AMOUNT TO BE PAID CONCERNING STOCKS ON CANCELLATION OF REGISTRATION
– WHETHER LIMITED TO ITC AVAILED STOCKS OR NOT?
1. A registered person under GST may seek cancellation of the registration for numerous reasons including the closure of business or the turnover falling below the threshold limits. Now on the date of such cancellation, the concerned person may have goods in stocks as well as even capital goods. The person might have procured certain stocks before the advent of GST and also procured certain stocks in the GST regime. Person might have availed the VAT/Excise duty credit as well as an input tax credit (‘ITC”) under GST. However it is also possible that the person might not have availed the ITC for the reason that he may have been making the supplies under composition scheme (wherein tax credit is not permitted) or he may have purchased the goods on which ITC is not available (e.g. motor vehicles, etc.). In all such situations, the issue for deliberation is whether the person-in-question is required to pay any amount on the stocks including capital goods at the time of cancellation. Please note that the present discussion does not cover situations wherein the existing business is transferred (on account of sale, merger, etc.) with the transfer of balance ITC, if any.
2. Sec. 29 of the CGST Act, 2017 deals with the provisions related to cancellation of registration. Sec. 29(5) of the said Act dealing with the current issue provides as under:
“Sec. 29(5) Every registered person whose registration is cancelled shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher, calculated in such manner as may be prescribed :
Provided that in case of capital goods or plant and machinery, the taxable person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery, reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery under section 15, whichever is higher.”
3. Above provision thus provides that the registered person whose registration is cancelled shall pay any amount by either debiting the cash ledger or the credit ledger. It further states that the said amount shall be equivalent to:
(i) credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery on the day immediately preceding the date of such cancellation (referred to as first component)or
(ii) the output tax payable on such goods (referred to as the second component), whichever is higher, calculated in such manner as may be prescribed
4. It further provides that in the case of capital goods as far as first component is concerned the amount of ITC shall be derived after allowing for the period of use.
5. Perusal of the above-referred provisions will entail that what is sought to be paid is the “amount”. That amount needs to be determined as the higher of the value of the first and the second component.
6. Also fundamentally the distinction has been drawn between inputs and capital goods while determining the first component at (i) above by allowing for reduction from ITC availed for the period of use in case of capital goods but not in the case of inputs. This is logical as the capital goods are capable for use over a period of time and hence the ITC attributable to the period before the date of cancellation should not be taken into account for determining the amount payable at the time of cancellation. Reference here is invited to Rule 44(1) of the CGST Rules, 2017 formulated in the context of Sec. 29(5) which provides that the pro-rata ITC in case of capital goods is to be calculated assuming the useful life of capital goods to be 5 years. Hence if on the date of cancellation, the given capital goods has been used for 3 years, the ITC to be considered for determining the first component at (i) above shall be pro-rata of the balance 2 years of the remaining useful life.
7. Now with the above basic understanding, we must consider the issues posed in the introduction.
8. The first issue to consider is whether the goods acquired in the pre-GST era will be covered by Sec. 29(5) or not? And if yes, how to determine the amount payable at the time of cancellation?
9. Sec. 29(5) operates qua the inputs and capital goods. The word “input” has been defined u/s 2(59) of the CGST Act, 2017 to mean any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. The word “capital goods” has been defined u/s 2(19) to mean goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business. One may consider that wherever the legislature wanted the word “capital goods” to be defined in the context of the pre-GST regime it has been specifically provided for. Explanation to Sec. 142 in the context of transitional provisions specifically provide that the word “capital goods” shall have the meaning as per the Central Excise Act, 1944 or the rules made thereunder (in the context of CGST) or the word “capital goods” shall have the meaning as assigned under the Gujarat Value Added Tax Act, 2003 (in the context of SGST). Further, the first component for determining the amount payable specifically provides for considering the “credit of input tax” in respect of inputs as well as capital goods. The term “input tax” has been defined u/s 2(62) of the CGST Act, 2017 to mean the tax “charged on any supply of goods or services”. That can only be GST as the levy on supply came into existence only under GST. Hence a view can be taken that for determining the first component to arrive at the amount payable the word “inputs” and “capital goods” are to be read in the context of only the goods acquired under GST regime and hence the same cannot apply to pre-GST acquired goods.
10. Now we come to the second component which is “the output tax payable on such goods” or “the tax on the transaction value of such capital goods or plant and machinery under section 15” in the context of inputs and capital goods respectively.
11. For the pre-GST acquired goods it can be contended that as they are not “inputs” or “capital goods” based on the discussions above, even the second component cannot be determined when such goods are in stock at the time of cancellation for the reason that the second component is in the context of “such goods” or “such capital goods” referred while determining the first component and as the pre-GST acquired goods are neither inputs or capital goods for determining the first component, it cannot be so even for the second component and hence in such case no amount is required to be paid at the time of cancellation. Readers will have more clarity on the said aspect as we discuss the implications for the goods acquired during the GST period.
12. Now let us analyze the provisions in the context of goods in stock which were acquired during the GST period. Such goods will clearly be “inputs” and “capital goods” and therefore one has to ascertain the amount payable under both the components and pay the amount whichever is higher. Let us understand the implications.
13. The registered person cancelling the registration may have inputs or capital goods on which he would not have availed any ITC. Therefore as far as the first component is concerned the amount payable shall be zero. But what about the second component? Law provides that the amount of the second component shall be “the output tax payable on such goods” (in case of inputs) or “the tax on the transaction value of such capital goods or plant and machinery under section 15” (in case of capital goods). We submit that on the following grounds the value of the second component cannot be determined in case of non-ITC availed inputs as well as capital goods and therefore no amount is required to be paid on such non-ITC availed goods in stock at the time of cancellation:
a. Provisions contained u/s 29(5) of the CGST Act, 2017 are meant to neutralize any undue benefit taken by the person in terms of availing ITC on the inputs or capital goods and not paying the output tax on the same or utilizing the same for 5 years owing to the cancellation of registration. Therefore the said provisions cannot be construed as charging provisions seeking to levy the tax not otherwise imposable as per Sec. 9(1) of the CGST Act, 2017. Therefore the determination of the second component can only entail the inputs or capital goods for which ITC has been availed. Even in the pre-GST era, such provisions have been construed to neutralize the CENVAT credit benefits availed earlier (see UOI v. K. INDUSTRIES LTD. 2008 (223) E.L.T. 342 (Raj.)).Therefore the determination of the second component cannot be applied in cases where ITC has not been availed.
b. A view permitting the recovery of the amount equal to the tax payable on the non-ITC availed goods which are in stock at the time of cancellation and hence not supplied will be contrary to the Constitutional scheme concerning the GST. Article 246A of the Constitution permits the legislature to make laws for goods and services tax imposed by the Union or by such State. Further the term “goods and services tax” has been defined under Article 366(12A) to mean any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. Therefore categorizing the imposition of tax on the non-ITC availed stock under the guise of “any amount” to be paid on cancellation of registration in absence of any supply will run counter to the Constitutional scheme which authorizes the imposition only on the event called “supply”. Therefore even on this ground, the view permitting the recovery of the amount equal to the tax payable on the non-ITC availed goods may not sustain.
c. The definition of “capital goods” as contained u/s 2(19) of the CGST Act, 2017 only includes the goods which are capitalized in the books and for which ITC has been claimed. It does not include the goods which are capitalized but ITC has not been claimed (e.g. motor vehicles). Hence a view holding that Sec. 29(5) permits imposition of any amount on non-ITC availed inputs but not on non-ITC availed capital goods (as such goods will not be considered as capital goods) will be discriminatory under Article 14 of the Constitution.
d. The word “such” used in the provisions for determining the second component is vital. Determination of the second component entails “the output tax payable on such goods”. Now which are “such goods”? Are they the goods referred while determining the first component viz. inputs held in stock and inputs contained in semi-finished or finished goods held in stock or capital goods or plant and machinery in respect of which ITC has been claimed? The word “such” has been defined by Webster to mean “having the particular quality or character specified; representing or referring to the object as already particularized in terms which are not mentioned”. Hon’ble Supreme Court in the case of Central Bank of India v. Ravindra AIR 2001 SC 3095 has defined the word “such” as an adjective prefixed to a noun indicative of draftsman’s intention that he is assigning the same meaning or characteristics to a noun previously indicated. Therefore we can contend that the use of the word “such” in the context of goods for determining the second component covers the nature and the type of goods expressed in the first component. As only the inputs and capital goods on which ITC availed has been considered in the first component, the output tax payable for determining the second component can only be on such ITC availed goods.
e. The distinction sought to be made between inputs and capital goods as far as the first component is concerned wherein no reduction in terms of ITC is allowed for inputs but the same is allowed for capital goods whereas for the second components the value shall be the tax on such goods also supports the contention that only ITC availed goods are sought to be covered u/s 29(5).
f. The interpretation made otherwise will lead to imposition of tax on the goods for which no ITC has been availed. Therefore the same will defeat the very intention of allowing the person to cancel the registration to avail the threshold benefit while supplying the goods in stock post the date of cancellation.
g. It can also be contended that the determination of the second component entails the determination of the “output tax payable on such goods” in case of inputs. In the case of capital goods, it is “tax on the transaction value of such capital goods or plant and machinery under section 15”. There is a difference in the language used. As the levy of GST is only on supply, the output tax shall be payable only if there is a supply. There is no deeming fiction in law to treat the stocks on the date of cancellation of registration as deemed to have been supplied. Therefore it can be contended that in case of “inputs” in stock, there cannot be any output tax payable in absence of supply and hence on this ground the amount of the second component for non-ITC availed inputs and even for ITC availed inputs cannot be determined. Even in case of capital goods though the language is different it entails determination of the tax on the “transaction value of such capital goods or plant and machinery under section 15”. The transaction value u/s 15(1) is the price paid or payable where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Therefore even the determination of the value of supply requires a supply. In the absence of deeming fiction to treat the capital goods in stock as supplied, the value of supply cannot be determined. Hence it can be contended that even in the case of capital goods in the books at the time of cancellation of registration, the value of the second component cannot be determined. The author is conscious of the fact that in the pre-GST (Central Excise) era the Court has held that the determination of the value of the second component based on the market price is a valid provision even in absence of triggering the charging provisions (i.e. manufacture) but that was only limited to capital goods on which CENVAT credit was availed to neutralize the benefit. However, the relevance of a deeming fiction to treat such stocks as supplied will be required as was the case in the context of GVAT Act, 2003 (see Sec. 27(6) of the GVAT Act, 2003). Therefore it is submitted that even the aspect of absence of a deeming fiction will be vital to test the validity of the second component.
14. Based on the above discussions it can be considered that the amount payable on the stocks (inputs as well as capital goods) at the time of cancellation of registration shall be limited only for the stocks on which ITC has been availed. Also in the absence of the deeming fiction to treat such stocks as supplied, the validity of the second component needs to be determined. However for such ITC availed stock, the payment of an amount equal to ITC availed (in case of inputs) or ITC availed less pro-rata for the period of use assuming useful life as 5 years (in case of capital goods) shall be required.
(Views are strictly personal)
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In para 11, the words “For the pre-GST acquired goods it can be contended that as they are not “inputs” or “capital goods” based on the discussions above” seem to be little perplexing.
In the discussions above para 11, case for Pre-gst goods not being CG can be discerned. But pre-GST goods not being Inputs is a little hard to comprehend.