Suraj Agarwal

Transitional Credit of Education Cess, Secondary Higher Education Cess and Krishi Kalyan Cess under GST

Even before the advent of GST, the credit of transitional credit of EC & SHEC was in dispute. Under pre-GST regime, a manufacturer of final products or a provider of output service was eligible to claim the CENVAT credit of EC & SHEC in terms of Rule 3 of the CENVAT Credit rules, 2004. Later on by Finance Act, 2015, EC & SHEC was subsumed into Service tax and Excise duty.

Subsequently, Delhi HC, in Cellular Operators Association of India vs. Union of India, denied cross utilization of unutilized EC & SHEC credit against Service tax. However, revenue authorities have not disputed carry forward of EC & SHEC in the return forms. Since then most of the tax payers have carried forward the amount of CENVAT credit towards EC & SHEC in the returns filed till the period ending June 30, 2017. The question was with regard to admissibility of such credit under GST.

Under GST regime, Section 140 provides for CENVAT credit of duties and taxes that are eligible to carry forward into GST. The definition of eligible taxes does not include the EC, SHEC and KKC and therefore such credit could not have been transitioned into GST. Subsequently, section 140 was amended vide Section 28 of the CGST Amendment Act, 2018 which discreetly disallowed transitional credit of Cesses (including EC & SHEC) retrospectively w.e.f. July 1, 2017. The instant position was further clarified by CBIC vide Circular No. 87/06/2019 – GST dated 02-01-2019. The said amendment was challenged before various quasi judicial authority as well as courts from time by time.

The relevant position of the issue has been discussed here-in-below (in chronological order):

List of events

Date Relevant Circulars /Notifications /AAR Contents / Rulings / Case status
22-12-2018 FAQ issued by CBIC The government has discreetly denied carry forward of EC & SHEC credit under GST, since it is not covered by the definition of “eligible duties and taxes” under Section 140 of the CGST Act
14-03-2018 Letter D.O. F.No. 267/8/2018-CX.8 issued by Chairman, CBIC with respect to issue of Transitional credit Under Guidance note on CGST Transitional Credit, para 4.2 states that

“Credit of taxes not covered in the definition of eligible duties in section 140 cannot be availed. Example: Krishi Kalyan Cess, Education Cess, etc.”

05-04-2018 AAR Maharashtra (Applicant – Kansai Nerolac Paints Ltd) [2018-TIOL-09-AAR-GST] AAR held that accumulated credit of KKC in the Service tax return will not be considered as admissible credit under GST.
19-05-2018 AAR Maharashtra (Applicant – CMI FPR Limited) 2018-TIOL-123-AAR-GST AAR denied availment of ITC against unutilized CENVAT credit of EC, SHEC & KKC lying in books.
02-01-2019 Circular No. 87/06/2019 The Circular was published by CBIC clarifying credit of the service tax shall be allowed, however, credit of cess shall not be allowed.
29-01-2019 Notification no. 2/2019-CT Notifying Section 28 of the CGST Amendment Act
05-03-2019 Kesoram Industries Limited vs. UOI Telangana HC issued notice to the revenue in writ challenging the retrospective amendment
02-04-2019 HP India Sales Private Limited v. Union of India and Ors Karnataka HC issued notice to the revenue in writ challenging transition of Krishi Kalyan and Education Cess
03-04-2019 Hindalco Industries Limited vs Union of India [W.P.(C) No. 3138 of 2019] [TS-239-HC-2019(ORI)-NT] The Revenue authorities had issued letters for reversal of transitional credit pertaining to the EC & SHEC.

Odisha HC stays coercive recovery of transitional cess credit.

29-04-2019 Timken India Limited vs. UOI and Anr. Jharkhand HC issued notice to the revenue in writ challenging vires of Section 28 of CGST Amendment Act, 2018

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October 2020