Restriction on utilization of transitional credit & certain issues

Restriction on utilization of transitional credit vide Circular No. 33/07/2018-GST dated 23.02.2018-certain issues

1. Government recently issued Circular No. 33/07/2018-GST dated 23.02.2018 imposing certain conditions about utilization of transitional credits for payment of GST. My article is to highlight the issues involved in the enforceability of the instructions which are as discussed hereunder:

2. 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.

2.1. In para 2 of the said circular it is clarified that if there is an order exists as on 1.7.2017 disallowing certain CENVAT credit (named as “disputed credit”), which is carried forward as transitional credit in terms of section 140 of the Act, such disputed credit shall not be utilized by a registered taxable person to discharge his tax liability under GST during the period in which such order disallowing subject credit is in operation. If the said credit is utilized it shall be recovered from the tax payer, with interest and penalty as per the provisions of GST Act. However, as per Section 142(6) of CGST Act, 2017, it is observed that pending proceedings under previous law (Cenvat Credit Rules, 2004) relating to claim or recovery of cenvat credits are to be dealt as per previous law. Section 142(6) ibid is as reproduced below:

Section 142(6)(a) reads as: 

“every proceeding of appeal, review or reference relating to a claim for CENVAT credit initiated whether before, on or after the appointed day under the existing law shall be disposed of in accordance with the provisions of existing law, and any amount of credit found to be admissible to the claimant shall be refunded to him in cash, notwithstanding anything to the contrary contained under the provisions of existing law other than the provisions of sub-section (2) of section 11B of the Central Excise Act, 1944 and the amount rejected, if any, shall not be admissible as input tax credit under this Act:

Provided that no refund shall be allowed of any amount of CENVAT credit where the balance of the said amount as on the appointed day has been carried forward under this Act;” 

Section 142(6)(b) reads as: 

“every proceeding of appeal, review or reference relating to recovery of CENVAT credit initiated whether before, on or after the appointed day under the existing law shall be disposed of in accordance with the provisions of existing law and if any amount of credit becomes recoverable as a result of such appeal, review or reference, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under this Act and the amount so recovered shall not be admissible as input tax credit under this Act. 

2.2. As per above provisions of Section 142(6)(b) ibid, if any amount of credit becomes recoverable as a result of proceedings, the same shall, unless recovered under the existing law, be recovered as an arrear of tax under GST Act. Accordingly, subject disputed credit becomes recoverable arrears, unless stayed, in terms of old provisions which are saved by provisions of Sec 174(2)(e) of GST Acts and alternatively, can be recovered as arrears of central tax  as provided under Transitional provisions (Section 142 of CGST). Further, it is pertinent to mention that there is no condition under Section 140(1) of CGSTA that the CENVAT credit balance to be taken as transitional credit has to be free from litigation. Hence, eligibility of any amount which is part of such CREDIT balance is the matter to be dealt in terms of CCR only.  In other words, if such credits are finally held to be ineligible those disputed credits can be recovered under the head of Central excise/Service Tax by resorting to recovery provisions provided under CGST Act, which are more stringent when compared to the earlier provisions. It also appears that those amounts are anyhow cannot be allowed to paid back by way of debit in the present ITC account as amount in ITC account shall be used only towards the payment of CGST/IGST amount as mentioned in Section 49(3) & 49(5) of CGSTA.

2.3.    The use of the two different expressions ‘in existence’ and ‘in operation’ in the Circular are also creating confusion. An Order-in-Original or Order-in-Appeal remains in existence till it is set aside by the competent authority in accordance with law. Such Orders may even legally be considered as ‘in operation’ till they are stayed by the competent authority. Whether the intention is to restrict utilization of DISPUTED CREDITS which are covered by the orders where recovery of amounts are not stayed (stayed on account of payment of mandatory pre-deposit etc). If it intends to cover stayed amounts also, then restriction on utilization of such disputed credits before the same becomes recoverable arrears perceived in the trade as pre-mature and also without authority of law. Further, interest amount in terms of Rule 14 of CCR read with Section 11AA of CEA/Section 75 of FA,1994 is payable on such disputed credits even for the period beyond 30.06.2017 as per saving clause mentioned above.

3. Further, in para.3 of the said circular, transitional credit of CENVAT in terms of Section 140(1) of CGST Act, is not allowed on certain items which are covered under Section 17(5) of CGSTA (termed as BLOCKED CREDIT) as per clause (i) of sub-section (1) of section 140 of the CGSTA (hereinafter referred to as “blocked credit”), such as, telecommunication towers and pipelines laid outside the factory premises. It is stated in the circular that such credit is not allowed to be utilized to discharge tax liability under GST and if utilized it should be recovered from the tax payer with interest and penalty as per the provisions of the CGST Act. In case any transitional credit which is not allowed in terms of Section 140, yet taken, it is recoverable in terms of Rule 121 of CGST Rules read with Section 73/74 of CGST Act. However, it appears that there is no provision for charging interest on such irregular transitional credits. 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 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.

4. In para 4 of the subject circular, it is specified that where ‘disputed credit’ or ‘blocked credit’ is higher than Rs. ten lakhs, the taxpayers shall submit an undertaking to the jurisdictional officer of the Central Government that such credit shall not be utilized or has not been availed as transitional credit, as the case may be. It is also mentioned that in other cases of transitional credit of an amount lesser than Rs. ten lakhs, the directions in the para 2 and 3 of the circular shall apply but there is NO need to submit the undertaking. It is not clear why there is distinction between both the cases. Further it seems, prescribing an undertaking to be filed by registered person intimating about the data pertaining to the subject DISPUTED CREDITS/ BLOCKED CREDITS, through a circular issued under Section 168 ibid is prone for litigation as subject Section 168 only enables Board to issuance of directions to the officers only. Section 168(1) reads as:

“168. (1) The Board may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions.”

If such undertaking is desired to be filed, relevant provision (Rule 117) should be amended so as to cast responsibility on the registered person to submit such data. Alternatively, based on the instructions of Board under Section 168(1) ibid, Commissioner {As per Section 168(2)- Commissioner for the purpose of Section 151 is ‘Commissioner in Board } can specify subject undertaking in terms of Section 151 of CGST Act, which reads as follows:

“151. (1) The Commissioner may, if he considers that it is necessary so to do, by notification, direct that statistics may be collected relating to any matter dealt with by or in connection with this Act.

(2) Upon such notification being issued, the Commissioner, or any person authorized by him in this behalf, may call upon the concerned persons to furnish such information or returns, in such form and manner as may be prescribed, relating to any matter in respect of which statistics is to be collected”

If so, Commissioner in Board may issue such notification casting obligation on the registered person to submit the undertaking with required details. Hence, it is desired that Government may consider the above aspects.

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

(Views expressed by the author are purely personal.)