Implications of Lapse of Credit on Inputs against outward supplies of fabric as per Notification 20/2018-Central Tax (Rate) dated 26-07-2018
As per clause (ii) of proviso added to Notification No. 5/2017-Central Tax (Rate) dated 28-06-2017 vide the subject notification:
“………in respect of said goods , the accumulated input tax credit lying unutilized in balance, after payment of tax for and upto the month of July, 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse………………..”
Notified Goods where refund under Inverted Duty Rate was not allowed vide Notification No. 5/2017-Central Tax (Rate) dated 28-06-2017 and Notification No. 44/2017-Central Tax (Rate) dated 14-11-2017 and for which refund shall henceforth be allowed are as under:
|S. No.||Tariff item, heading, sub-heading or Chapter||Description of Goods|
|1.||5007||Woven fabrics of silk or of silk waste|
|2.||5111 to 5113||Woven fabrics of wool or of animal hair|
|3.||5208 to 5212||Woven fabrics of cotton|
|4.||5309 to 5311||Woven fabrics of other vegetable textile fibres, paper yarn|
|5.||5407, 5408||Woven fabrics of manmade textile materials|
|6.||5512 to 5516||Woven fabrics of manmade staple fibres|
|6A.||5608||Knotted netting of twine, cordage or rope; made up fishing nets and other made up nets, of textile materials|
|6C.||5806||Narrow woven fabrics, other than goods of heading 5807; narrow fabrics consisting of warp without weft assembled by means of an adhesive (bolducs)|
|7.||60||Knitted or crocheted fabrics [All goods]|
It may be noted that notification has been issued in exercise of powers conferred under clause (ii) of the proviso to sub-section (3) of section 54 of the Central Goods and Services Tax Act, 2017, which only allows to notify the goods or service against which refund of inverted duty rate shall not be allowed. Though the government well with in its power has rescinded the notification issued earlier on the subject, but the said section does not empower the government to decide and seal the fate of accumulated balance of unutilized credit. Hence by declaring “lapse” of unutilized credit, the executive has exceeded its delegated powers under the law.
2. Credit of services shall also get lapsed
Further, the entire amount of unutilized credit has been promulgated to lapse in respect of goods covered by subject notification. It may be noted that what has been notified under the notification 5/2017 as amended by 20/2018 is the fabric, the unutilized credit in respect where of includes both the credit of inputs as well as input services. While the refund of input services is already not being allowed by virtue of section 54(3) Proviso clause(ii) read with Rule 89(5), the above notification shall result in lapse of credit of input services also, which was never the subject of above inverse duty rate refunds. Hence what is being withdrawn from the hands of the industry is more than what is sought to be awarded by the said notification 20/2018 dated 26-07-2018.
Lapse of unutilized balance of credit shall result in unsold stock existing on 31-07-2018, being charged to tax without corresponding availability of input tax credit, whether stock comprises above mentioned items of HSN.
For Example, if a person is having stock of Rs. 50 lacs in the form of fabric, comprising Yarn for Rs 30 lacs and having paid ITC @ 12% on Yarn amounting to Rs. 9 lacs and has ITC balance of Rs. 10 lacs on 31-07-2018. He may have to pay tax of Rs. 2.50 lacs [50 lacs @ 5%] on sale of stock of fabric Rs. 50 lacs, without availability of credit of ITC
In Eicher Motors Ltd. And Anr vs Union Of India And Ors decided on 28-01-1999 similar issue of lapse of MODVAT credit under Rule 57-F(4A) farmed u/s 37 was before the Supreme Court :
a. As per Rule 57F (4A) enunciated:
Notwithstanding anything contained in sub-rule (4), or sub-rule (1) of Rule 57-A and the notifications issued thereunder, any credit of specified duty lying unutilised on the 16th day of March, 1995 with a manufacturer of factors, falling under Handing No. 87.01 or motor vehicles falling under Heading No. 87.02 and 87.04 [or chassis of such tractors or such motor vehicles under Heading No. 87.06] of the Schedule to the Central Excise Traffic Act, 1985 (5 of 1986) shall lapse and shall not be allowed to be utilised for payment of duty on any excisable goods, whether cleared for home consumption or for export Provided that nothing contained in this sub-rule shall apply to credit of duty, if any, in respect of inputs lying in stock or contained in finished products lying in stock on the 16th day of March, 1995.
b. Held by Supreme Court in Para 6:
“…………….If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the Rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods……………..”
Hence the lapse of unutilized credit in terms of 20/2018-CTR dated 26-07-2018, can not withstand the rigors of jurisprudence already available on the subject.
Since the clause (ii) as mentioned here in above is out side the ambit of section itself, drawing inference from the language of notification, it is difficult to say that the implications are limited to manufacturer and not traders or that implications are limited to when fabric is outward supply and not inward supply.
Hence there may be following class of persons who may be affected:
1. Persons purchasing Yarn and manufacturing fabric under above HSNs
2. Persons purchasing fabric under above HSNs and manufacturing under some other HSNs
3. Persons purchasing fabric under same HSNs, specified above, and disposing off under same HSNs.
The above notification shall however not impact where
a) Yarn is traded/returned instead of being converted into fabric
b) A person doing job work on yarn and manufacturing fabric on behalf of principal manufacturer instead of manufacturing fabric on his own account.
c) Fabric is sold /disposed off before 31-07-2018.
Lapse of unutilized credit in respect of goods mentioned in the notification shall result in making the unutilized credit the part of cost of goods, which have already been sold without making the unutilized credit the part of recovery of sale proceeds. These credits were never part of cost of goods sold because though the refund was not being allowed on these goods, the input tax credit could be claimed. The “lapse” of credit shall result in total loss which is not recoverable from the customer.
More than 1 crore returns have been filed till the date of subject notification, where in the above amount has not been claimed as expenditure, though the substantial part of it was incurred in the year 2017-18. If the assesses wish to claim it in current year expenditure, it shall be prior period item and it is apprehended that expenditure shall not be allowed to the assesses. Further, the claim of entire amount as expenditure in current year shall result in complete imbalance in the financials to be reported to the banks and income tax department, resulting in multiplication of miseries. It may here be pertinent to note that the unutilized amount in this regard is running into lakhs and crores and shall substantially affect the direct tax collections also. The industry is also confused over the impact of this notification on capital goods as whether to capitalize this lapsed credit or claim it as expenditure, which is running into crores.
A number of persons are dealing in multiple items which cover not only the items covered by notification 5/2017 and 20/2018 , but also items covered by other HSNs. The law does not require HSN wise segregation of input tax credit. But the above notification shall result in carrying out the painful and subjective task of this segregation which shall again be subject to whim and fancies of tax authorities.
The above notification though takes care of all tax liabilities up to July 2018, but it may be noted that section 74 allows the determination of tax liability even up to 5 years. Once credit gets lapsed under notification 20/2018 whether the proceedings at subsequent period of time shall allow restoration of credit to allow such set off is another moot point which requires a lot of mulling.
Before this notification, The unutilized credit was available for meeting liabilities resulting from other businesses also, which advantage has completely been deprived off.
The scheme of GST law no where envisages the lapse of credit once for all. Even where the goods travel to exempted category, the incidental credit after going to temporary suspension gets revived once goods come out of slumber of exemption category. Section 18 of the CGST law stands testimony to the fact.
While the restoration of refund of fabric covered by notification 5/2017 as amended by notification 20/2018 is a welcome step, the move to declare death knell for unutilized credit is completely unwarranted.