Under the Goods and Services Tax Act 2017 though the input tax credit is projected as one of the incentives, but it is not so easily seen or visualized for the benefit of the tax payers. Let us examine the background of input tax credit given under the statute and now proposed is it to be circumscribed.
The input tax credit is first given by the Central Excise Act with regard to the inputs purchased for use in manufacture of the finished products and as per Rule 2(k) and 2(l), the input tax credit on goods services had also been extended. Thus pre-advent of GST, Cenvat has ruled the field for the benefit of ITC. The goods and services that are emanated in these rules are as follows.
Rule 2 (k) “input” means-
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods;
Rule 2 (l) “input service” means any service,-
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;
According to these rules, the claim of input tax credit is with regard to inputs that are used in the manufacture of finished products by the manufacturer and services are those that are used for the final service that would be provided by a service provider.
Under VAT Act also , the input tax credit facility was extended to the registered dealers. I would like to refer and explain in the article. The APVAT Act 2005 and TS VAT Act 2005 and as most of the State VAT Acts are similar and identical and accordingly, I continue. Under section 13(2) to (11), the claim of input tax credit to registered dealers is provided. However section 13(5) restricts the claim of input tax credit or will not allow the input tax credit claim to the dealers engaged in works contract and who have opted to pay the tax at compounded rate under the provisions of sub clause (b) & (d) of sub section (7) of section 4. Clause (b) and (d) of sub section (7) of section 4 deals with composite works contract where the dealer would be paying on the entire turnover, a tax of 4% or 5% as the case may be or 1% as the case may be. Hence the works contractor who has elected composite scheme would not be permitted to claim input tax credit. Then when a dealer transfers his business as a whole he would not be permitted to claim input tax credit and a dealer who sells exempted goods except when such goods are sold in the course of export or exported outside the territory of India , such dealer would not be entitled to claim input tax credit. Here for the reasons best known to the Governments or the draftsman of the VAT Act 2005, the exports outside the territory or in the course of exports outside the territory of India are given input tax credit but rest of the exempted goods are not given input tax credit. The reasons may be because the export outside India generates foreign exchange but I don’t see any rational in giving exemption in the cases of in the course of exports which is nothing but a penultimate export. When an exemption presupposes levy of tax but it is exempted only under certain circumstances or occurrence of events. In other words, the tax would levied on the commodity but would be exempted basing upon the circumstances and hence the denial of input tax credit to the penultimate exports is quite ununderstandable and unwanted. Though other sub sections deal with the claiming of input tax credit, I would like to quote sub section (7) which was subordinate by Ordinance No. 7/2011 w.e.f. 15-11-2011 and replaced by Act No. 21/2011 and this particular sub section deals with the works contract and where works contract leviable under section 4(7)(a), the input tax credit was earlier allowed at 90% and later was restricted to 75%. I do fail to understand as to when works contract was considered as a deemed sale, the rationale behind restricting the input tax credit either 90% or 75% as the case may be would completely be illogical and though it is said that grant of input tax credit is not a right but a concession grant still, the input tax credit is allowed to the VAT dealers only when they have paid the tax to the seller and the same tax would be given a set off from output tax payable by the dealer. Hence placing any restrictions on the purchases made from a registered dealer is somehow indigestible. Of course it is always for the concerned persons to mull over and decide on their measure of eligibility.
Whether a dealer is a registered or not , he has to pay the tax. when the department is able to catch the dealers and the definition of the dealer as envisaged in section 2(10) of the VAT Act 2005 specifies that dealer means any individual , firm or company, he is liable to pay the tax as per the charging section 4, which is the heart of the APVAT Act 2005. So it is for the statute to extend its hand and to catch the dealers but placing any restriction on the purchases made from a dealer would somehow is not advisable. Further one more unhappy provision namely section 13(3)(aa) of the APVAT Act 2005 categorically envisages that if the selling dealer has not paid the tax or filed the return, then no input tax would be found eligible to the purchasing dealer. Several writ petitions before various High Courts have been filed and the Delhi High Court has declared that provision in section 4(9) which says that the ITC would not be given to the purchasing dealer if the selling dealer does not pay the tax as arbitrary and as such read down. The order was carried in by way of an appeal to the Hon’ble Apex Court in the case of Commissioner of Trade and Taxes, Delhi and others Vs. Arise India Limited and others [TS-2-SC-2018-VAT] whereby the Hon’ble Supreme Court has confirmed the orders of the Delhi High Court. Similar view was also taken by other High Courts. As far as the Telangana High Court is concerned no final orders have been passed by the Hon’ble High Court. Same is the case with the A.P. High Court also.
I have argued a case in W.P. No. 14952/2020 in the case of Ganesh Enterprises where peculiarly the seller who is under the incentives scheme in the form of deferment has not paid the tax but the department is disallowing the input tax credit and asking the purchaser to pay the tax. This is quite surprising as also atrocious as on one hand the seller is not found fault and he is allowed to claim the benefit of incentive and on the other hand the purchaser is denied the ITC and asked to pay the tax. The Hon’ble Court has granted interim stay.
Coming to GST Act 2017, the denial of ITC has taken different colours and in a period of 3 ½ years advent, there are several amendments to section 16. I would like to deal with the recent amendment made to section 16. Section 16 deals with input tax credit
16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
(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 due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Sub section (2) of section 16 is proposed to be amended once again in the Finance Bill 2021 by inserting clause (aa) which promalgamates as under;
“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”
Already times be gone proved that section 16 is a night mare for the dealers under the GST Act 2017. As section 16 says that the dealer who is doing the business has to not only verify the books of accounts, the monthly returns such as GSTR 1, 3B and annual returns like GSTR 9 and 9C etc, but has also to verify whether the seller has filed the GSTR 2B returns and paid the tax and GSTR 2A is auto populated return and if any mistake takes place in GSTR 2A when compared with GSTR -3B then he has to face all sort of music and also the selling dealer has to provide a statement of payment of tax and invoice particulars , accounting details, uploading of the particulars to the purchasers.
This seems to be a herculious task for the selling dealer. On one hand, it places in human workload to the selling dealer, it completely relieves and relaxes the officials appointed to administer the provisions. I would sarcastically say the Act enormously burdens the selling dealer to distract from his business and to look after these aspects. It is unfortunate that the GST Council proposed the section and its corresponding rules forgetting the fact under the indirect tax regime, the dealers act as agents on behalf of the Government.
Certain writ petitions were filed before various High Courts in Delhi High Court in the case of Bharati Airtel Tele Media Limited, Himanshu Mohita and Associates and Kolkata High Court in the matter of LGW Industries and AP High Court in Bharati Airtel Tele Media Ltd, which has withdrawn the writ petition and several other High Court like Gujarat and Rajasthan in which stay was not pressed, subject to correction.
Undoubtedly the proposal would trouble or harass the dealers who are registered with the departments and who are paying the taxes to the State and who are vigilant and kneen in filing the returns and the respective forms under the GST Act. However, it cannot be forgotten or ignored dealers are nothing less than agents who act for the Government in collecting the taxes only to pays to the Government exchequer. When the taxes are not paid by the dealer who are supposed to be the agents of the government, the government would be levying interest added to levy of penalties. It is no doubt that they are some blacksheep and unscrupulous dealers on whom the department would be initiating action very harshly including the provision for arrest not only against the dealers but also their family members and the persons like Chartered Accountants, Tax Practitioners and Advocates and their kith and kin.
Be that as it may, the government should think of the well being dealers who constitute taxman family who are registered under the GST Act and who purchase the goods from the registered person who provide the details of the registered person such as registration number etc and claim ITC and instead of granting them ITC, the department is demanding them to pay the ITC which is nothing but a tax required to be paid by the selling dealer. When the selling dealer fails to pay, collecting such tax from the recipient amounts to double taxation and is violative of article 265. For these reasons under the GST Act, the dealers not only pay the taxes but the interest and penalties which may vary from 25% to 100%. The dealer is burdened with the tax that the seller has to pay. There is no RCM also provided under the Act to take the benefit of the tax that would be paid by the dealer if tax that has not been paid by his selling dealer.
Whether it effects the capital expenditure:- Though RCM is referred to in the preceding paragraphs, nevertheless the RCM if implemented is a burdensome to the dealers as the dealers has to borrow money and pay the taxes on which he would be paying interest that would escalate the capital expenditure.
Whether the price of the goods would effect the end customer:- This is a very important factor and subject, which has to be thought of by all the concerned stakeholders like the Government, the dealers and also the end customer as the end customer is the effected person who would be paying for the commodity at an increased rate.
The end customer is certainly burdened with the hike in price as the selling dealer if does not pay tax, purchasing dealer would be paying the tax and interest and penalties under statutory mandate and would comprise of tax that he paid, penalties and interest which value would increase the capital expenditure also and would be determinative factor of the price after adding the gross profit to the commodity and adding to that the tax rate. That would be collected from the end customer and this aspect is not visualized or forecasted by anyone either Government or the dealer or the end customer as the Government wants money by hook or crook and the dealer who would be doing business wants his business to flourish and always looks towards for a healthy relationship with the Government would be penalizing the end customer who on account of the necessity for the goods would aim at purchasing the goods irrespective of the costs of the goods.
Something has to be done with the rejection of the ITC by the department. At best what I can suggest is the department persons can provide a note informing that if the goods are purchased from the dealers other than the one specified in the statement provided by them, the dealer would not be eligible for ITC. The question that arises is the dealers may be added and the statement has to be amended from time to time. Friends rather than inviting undue hurdles, I feel that the amendments in the statements would be feasible and more so the department is coming up with lot of amendments by way of notifications and if these type of thoughts are given, then I think the pilferage for government revenue can be curbed down. After all the President of India is also a victim as he is also an end user and every person in this world is the end user of the product.
Hence with great respect to all the people who read my article, I would with folded hands request earnestly and beg to give a thought including the departmental, GSTIN council and the Finance Minister and if permissible the Prime Minister to make suitable amendments to this effect. Hope that some goods days are in hear sight under the encomious leadership of our esteemed Prime Minister and his team who are striving hard for the development of the country.
*Author Mr. M. V. J. K. KUMAR, is Senior Standing Counsel for Central Excise, Customs & Service Tax at High Court of Hyderabad.