This procedure also should not only be established by law, but the procedure should be rational, fair and in consonance with the principles of justice and equity. Even otherwise, the unjust enrichment on account of the double taxation at the moment of inward supply by way of charging the tax on the said supplies from the supplier as the latter’s outward supply and at the moment of outward supply by the taxpayer can be justified by no stretch of imagination in the present era of democratic welfare state. The principle of unjust enrichment applying to the retention of the tax collected by the taxpayer, but no due as per law applies equally to the amount collected by the Government except with the authority of a valid law. It may be noted that the supplier is merely a collection agent of the government for collecting the tax on the outward supplies, and the burden of that tax is shouldered by the recipient. Therefore, having paid the tax at that stage, recipient cannot be coerced to pay the same again on technical and procedural grounds alone.
8. Now that the amendment has been proposed by insertion of sub sections (5) and (6) in Section 16 of the Act, by way of providing relief to the taxpayer, there is another conundrum the taxpayer has to face. The enigma is that the various demands having been confirmed recently and the appeal period having already expired or expiring shortly, the tax advisors are having different opinions whether to go in for rectification of the Orders of demand or to file appeal before the Appellate authorities. There are divergent views whether in view of the retrospective effect of the amendments proposed, there is any error in the demand orders requiring rectification thereof, or in the absence of any express provision about the limitation in case of rejection of rectification, to file the appeal within the statutory period of three months prescribed under Section 107 of the Act. Some tax consultants are of the view that both rectification application as well as the statutory appeal ought to be filed. However, this procedure is again cumbersome, expensive, time consuming.
9. In the opinion of the author, the taxpayer should only step into one boat, by either filing the rectification or statutory appeal. The rectification route is easy and less expensive as no pre-deposit is required under Section 107, which is mandatory for filing the appeal. As regards the point of limitation of filing the appeal, the said period ought to be reckoned from the date of issuance of the rectification orders, where both the original demand order and rectification orders needs to be challenged in appeal if the needs arises due to adverse rectification orders. As far as the twin route of filing the rectification and appeal is concerned, the same also appears to be not proper and logical for the reasons that (a) if the appeal is filed, the lower authority may be hesitant to give relief in rectification orders when the senior authority in appellate forum is seized of the matter in appeal (b) the appellate authority may ask the taxpayer to first get his rectification application decided and then come to the appellate authority (c) if the rectification orders are passed in favour of the taxpayer, the appeal will be automatically rendered infructuous and may be directed to be withdrawn or dismissed as such.
10. In case of filing the appeal, the taxpayer may be required to pre-deposit the amount of 10% before filing the first appeal and then get the refund thereof after decision in the appeal in view of the amendments proposed by the budget. This will put unnecessary strain on the taxpayer as well as the Department in terms of man hours required and extra money for the taxpayer from his limited financial resources.
11. The taxpayer may tread with caution while the tax authorities may keep the proceedings pending till the budget notification to avoid unnecessary waste of valuable time and energy.
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