The Central Government’s approach towards retrospective amendment, Budget 2015-2016 Speech of Arun Jaitley Minister of Finance February 28, 2015:

114. The provision relating to indirect transfers in the Income-tax Act which is a legacy from the previous government contains several ambiguities. This provision is being suitably cleaned up. Further, concerns regarding applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders will be addressed by the Central Board of Direct Taxes through a clarificatory circular. These changes would eliminate the scope for discretionary exercise of power and provide a hassle-free structure to the taxpayers. I reiterate what I had said in the last Budget that ordinarily retrospective tax provisions adversely impact the stability and predictability of the taxation regime and resort to such provisions shall be avoided

In the Central Goods and Services Tax (Amendment) Act, 2018, there have been several amendments in GST which are effective retrospectively.  However, major amendments have been made in section 140 – Transitional credit.  The amendment made with retrospective effect from 1 July 2017.

Despite of the commitment, the Government is going against self – commitments.

Before moving further, let us discuss the availability of credit of cess in short. It was argued by the Central Board of Indirect Taxes and Customs (‘CBIC’) that cess are not forming of GST also it is not forming part of Input Tax Credit as defined under GST and hence cess were not allowed to transit under GST law. If the argument is accepted then the result would be absurd, even duties of central excise or service tax are not part of input tax credit as defined under the CGST Act, 2017 and input tax credit with respect to such duties and taxes would not be allowed.

Interestingly, Section 97(2) of the CGST Act, 2017 provides for topics/questions on which advance ruling can be sought. Advance ruling can be sought on Clause (d) admissibility of input tax credit of tax paid or deemed to have been paid;, however if cess are not qualify as input tax credit, then advance ruling authority does not jurisdiction to pronounce ruling on the same.

It is pertinent note that statement and object clause of The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 categorically provided that cess would be subsumed in the GST.  The relevant portion is reproduced below:

The proposed Bill, which seeks further to amend the Constitution, inter alia, provides for— 

(a) subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;

Accordingly, cess should be transmitted in GST and hence credit should be available.  Nevertheless, keeping aside whether the issue about legal sanctity of retrospective amendment. Now the question would arise while reversing Cess, whether interest and penalty would be applicable on such reversal.

In this connection the CBIC has issued Circular No. 58/32/2018-GST dated 4th September 2018 clarifying that applicable interest and penalty on inadmissible credit would be payable.

Currently, the functionality to record this liability in the electronic liability register is not available on the common portal. Therefore, it is clarified that as an alternative method, taxpayers may reverse the wrongly availed CENVAT credit under the existing law and inadmissible transitional credit through Table 4(B)(2) of FORM GSTR-3B. The applicable interest and penalty shall apply on all such reversals which shall be paid through entry in column 9 of Table 6.1 of FORM GSTR-3B.

Applicability of Penalty:

As per Article 20(1) of the Constitution of India states that no person can be convicted for any offence except for a violation of a law in force at the time of action charged an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of offence.

The relevant text has been reproduced below:

No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence

Further, Supreme Court in case of Commissioner of Central Excise, Meerut Versus Rama Vision Ltd. (2005 (181) E.L.T. 201 (S.C.))

Penalty – Not imposable when the levy is revalidated or charge to duty is created with retrospective effect

Star India Pvt. Ltd. versus Commr. of Central Excise, Mumbai & Goa 2006 (1) S.T.R. 73 (S.C.)

It is well established that while it is permissible for the legislature to retrospectively legislate, such retrospectivity is normally not permissible to create an offence retrospectively.

Further, in case of CIT V/s. M/s. Yahoo India Pvt. Ltd (INCOME TAX APPEAL No. 2014 OF 2012), Hon’ble Bombay High Court held that penalty is not applicable in case retrospective amendment.

The very fact that the law has been amended with retrospective effect clearly shows that the issue was debatable and in the absence of any failure to disclose material facts necessary for the purpose of assessment, the deletion of penalty levied under Section 271(1)(c) of the Act cannot be faulted

Therefore, if the reversal is done and complies with the law post retrospective amendment, imposition of penalty on the grounds of retrospective amendment would be unjustified.

Applicability of Interest:

In this regard it is worthwhile to refer again Star India Pvt. Ltd. versus Commr. of Central Excise, Mumbai & Goa 2006 (1) S.T.R. 73 (S.C.)

8. The liability to pay interest would only arise on default and is really in the nature of a quasi-punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect. 

9. It is also to be noted that the Tribunal itself deleted the imposition of penalty imposed by the Commissioner (Appeals) on the appellants on this ground. 

10. Besides, if the liability has been created under the amended section by virtue of sub-section (2) of Section 148 of the Finance Act, 2002, it must be given effect to wholly. The section expressly makes the assessee liable under the amended provision to pay the tax within the period of 30 days from the date of the Presidential Assent to the Finance Bill, 2002. It is admitted that the Finance Bill, 2002 was assented to on 11-5-2002 by the President. In the circumstances, the appellant was entitled to a period of thirty days thereafter to make payment of the tax. Needless to say, if it did not make payment within thirty days from the 11-5-2002, it would be liable to pay interest at the rate specified after that date.

However, in case of Shiv Dutt Rai Fateh Chand Vs. Union of India & Anr. (1983 SCC  (3) 529), Hon’ble Supreme court held that interest and penalty retrospectively if law is constitutionally valid.

The provision for levying of interest and to levy penalties retrospectively and to validate earlier proceedings under laws which have been declared unconstitutional after removing the element of unconstitutionality is included within the scope of legislative power.

In this regard, the Government should take positive steps for waiver of interest and penalty instead of just implementation of penal provisions. Even under Income Tax, The Central Board of Direct Taxes (CBDT) waived interest (in certain cases) if tax paid in retrospective cases vide Circular No. 11/2017, dated 24 March 2017.

Thus, the interest is a consequential result of the retrospective amendment, which was otherwise not applicable, therefore interest on such reversal needs to be waived/ should not be demanded at all.

CA Nilesh Saboo and CA Mahesh Bandre – views are personal and can be reached on [email protected] or [email protected]

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