prpri Is Tran credit/ITC recovery mechanism defective under GST? Is Tran credit/ITC recovery mechanism defective under GST?

Trade has been witnessing numerous show-cause notices being issued to them of late, under Section 73(1) of the Central Goods and Services Tax Act, 2017 read with Rule 121 of the Central Goods and Services Tax Rules, 2017, for recovery of alleged claim and availing of TRAN-1 credit.

Though there may be numerous reasons for issue of such notices such as wrong entry in the columns in Form TRAN-1, excess claims not supported by invoices etc. the principal issue is whether or not the proceedings initiated under Sec 73(1) of the Act read with Rule 121 of the Rules, to determine and recover such excess transitional credit.

Therefore, the expression ‘input tax credit availed or utilized’ employed in section 73(1) is said to confine to only input tax credit availed and utilized in accordance with the provisions of  the Act and Rules and not the ‘transitional credit’ claimed under section 140 of the CGST Act.

There is a wide spread misnomer that the expression ‘input tax credit availed or utilized’ used in section 73 covers only tax on the supplies made under the GST Acts, while transitional credits are in respect of taxes paid under the erstwhile  laws as per section 2(48) of the CGST Act, claimed under section 140 of the GST Act.

A possible contrarian View

Some experts have hastened to conclude that the claim for transition of CENVAT credit cannot be considered as ‘input tax credit’ availed and utilized in respect of taxable supplies under this Act and therefore, determination and recovery of such transitional credit is said to be completely out of the ambit of section 73 of CGST Act and out of authority under Article 265.

A strong counter point of view

The question that arises immediately is this: if the transitional credits cannot be treated as ‘input tax credit’, whether the taxpayers will be justified in utilizing the same in off setting their output tax liabilities arising under the GST Acts.

Therefore, it can be argued that the nature of ‘transitional credits’ are no different from the ‘input tax credits’ in the sense that that ultimately the said credit only when applied to the off-set ledger, it becomes really actionable.

In such an event, invoking the provisions of Sec 73/74 of Act, to recover the alleged wrong utilization of Tran Credit would appear perfectly in sync with the current recovery mechanism prescribed under GST.

In line with the above, determination of taxes short paid or short levied or not paid or input tax credit wrongly availed or utilized under section 73/74 of the Act, Rule 142 should be quite all right for our discussion above.

Rule 121, on the other hand amply supplements the scope of section 73/74 as it empowers the Department to initiate the proceeding under it, which is more specific to the amount credited in the electronic credit ledger maintained in Form-PMT-02 in the common Portal allowed under Sec 117(3) in this instance.

A short comment

 Therefore, in the view of the Author, Rule 121, as a delegated legislation, is framed perfectly as per the authority conferred by the Parent Act and its enactment stands validated from the rule framing angle as well and hence does not fall out of grace with Article 265 either.

Therefore, Rule 121 of the Act can very well empower the department to initiate proceedings under section 73/74, in terms of the powers duly vested under it, pursuance of which the Rules are framed and applied.

The General Precedent of Law on mere availing of credit

It was held by the High Courts that the proceedings cannot be initiated unless there is a positive act of availing of credit in the monthly returns filed by the taxpayer and that mere credit in the electronic credit ledger on submission of Form TRAN-1 does not entitle the Department to initiate the proceedings.

While holding so, it was observed by the High Courts that the legislative intent reflected from a purposeful reading of the provisions underlying section 140 alongside the provisions of section 73 and Rules 117 and 121 is that even a wrongly reflected transitional credit in an electronic ledger on its own is not sufficient to draw penal proceedings until the same or any portion thereof, is put to use so as to become recoverable.


Extract of the judgment

Section 73 is self-eloquent and it is only if such availment is for reducing a tax liability that it vests jurisdiction in the assessing authority to recover such tax together with levy of interest and penalty under section 50 but until such time that the statutory authority is able to demonstrate that any tax was recoverable from the petitioner, a reflection in the electronic credit ledger cannot betreated as an ‘availment’.

Other Pointers of the judgment

Though it is not directly the point of discussion here to dwell upon the consequences of interest and penalty for such wrong availment about which there is a passing reference in Sec 73/74, one still gets some very useful advice from the above judgment.

 That consequent upon any possible wrong availment of any ITC including Tran credit, no recovery of the amount, or interest or penalty under the Act is imposable so long as the said disputed credit has not been put to use by the tax payer for off-setting it against his own output tax liability.

A deviation in Sec 73/74 and how it works in the new scheme of recovery of wrongly availed credits under GST

However, the words used under Section 73/74 of the Act is ”wrongly availed OR utilized” leading to a possible interpretation that the ITC wrongly availed but not utilized can also be subject to recovery of tax.

Sec 73/74 merely adumbrates the grounds for recovery of tax, and for the exact wordings of each of the proposals of recovery of tax one can also turn to other concurrent provisions and rules.

Further, if entitlement to credit is dependent on the filing of the GST return, then there does not exist any scope under Section 73/74 of the Act for the department to initiate recovery on mere wrong availing in the books of accounts or in the electronic credit ledger, until such credit has been utilized by way of filing of GST return by off-setting the tax liability.

The saving clause in the Act and its latent role explained

If you look closely enough into the Act provisions, there is more than what ordinarily meets the eye. Sec 174(2)(e) is especially kept ready for a situation like the above to kick in if needed to recover the wrongly availed Tran Credit, which is a comprehensive saving clause of the repealed/amended Act/s during the transition period.

Utilization is the real action point of recovery of credit

Further, the transitioned credit can be recovered independent of the wrongly availed/used Input Tax Credit as a tax under GST, on the end product in which it is most likely to be used as per the LIFO method prescribed by the Board under the new regime.

An alternative thought shared for consideration

If need be, proportionate to the supply in which such credit is used can be restored to the tax payer based on the Provisions of Sec 142(11) (c) and later allowed as transition credit under the old regime, if and when a Tran-credit claim or refund of the tax is made under 141/143 as the case may be, on merits case to case.

End Note

In order to mitigate unwanted litigation, it would be worthwhile for the Government to clarify at the earliest its stand, on payment of tax on mere irregular availing of Tran Credit/ITC including restricted ITC under Section 17(5) cases, which is merely availed but not utilized, is the humblest request of all the stakeholders including the Author.

Author Bio

Qualification: LL.B / Advocate
Company: RANK Associates,Chennai
Location: CHENNAI, Tamil Nadu, IN
Member Since: 15 Dec 2020 | Total Posts: 6
Author was formerly with the IRS. He writes regularly on Indirect Tax Laws, Macro Economics and General Laws. He is a senior Guest Faculty at NACEN, Chennai and a CBIC Master Trainer of GST. He has trained a large number officers of the Center and State Tax Departments.He has a long association with View Full Profile

My Published Posts

More Under Goods and Services Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

July 2021