Can Delhi High Court decision in the case of ‘Cellular operators association of India Vs. UOI‘ block migration of KKC?
Revenue authorities are issuing show cause notice to the registered taxable persons who had migrated accumulated credit of Krishi Kalayan Cess (herein after referred as KKC) from erstwhile tax regime to new tax regime vide Trans-1 Form.
These show cause notices are issued mainly on the following two grounds:
1) Cenvat credit on account of KKC was not allowed to set off with service tax and central excise duty. CGST subsumed Finance Act 1994 (Service Tax) and Central Excise. Therefore KKC is not an admissible credit to discharge CGST liability.
2) Accumulated cenvat credit on account of KKC cannot be migrated to GST as because KKC has ceased to exist in GST regime.
Revenue authorities are relying on the decision of Delhi High Court in the case of cellular operators association to block the migration of accumulated credit of KKC to electronic credit ledger and subsequent utilisation of the same to discharge CGST/IGST liability.
To analyse the fairness of the aforesaid approach as taken by the revenue authority, we need to evaluate the aforesaid decision of Delhi High Court from the perspective of its applicability to block the migration of accumulated credit of KKC cenvat credit in the electronic credit ledger and subsequent utilisation of the same to discharge CGST/IGST liability.
In the writ petition filed before the Delhi High Court, Cellular Operators Association of India and Others (herein after referred as petitioner) claim a vested right to avail benefit of the unutilized amount of Education Cess (EC in short) and Secondary and Higher Secondary Education Cess (SHE in short) credit.
Delhi High Court rejects the petition mainly on following grounds:
1) EC and SHE were abolished and were not payable on excisable goods with effect from 1st March, 2015. EC and SHE were also abolished and ceased to be payable on taxable services with effect from 1st June, 2015. Omission of a provision signifies deletion of that provision and is normally not treated as different from repeal. EC and SHE cess have not been allowed to take credit after the afore said two dates for the simple reason that EC and SHE ceased to be applicable and were no longer payable after the said dates. EC and SHE did not subsume in excise duty and service tax as such subsume was not incorporated in the law.
2) Cross-utilization of EC and SHE cess was never permitted and allowed under earlier provision. EC and SHE, were in the nature of taxes and not fee, but it would be incorrect and improper to treat them as excise duty or service tax. They were specific cess for the objective and purpose specified.
3) There is no vested right to avail benefit of the un utilised amount of EC or SHE credit.
Present issue is regarding admissibility of migration of KKC to CGST credit ledger. To analyse the issue, first we need to deliberate on applicability of the aforesaid Delhi High Court decision to deal with transition of KKC credit from earlier tax regime to GST regime.
EC or SHE was not allowed to set off as because they were abolished and not subsumed with central excise and service tax as noted by the Delhi High court in the case of petitioner. EC or SHE credit was never allowed to set off with central excise duty and service tax, therefore accumulated credit on account of EC or SHE automatically lapsed in absence of any transition provision under the erstwhile law.
Whereas KKC, which was imposed under section 161 of Finance Act 2016 and is a part of chapter V of Finance Act 1994, is subsumed with CGST Act 2017 in view deletion of Entry 92C of Union List I vide 101 amendment of Constitution.
Therefore, KKC is subsumed with GST along with central excise duty and service tax, which implies identity of KKC, central excise duty and service tax have lost and all of them merged with CGST ( Central Goods and Service Tax) hence on migration of accumulated KKC, it gets the character of CGST credit and there is no restriction to set off CGST credit with CGST or IGST (Integrated Goods and Service Tax) liability.
Therefore the principle of law as considered by Delhi High court to negate the claim of petitioner to set off EC or SHE is no longer applicable under GST regime.
To analyse the aforesaid issue, we need to examine the sec 140(1) of CGST Act 2017, which allows transition of credit from earlier tax regime to GST regime.
“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 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 in such manner as may be prescribed:
Provided that the registered person shall not be allowed to take credit in the following circumstances, namely:—
(i) where the said amount of credit is not admissible as input tax credit under this Act; or
(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or
(iii) where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.” ( Emphasis supplied)
Section 140(1) of CGST Act 2017 allows migration of CENVAT credit which was captured in service tax return for the quarter ended on June 30, 2017 in electronic credit ledger. There is no pre condition that the said CENVAT credit should be eligible for set off under earlier law. The only condition is that the said credit is admissible under CGST Act 2017.
Delhi High Court while disposing the petition of cellular operators association has accepted that the nature of EC or SHE is tax, according to the said principle, KKC is also tax.
Moreover Rule 3(1a) of Cenvat Credit Rules 2004 includes KKC as CENVAT credit. Sec 140(1) of CGST Act admits CENVAT credit transition to electronic credit ledger. Therefore KKC being CENVAT credit is eligible in transition to electronic credit ledger. Restriction on cross utilisation of KKC with service tax and excise duty was there under earlier law and there is no such restriction under CGST Act. Moreover section 140(1) which allows transition of CENVAT credit put restriction on same only where the same is not admissible under the CGST Act and not under earlier law.
In this context it is relevant to refer sec 140(2) of the CGST Act 2017
“Sec 140(2) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, credit of the unavailed CENVAT credit in respect of capital goods, not carried forward in a return, furnished under the existing law by him, for the period ending with the day immediately preceding the appointed day in such manner as may be prescribed:
Provided that the registered person shall not be allowed to take credit unless the said credit was admissible as CENVAT credit under the existing law and is also admissible as input tax credit under this Act.” (Emphasis supplied)
There is a restriction in transition of CENVAT credit in respect of capital goods if the said credit is not eligible for set off under earlier tax regime.
Therefore had it been the intention of the legislator to block the transition of KKC in electronic tax register it should have added the word under “existing law” as well in sec 140(1) of CGST Act as it has added in sec 140(2) of CGST Act for transition of CENVAT credit in respect of capital goods. Hence as per sec 140(1) of CGST Act, there is no requirement of eligibility of CENVAT credit under the earlier law to migrate in electronic credit ledger.
Therefore the action of the revenue authority for blocking the KKC in transition to electronic credit ledger goes beyond the power given in legislation.
Delhi High Court negates the claim of the petitioner regarding availing of benefits of vested right on un utilised EC or SHE as because such right is not recognised in the law. Whereas under GST regime, sec 140(1) of CGST Act 2017 has recognised the right of the taxpayer to avail the benefit of unutilised CENVAT credit, which is KKC in this case by way of transition in electronic credit ledger.
Therefore revenue authorities, including Advance Ruling Authorities are in correct in applying Delhi High Court judgement to deny the legitimate right of the tax payer to migrate un utilised KKC in electronic credit ledger.
Question- 2 : Does transition provision as captured in CGST Act provide safe passage of migration of KKC which was not available for EC or SHE Cess under earlier law?
Delhi High court has pronounced its decision in the backdrop of abolition of EC or SHE Cess and there was no transition provision to migrate EC or SHE cess to Excise duty or Service Tax.
But under CGST Act there is a specific provision to migrate cenvat credit from earlier tax regime to GST regime.
There are no two opinions that KKC is tax. Even Delhi High court has also admitted, EC or SHE cess is tax. Moreover Rule 3(1a) of Cenvat Credit Rules 2004 incudes KKC as cenvat credit.
Therefore KKC is nothing but cenvat credit.