GST Update on Amended Section 140(1) of the CGST Act, 2017 restricting carry forward of Cess:-

The carry forward of the balance of education cess and SHE cess in the GST regime has been a point of discussion for a long time. Although, we had explained in our earlier update that there is no legal prohibition in the CGST Act, 2017 as regards carry forward of the cenvat credit balance of education cess and SHE Cess, but the FAQs and tweets released by the government have unanimously held that it is not permissible to carry forward the balance of cess in the GST regime under section 140(1) of the CGST Act, 2017. It is pertinent to mention that even the Maharashtra Authority for Advance Ruling in the case of Kansai Nerolac Paints Limited [2018 (12) G.S.T.L. 526 (A.A.R.-GST)] has held that the carry forward of accumulated credit by way of KKC appearing in service tax return is not allowed in the GST regime on the basis of FAQs released by the government. As there was no legal prohibition as regards carry forward of Cesses in the GST regime, the government came up with amendment in section 140 of the CGST Act, 2017. The amended section reads as follows:-

Section 140 of CGST Act,2017 – Transitional arrangements for input tax credit

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 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.

Explanation 1.—For the purposes of sub-sections (1), (3), (4) and (6), the expression “eligible duties” means––

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;

(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;

(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;

(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001,

in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.

Explanation 2.—For the purposes of sub-sections (1) and (5), the expression “eligible duties and taxes” means––

(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;

(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;

(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;

(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;

(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;

(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985;

(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001; and

(viii) the service tax leviable under section 66B of the Finance Act, 1994, in respect of inputs and input services received on or after the appointed day.

Explanation 3.- For removal of doubts, it is hereby clarified that the expression ‘eligible duties and taxes’ excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975;

It is submitted that the motive of the amendment in the above cited section is to disallow carry forward of cess balance in the GST regime. However, the amendment done by the government has given rise to more confusion and disputes in the days to come.

Firstly, we discuss the impact of including the word ‘eligible duties’ in section 140(1). As the erstwhile section 140(1) mentioned only cenvat credit, the meaning of which was to be taken according to Rule 3 of the Cenvat Credit Rules, 2004 which also included cesses, the addition of words ‘cenvat credit of eligible duties’ has been resorted to by the government. Now, the meaning of eligible duties as given in Explanation no. 1 and 2 of section 140 has also been amended so as to include reference of sub-section (1) in the same. However, the inclusion of reference of sub-section (1) seeks to bring absurd interpretation for the reason that the meaning of ‘eligible duties’ as given in the explanations was originally in the context of sub-section (3), (4) and (6) which pertained to credit admissibility on stock of inputs, semi-finished goods and finished goods as on appointed day. Similarly, explanation 2 specifying meaning of eligible duties in the context of sub-section (5) pertained to credit of goods/input services in transit. However, the government while adding reference of sub-section (1) in the said explanations, that too retrospectively, has forgotten this vital aspect which has huge ramifications for the assessees. It is submitted that the meaning of eligible duties in the explanation 1 clearly states that it is with respect to inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day but the sub-section (1) of the CGST Act, 2017 pertains to carry forward of balance of cenvat credit in the return filed by the assessee. This is the major point to ponder as one may interpret that this amendment seeks to restrict carry forward of the cenvat credit of eligible duties of inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock on the appointed date. Say for example- if the total cenvat credit to be carried forward in the return is Rs. 20,00,000/- but the closing stock available with the assessee reflects cenvat credit of Rs. 12,00,000/- only, then in that case, whether the assessee will be allowed to carry forward cenvat credit only to the extent of Rs. 12,00,000/-? This situation may arise due to many reasons including if the rate of tax on output is less than rate of tax on inputs in Excise and Service Tax regime. Not only this, the bifurcation of the cenvat credit according to the closing stock and exclusion of cesses will be a complex activity. It is submitted that though the intention of the government is not to restrict carry forward of cenvat credit to the extent of stock but the meaning of eligible duties definitely indicates so.

We also wish to point that the reference of sub-section has been included in both the explanations thereby leading to two questions as follows:-

1. Whether the carry forward of balance of service tax credit is allowable? This is for the reason that there is no mention of service tax in the meaning of eligible duties given in Explanation no. 1 whereas in Explanation no. 2, service tax leviable in respect of inputs and input services received on or after the appointed day is being mentioned and not that accumulated in the erstwhile regime. Since there is no specific mention of service tax in either of the explanations, can it be presumed that the assessees have wrongly carried forward their service tax credit balance in the GST regime?

2. Another question that arises is which of the explanation is required to be referred for the meaning of eligible duties for sub-section (1)? Both the explanations provide meaning of eligible duties and both the explanations have reference of sub-section (1) of section 140. Moreover, certain duties such as excise duty is appearing in both the explanations.

It is submitted that the amendment in section 140 was made with a view to settle down issues cropping in the GST regime but the manner in which amendment has been done has led to more anomalies in the drafting of GST Law. As such, the government should resolve the confusion created by the amendment made in section 140 of the CGST Act, 2017.

We hope the above is useful to you. This update is solely for educational purpose.

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2 Comments

  1. Saurabh Chokhda says:

    Hi Subhash, as per explanation 2- eligible duties and taxes for the purpose of sub-section (1) & (5) includes service tax too. Therefore, there is no doubt in carrying forward of service tax credit u/s 140(1).

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