The recent ruling in the case of Anand Steel v. Union of India by the Honourable Madhya Pradesh High Court {WRIT PETITION NO. 3757 OF 2023 / WRIT PETITION NO. 2164, 1280, 1859, 2133, 2964, 3551, 3664, 13142, 14857, AND 14975 OF 2024 dated: NOVEMBER 22, 2024} has stirred significant discussions regarding the constitutional validity of Section 16(4) of the Central Goods and Services Tax (CGST) Act, 2017. This section, which imposes a time limit on claiming Input Tax Credit (ITC), has been declared arbitrary and unconstitutional, marking a pivotal moment for both taxpayers and tax authorities. This article explores the intricacies of the case, its legal ramifications, and the potential impacts on both the department and taxpayers.
Before proceeding on the topic, let us understand the provisions of Section 16 of the CGST Act 2014 and then comprehend Section 16(4) of the CGST Act 2014.
Summary of the Provisions of Section 16
The Section 16 of the CGST Act outlines the eligibility and conditions for taking ITC. The relevant provisions include:
- Section 16(1): “Every registered person shall, subject to such conditions and restrictions as may be prescribed… 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…”
- Section 16(2): This section specifies the conditions under which a registered person can claim ITC, including possession of a tax invoice, receipt of goods or services, and that the tax has been paid to the government.
- Section 16(3): Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
- Section 16(4): “A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after 30th Day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.” This time limit earlier read as
A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Amendments via Finance Act, 2024
The Finance Act, 2024 introduced amendments that significantly impact Section 16:
- Section 118: “In Section 16 of the Central Goods and Services Tax Act, with effect from 1st day of July, 2017, after sub-section (4), the following sub-sections shall be inserted:
(5) Notwithstanding anything contained in sub-section (4), in respect of an invoice or debit note for supply of goods or services pertaining to Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, the registered person shall be entitled to take input tax credit in any return under section 39 which is filed up to thirtieth day of November, 2021.”
The crux of the issue lies in Section 16(4) of CGST Act 2017 which imposes a strict timeline for claiming ITC that can lead to disallowance if not claimed in time.
Under this scenario, decision of the honourable High Court of Madhya Pradesh assumes larger significance. The background of the issue is that M/s.Anand Steel, a proprietorship firm registered under the CGST Act, 2017 faced disallowance of ITC claims due to late filing of GST returns for the financial year 2018-19. The tax authorities issued notices for recovery of wrongly availed ITC due to limitations of time, based on Section 16(4), which restricts ITC claims if returns are not filed within a specified timeframe. M/s. Anand Steel challenged this provision, arguing that it violated their constitutional rights and imposed unjust penalties.
The petitioners presented as part of their appeal prayer several key arguments which included,
- Arbitrariness of Section 16(4): They contended that this section imposes an unreasonable restriction on the right to claim ITC, which should be available upon purchase of goods or services intended for business use.
- Double Penalty: The court noted that late filers already incur late fees and interest; thus, further penalizing them by disallowing ITC constitutes double punishment for a single lapse.
- Legislative Intent: The petitioners argued that Section 16(4) contradicts the legislative intent behind GST, which aims to eliminate tax cascading and promote seamless credit mechanisms.
- Expectation of Fair Treatment: They invoked the principle of legitimate expectation, asserting that taxpayers should be treated fairly based on past practices and representations made by tax authorities.
The Honourable Madhya Pradesh High Court has ruled in favour of the petitioner M/s. Anand Steel, declaring Section 16(4) unconstitutional. The court emphasized the facts that Section 16(4) undermines the provisions of Section 16(2), which outlines conditions for claiming ITC. By imposing a time limit, Section 16(4) effectively nullifies the rights established by Section 16(2). Further, the existing provisions for late fees and interest were deemed sufficient deterrents for taxpayers, making additional penalties through ITC disallowance is unjustifiable.
The court emphasized the fact that Section 16(2) operates as a non-obstante provision, meaning it should take precedence over conflicting provisions like Section 16(4). The rights established under Section 16(2) are intended to ensure that eligible taxpayers can claim ITC as long as they meet specified conditions, irrespective of procedural delays. By imposing a time limit through Section 16(4), the provision undermines these rights and renders Section 16(2) ineffective. Under the current GST framework, there is no provision for filing revised returns, which forces taxpayers to be overly cautious when filing their monthly returns. This caution often leads to delays as businesses reconcile entries during financial audits. The court recognized that penalizing taxpayers for late filings—despite their compliance with other requirements—creates an inequitable situation that contradicts the spirit of GST.
The honourable Court acknowledged the recent amendments through the in the Finance Act, 2024, on the time limitations under Section 16(4) as well as the benefits extended by altering the timelines for previous periods retrospectively by inserting a new Provision under Section 16(5) & Section 16(6) which clearly justifies the intend that the legislative intent cannot be nullified by any means. These amendments aim to clarify ITC claims and rectify issues related to past financial years. Ultimately, the court ruled in favour of M/s. Anand Steel, declaring Section 16(4) unconstitutional due to its arbitrary nature and its failure to align with the legislative intent behind GST reforms and setting aside show cause notices and assessment orders related to the disallowance of ITC due to late filing. The honourable court also noted that existing provisions for late fees and interest serve as adequate deterrents for taxpayers. Thus, further penalizing them through disallowance of ITC is unjustifiable.
This judgment has several implications for taxpayers as well as for Tax authorities. The Taxpayers can now claim ITC without fear of losing their rights due to procedural delays. This ruling restores confidence among businesses regarding their entitlements under GST. Taxpayers may feel less pressured to rush through filings at the expense of accuracy. Businesses that previously faced disallowance of ITC due to late filings can now think of reclaiming their credits they were denied with greater certainty about their rights and obligations under GST law. This financial relief is particularly crucial for small and medium enterprises struggling with cash flow. For the Tax Officers, this gives an opportunity for re-evaluating their policies to consider more equitable approaches that align with the court’s findings. The judgment may prompt further legislative changes aimed at clarifying ambiguities within the GST framework, particularly concerning ITC claims and procedural requirements.
Before bidding adieu…….
So, the Honourable Madhya Pradesh High Court’s decision in M/s. Anand Steel v. Union of India represents a significant shift in how Input Tax Credit claims are treated under the GST regime. By declaring Section 16(4) unconstitutional, the court has reinforced taxpayer rights while promoting fairness in tax administration. Also, by deeming this provision arbitrary and capricious, the court has steel-clad taxpayer rights while promoting a more equitable approach to compliance that encourages engagement rather than punitive measures. The ruling not only benefits taxpayers by restoring their entitlements but also challenges tax authorities to adopt more reasonable practices moving forward. As this case unfolds within broader discussions on GST reform, its implications will likely resonate throughout India’s taxation landscape for years to come. This landmark ruling has far-reaching repercussions for taxpayers across India. The judgment may also positively prompt further legislative changes aimed at clarifying ambiguities within GST provisions concerning ITC claims and procedural requirements. Such amendments could enhance administrative efficiency by streamlining processes and reducing confusion among taxpayers striving for an optimal balance between compliance & efficiency in tax administration and improve ease of doing business.
Jai Hind !!!!!!!
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