Ever since introduction of the GST Law, Input Tax Credit (ITC) has been the most debated topic and a lot of confusion and disputes are revolving around the subject of availment of ITC. This has led to a plethora of litigations which are pending with the Hon’ble Courts and many more are still awaited. The most common illusion among the stakeholders in dealing with the issue is to confuse availment of ITC with the concept of vested right. It is argued that ITC is a benefit in the nature of concession and not a right given by the legislature and that it is not devoid of any conditions. In this article, we shall try to understand the exact nature of ITC and the concept of vested right.
The word ‘vested right’ is defined as under:
“To give an immediate fixed right of present or future enjoyment;”
“A vested right is commonly defined as a “right that so completely and definitely belongs to a person that it cannot be impaired or taken away without the person’s consent.” Brubaker v. Deere & Co., 2009 U.S. Dist. LEXIS 102419 (S.D. Iowa Oct. 16, 2009)”
Thus, a vested right is an absolute right over any asset which cannot be taken over without the consent of its owner.
Section 16 of the CGST Act, 2017 contains detailed provisions regarding eligibility and conditions for taking input tax credit. Section 16 reads as follows:
“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,-
(3) ……………………….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………………”
Section 16(1) is the primary provision in the GST Law which confers the eligibility to claim ITC to every registered person. However, the eligibility is not absolute and requires compliance with certain specified conditions after which ITC can be availed.
Section 16(2) is a non-obstante provision to Section 16(1) and it specifies certain conditions which have to be complied by a registered person to become eligible for claiming ITC benefit. In addition to these, Sub-Sections (3) and (4) also specifies conditions which must be complied to avail ITC under Section 16(1). Further, Section 17 and 18 also prescribes conditions for availing input tax credit by any registered person.
Thus, Section 16, 17 and 18 of the CGST Act, 2017 specifies certain conditions for availment of ITC by a registered person. Some of these are pre-conditions and some are post-conditions to the availment of ITC. Until and unless these conditions are satisfied, the right to claim ITC is inchoate and they are subject to operation of law and can be taken away by it. In Eicher Motors Ltd. and Anr vs Union of India and Ors. Etc, (1999) 152 CTR (SC) 273, the Hon’ble Supreme Court of India considered MODVAT Credit as an ‘indefeasible right’. However, it must be understood that this indefeasible right as stated by the Hon’ble Court is created only once the same gets vested and not before that. Once a right gets vested, it cannot be taken away by any authority and then it becomes indefeasible. Any infringement by any person or authority on such rights, can be interfered by the court.
The legislative intent in this context is very clear that the right to claim ITC is in the nature of concession or benefit granted to a registered person and is not an absolute right. The legislature has conveyed its intention very clearly that ITC benefit can be withdrawn by the department if these conditions are not complied with in letter and spirit.
Section 16(1) which grants eligibility to avail ITC benefit, before allowing any such benefit, speaks about “conditions and restrictions as may be prescribed”. Further, it states that ITC can be availed only by a registered person. Section 2(94) defines “registered person” as a person who is registered under section 25 but does not include a person having a Unique Identity Number. However, Section 9(1) which is the section for levy of taxes states that CGST shall have to be paid by every taxable person. Section 2(107) defines “taxable person” as a person who is registered or liable to be registered under section 22 or section 24. Thus, it is very clearly stated that tax shall have to be paid by every taxable person i.e. by those who are liable to be registered under the Act. Thus, even unregistered persons are liable to pay taxes. However, ITC can be claimed only by a registered person which may be said to be in the nature of a condition. Thus, in case, a person who is liable to pay taxes, but does not get himself registered, shall have to pay taxes payable by him till the date of his registration, but he shall not be able to avail ITC on the purchases made by him, if any.
The right to avail ITC does not vest until all the conditions mentioned in Section 16, 17 & 18 are satisfied. Once it vests, then it becomes absolute and is guarded by Article 300A of the Indian Constitution which gives Right of Property to every citizen. However, it is only a constitutional right and not a fundamental right. Further, in the humble opinion of the author, the vesting conditions must also be such which are within the tenets of the Indian Constitution. The following provisions of the Indian Constitution are worth mentioning within which the conditions must be framed:
The Hon’ble Supreme Court of India in ALD Automotive Pvt. Ltd. Vs The Commercial Tax Officer & Ors., (2019) 13 SCC 255, held as under:
“32. The input credit is in nature of benefit/ concession extended to dealer under the statutory scheme. The concession can be received by the beneficiary only as per the scheme of the Statute.”
“The conditions under which Input Tax Credit is to be given are all enumerated in Section 19 as noticed above. The condition under which the concession and benefit is given is always to be strictly construed. In event, it is accepted that there is no time period for claiming Input Tax Credit as contained in Section 19(11), the provision become too flexible and give rise to large number of difficulties including difficulty in verification of claim of Input Credit. Taxing Statutes contains self-contained scheme of levy, computation and collection of tax. The time under which a return is to be filed for purpose of assessment of the tax cannot be dependent on the will of a dealer.”
The Apex Court in the case of M/S. TVS Motor Company Ltd. vs The State of Tamil Nadu And Others, 2018 Latest Caselaw 763 SC, read as under:
“After discussing certain judgments of this Court and other High Courts, the High Court has observed that the legal position was that right to claim ITC is not a vested right or an indefeasible right. It is a benefit conferred under the Act in certain contingencies and subject to conditions prescribed in the statutory scheme. Therefore, it is open to the State Legislature to provide for conditions and restrictions while extending the concession. Likewise, it was also necessary for any assessee to claim input credit to fulfill those conditions.”
Section 140 of the CGST Act, 2017 contains Transitional Provisions so as to ensure smooth transition from the erstwhile regime. Further, to enable seamless flow of credit, these provisions contained certain provisions for claiming credit of tax paid on stock lying as on 01-07-2017. However, certain due dates were specified for claiming the same and crediting the ITC in the Electronic Credit Ledger under the GST Regime. Certain registered persons who were legitimately entitled to avail such credit, due to certain reasons could not file the return specified for the purpose and thus could not avail the credit which was otherwise available to them. A question arises if such a credit could lapse due to a procedural default on the part of a registered person?
In this context, the Hon’ble Gujarat High Court in M/s. Siddharth Enterprises vs The Nodal Officer, TS-684-HC-2019(GUJ)-NT read as under:
“23. The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per the then existing CENVAT credit rules is a vested right and, therefore, it cannot be taken away by virtue of Rule 117 of the Central GST Rules, 2017, with retrospective effect for failure to file the form GST Tran-1 within the due date, i.e. 27.12.2017. The provision for facility of credit is as good as the tax paid till the tax is adjusted and, therefore, the right to the credit had become absolute under the Central Excise Act and, therefore, the credit is indefeasible and the same cannot be taken away.
27. The right to carry forward credit is a right or privilege, acquired and accrued under the repealed Central Excise Act, 1944 (1 of 1944) and it has been saved under Section 174(2)(c) of the CGST Act, 2017 and, therefore, it cannot be allowed to lapse under Rule 117 of the CGST, 2017, for failure to file declaration form GST Tran-1 within the due date, i.e. 27.12.2017.”
Thus, transitional credit can be said to be a vested right which has already accrued to the registered person due to total compliance with conditions under the erstwhile law and it cannot be taken away by a procedural lapse on the part of the registered person.
It is well understood that ITC is one of the most misused concept of the GST Law and majority of frauds under the regime have hovered around this very concept. However, in this connection, the following needs a deeper reading:
“Mitigation of cascading of taxes expected to result in reduction in final price of goods or services;”
The above was perceived to be a benefit of GST implementation as stated by the Ministry of Finance vide Press Release dated 10-03-2017 and thus a seamless flow of credit was ensured under the GST Regime. However, of late, due to the misdeeds of some handful of unscrupulous elements, new amendments started flowing in which ultimately compromised with the very basic intent behind enactment of the law and thereby causing unnecessary trouble to the honest taxpayer.
From the above discussion, we can understand that it is a well settled law that Input Tax Credit is in the nature of a benefit or concession which is offered by the statute and is contingent upon satisfaction of specified conditions. ITC under the GST Law cannot be said to be a vested right at the time of procurement of inputs. However, it becomes a vested right only after complying with all the conditions attached to it. Thus, a complete knowledge of all the mandatory conditions is necessary to declare it a vested right. However, even though it is concluded that ITC is not a vested right, it needs to be examined as to whether unnecessary, impossible and ingenuine conditions can be imposed on the honest taxpayers in the guise of curbing tax evasion. In the view of the author, the stipulated conditions are not above legal scrutiny and they have to adhere strict compliance to the fundamental rights conferred under Article 14 and 19(1)(g) of the Indian Constitution and constitutional rights under Article 300A and 301. Any unnecessary, impossible and ingenuine conditions are not above legal scrutiny and they have to ultimately face their fate in the courts of law.
Disclaimer: The above expressed views are purely the personal views of the author. The possibility of other views on the subject matter cannot be ruled out. So, the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The author is not responsible in any manner.