pri Recovery of arrears under existing law & reversal of inadmissible ITC- Certain issues Recovery of arrears under existing law & reversal of inadmissible ITC- Certain issues

Clarification vide Circular No. 42/16/2018-GST Dated 13.04.2018 regarding procedure for recovery of arrears under the existing law and reversal of inadmissible Input Tax Credit (ITC)-Certain issues:-

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Government recently issued Circular No. 42/16/2018-GST dated 13.04.2018 clarifying that certain liabilities (which became recoverable post 1.7.2017)  pertaining to Central Excise/service tax can be paid under Central Tax (CGST) through Electronic Credit Ledger (ITC account). My article is to highlight the issues involved in the rationality/legality of the same which are as discussed hereunder. My comments/doubts are provided point/para wise immediately thereunder for discussion :

1. Kind attention is invited to the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) relating to the recovery of arrears of central excise duty /service tax and CENVAT credit thereof, CENVAT credit carried forward erroneously and related interest, penalty or late fee payable arising as a result of the proceedings of assessment, adjudication, appeal etc. initiated before, on or after the appointed date under the provisions of the existing law. In this regard, representations have been received seeking clarification on the procedure for recovery of such arrears in the GST regime.

2. The issues have been examined and to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in exercise of its powers conferred under section 168 (1) of the Central Goods and Services Tax Act, 2017, (hereinafter referred to as the “CGST Act”) hereby specifies the procedure to be followed for recovery of arrears arising out of proceedings under the existing law.

(Comments:

The subject Circular was issued by CBEC in terms of Section 168 of CGST Act which is akin to Section 37B of Central Excise Act,1944. As held by various judicial fora, circulars or orders issued under Section 37B ibid are binding on the officers of the department but not binding on the trade if the same are in contradiction with the provisions of the Act)

3. Legal provisions relating to the recovery of arrears of central excise duty and service tax and CENVAT credit thereof arising out of proceedings under the existing law (Central Excise Act, 1944 and Chapter V of the Finance Act, 1994)

i) Recovery of arrears of wrongly availed CENVAT Credit:

In case where any proceeding of appeal, review or reference relating to a claim for CENVAT credit had been initiated, whether before, on or after the appointed day, under the existing law, any amount of such credit becomes recoverable, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under the CGST Act [Section 142(6)(b) of the CGST Act refers].

(Comments: It appears that subject proceedings should conclude during the period after 01.07.2017.What is the meaning of ‘proceeding of reference’? Does it cover investigation/audit/scrutiny also?)

ii) Recovery of CENVAT Credit carried forward wrongly:

CENVAT credit of central excise duty/service tax availed under the existing law may be carried forward in terms of transitional provisions as per section 140 of the CGST Act subject to the conditions prescribed therein. Any credit which is not admissible in terms of section 140 of the CGST Act shall not be allowed to be transitioned or carried forward and the same shall be recovered as an arrear of tax under section 79 of the CGST Act.

(Comments: Rule 121 of CGST Rules provides for Recovery of transitional credit wrongly availed (that of those taken in contravention of transitional provisions namely Section 140 of CGST Act read with Rules 117 to 120 of CGST Rules), which reads as The amount credited under sub-rule (3) of rule 117 may be verified and proceedings under section 73 or, as the case may be, section 74 shall be initiated in respect of any credit wrongly availed, whether wholly or partly.”. As per above, specified procedure namely issue of SCN and Adjudication thereof has to be followed in terms of Section 73/74. Whereas in the circular it is mentioned that such irregular credit can be recovered as an arrear of tax. Does it mean after due process in terms of Section 73/74?. Further the wordings of Rule 121 are in the nature of instructions to the departmental officers to verify all transitional credits)

iii) Recovery of arrears of central excise duty and service tax:

a. Where in pursuance of an assessment or adjudication proceedings instituted, whether before, on or after the appointed day, under the existing law, any amount of tax, interest, fine or penalty becomes recoverable, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under the CGST Act [Section 142(8)(a)of the CGST Act refers].

(Comments: In this context it appears that the ‘assessment’ is Final Assessment in terms of Rule 7 of CER in respect of C.E.Duty and Best Judgement Assessment in terms Section 72 of FA,1994; made by the proper officer of Central Excise. Why duty is not covered in this sub-section? Further, it appears that subject assessment or adjudication must take place after 30.06.2017 so as to cover under the said provisions)

b. If due to any proceedings of appeal, review or reference relating to output duty or tax liability initiated, whether before, on or after the appointed day, under the existing law, any amount of output duty or tax becomes recoverable, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under the CGST Act [Section 142(7)(a)of the CGST Act refers].

(Comments: Again what is reference? Anything specific about mentioning ‘output duty’? Why interest, fine or penalty are not mentioned in Section 142(7)(a).?)

iv) Recovery of arrears due to revision of return under the existing law: Where any return, furnished under the existing law, is revised after the appointed day and if, pursuant to such revision, any amount is found to be recoverable or any amount of CENVAT credit is found to be inadmissible, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under the CGST Act [Section 142(9)(a)of the CGST Act refers].

(Comments: How the ‘revision of return’ lead to finding of CENVAT credit in admissible?)

4. In view of the above legal provisions, recovery of central excise duty/ service tax and CENVAT credit thereof arising out of the proceedings under the existing law, unless recovered under the existing law, and that of inadmissible transitional credit, is required to be made as an arrear of tax under the CGST Act. The following procedure is hereby prescribed for the recovery of arrears:

(Comments: As mentioned above, in admissible transitional credit can’t be recovered as arrear of tax unless they are confirmed/determined in terms of Section 73/74 as mentioned in Rule 121 of CGST Rules)

4.1 Recovery of central excise duty, service tax or wrongly availed CENVAT credit thereof under the existing law and inadmissible transitional credit:

(a) The CENVAT credit of central excise duty or service tax wrongly carried forward as transitional credit shall be recovered as central tax liability to be paid through the utilization of amounts available in the electronic credit ledger or electronic cash ledger of the registered person, and the same shall be recorded in Part II of the Electronic Liability Register (FORM GST PMT-01).

{Comments: Section 49(5) of CGST Act which says that the amount of input tax credit available in the electronic credit ledger of the registered person on account of IGST, CGST, SGST/UTGST shall be used only to discharge of taxes payable under GST Acts. Accordingly, the said provisions do not allow ITC balance to be used for the amounts payable under Central Excise and Service Tax provisions. The words ‘any amount of interest’ in Rule 85(2)(d)  indicates subject amounts? Appears that May not be.}

(b) The arrears of central excise duty, service tax or wrongly availed CENVAT credit thereof under the existing law arising out of any of the situations discussed in para 3 above, shall, unless recovered under the existing law, be recovered as central tax liability to be paid through the utilization of amounts available in the electronic credit ledger or electronic cash ledger of the registered person, and the same shall be recorded in Part II of the Electronic Liability Register (FORM GST PMT-01).

{Comments: As mentioned above.}

4.2     Recovery of interest, penalty and late fee payable:

(a)  The arrears of interest, penalty and late fee in relation to CENVAT credit wrongly carried forward, arising out of any of the situations discussed in para 3 above, shall be recovered as interest, penalty and late fee of central tax to be paid through the utilization of the amount available in electronic cash ledger of the registered person and the same shall be recorded in Part II of the Electronic Liability Register (FORM GST PMT-01).

{Comments: There is no provision for charging interest on such irregular transitional credits (Credit wrongly carried forward). Section 50(1) & (2) of CGST Act, 2017 provides for charging interest only in respect of delayed/short/non-payment of GST and Section 50(3) provides for charging interest on undue or excess claim of ITC on account of mismatch of credits in terms of Sections 42(10) and 43(10) ibid.  But the said provisions are not applicable to charge interest on irregular availment of ITC other than on account of mismatch, for example in-admissible Credits taken on CG/inputs/input services covered by exclusions provided under Section 17(5) ibid and/or for any other inadmissible credit including irregular transitional credits. Hence, charging of interest on subject irregular transitional credits may invite litigation as there is no express provision to charge interest under CGSTA.}

(b)  The arrears of interest, penalty and late fee in relation to arrears of central excise duty, service tax or wrongly availed CENVAT credit thereof under the existing law arising out of any of the situations discussed in para 3 above, shall, unless recovered under the existing law, be recovered as interest, penalty and late fee of central tax to be paid through the utilization of the amount available in the electronic cash ledger of the registered person and the same shall be recorded in Part II of the Electronic Liability Register (FORM GST PMT-01).

{Comments: As mentioned above}

4.3  Payment of central excise duty & service tax on account of returns filed for the past period: The registered person may file Central Excise / Service Tax return for the period prior to 1 st July, 2017 by logging onto www.aces.gov.in and make payment relating to the same through EASIEST portal (cbec-easiest.gov.in), as per the practice prevalent for the period prior to the introduction of GST. However, with effect from 1st of April, 2018, the return filing shall continue on www.aces.gov.in but the payment shall be made through the ICEGATE portal. As the registered person shall be automatically taken to the payment portal on filing of the return, the user interface remains the same for him.

{Comment: Appears that this is with regard to voluntary filing of returns (in cases where returns are not filed previously for the period prior to 1.7.2017). What about returns filed on account of initiation of investigation in respect of persons who have not filed returns filed previously}

4.4 Recovery of arrears from assessees under the existing law in cases where such assessees are not registered under the CGST Act, 2017: Such arrears shall be recovered in cash, under the provisions of the existing law and the payment of the same shall be made as per the procedure mentioned in para 4.3 supra.

{Comment: This is understandably with regard to the liabilities (confirmed or assessed amounts) of the assesses towards C.E.Duty/Service Tax and penalties, interest pertaining thereto shall be paid through the ICEGATE portal }

Comment: Further, as can be seen from the other sub-sections of Section 142 of CGSTA that wherever any amount is payable to the tax payer on account of finalization of proceedings under erstwhile law shall be payable in cash which are in some cases given as cenvat/ITC credit. In such a scenario why any amounts payable by the tax payer on account of proceedings under erstwhile law shall be allowed to be paid through ITC account. If at all it is allowed it should be allowed only to the extent of unutilized credits of erstwhile taxes/duties which are transitioned and lying (unutilized )in ITC account( Electronic Credit Ledger) under head CGST.

(By C.Mallikarjun Reddy, Superintendent, Hyderabad GST zone; email- cmreddy.gst@gmail.com:

Note: The views expressed above are of the individual and need not be of the department in which he is working )

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