A person with a liability for a particular kind of expenditure incurred by the Government has to pay Cess.
Consider this as the obligation a government places on you towards the collection and expenditure for the objective, like Educational Cess (EC), Secondary Higher Education Cess (SHEC), Krishi Kalyan Cess (KKC), Swachh Bharat Cess, and Health & Education cess, etc.
The previous scheme of Central Value Added Tax (CENVAT) Credit Rules, 2004 allowed taxpayers to take credit of these cesses (EC and SHEC) as a CENVAT credit. But the current GST regime denies the transition of these, since EC and SHEC were abolished vide Finance Act, 2015 and KKC was abolished under Taxation Laws (Amendment) Act, 2017. Unfortunately, taxpayers were stranded with accumulated unutilised credit of these cesses in their CENVAT account. The transition of this un-utilised amount became a disputed issue under taxation.
140. Transitional arrangements for input tax credit.
(1) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed:
The transition of credits into the GST regime has been complex and extremely litigated with denial of transition of EC, SHEC and KKC (collectively referred to as ‘Cesses’) to CENVAT cesses is a draconian challenge. The issue is centred around these being allowed as CENVAT credit under the erstwhile regime and transition of the same was permissible as per the unamended Central Goods and Services Act, 2017 (CGST). Leading the taxpayer to believe that either credit of cesses could be transitioned under section 140 under the GST Act or a refund of such unutilized balance of credit of cesses could be claimed. Largely, because credit is a vested and indefeasible right and would not lapse in absence of statutory provisions.
However, the Central Board of Indirect Taxes and Custom (CBIC) vide CGST (Amendment) Act, 2018, retrospectively amended section 140 (1) to allow CENVAT credit of only “eligible duties” which did not include these Cesses. Further an explanation (3) to section 140 was inserted with retrospective effect to clarify that the term “eligible duties and taxes” excludes any cess which has not been mentioned in explanation (1) & (2). Following which Board Circular No. 87/06/2019-GST[1], was issued finalising that transitioning credit of the Cesses into the GST regime will not be allowed. This circular, along with the modifications to the Income Tax Act and the CGST Act, offered the CGST and Central excise Department to dispute transitional credit claims from the taxpayers, pointing out that provision to carry over the Cesses under the GST regime did not exist, and such credits would lapse under the GST law.
Interestingly, Section 140 (8) of the CGST Act was not amended and did not consist of words like “eligible duties” or “eligible duties and taxes” like the other sub-sections of section 140, whereby it implied that assesses having centralised legislation could still carry forward CENVAT credit of the Cesses.
S. 140 (8)- Where a registered person having centralised registration under the existing law has obtained a registration under this Act, such person shall be allowed to take, in his electronic credit ledger, credit of the amount of CENVAT credit carried forward in a return, furnished under the existing law by him, in respect of the period ending with the day immediately preceding the appointed day in such manner as may be prescribed
Single Bench of Hon’ble Madras High Court (Mad HC) in Sutherland Global Services Pvt. Ltd. v. Asstt Comm. CGST and Cen. Ex.[2]Followed this rationale and allowed the transition of Cesses.
The appellant opposed, stating that the Cesses were abolished prior to the introduction of GST coupled with non-permissible cross-utilization. The difference of opinion with respect to the transition of these Cesses into the GST regime led to the rise of two questions of law:
- Whether the transition of Cesses into the GST regime is possible despite being abolished prior to implementation of GST?
- What about the unutilised accumulated credit of the Cesses that lies in the ledger of the tradesmen?
These were extensively dealt with in the landmark judgement by the Mad HC in the case of Assistant Commissioner of CGST and Central Excise v. Sutherland Global Services Private Ltd and Ors[3].
Brief facts
The writ petition was filed by Sutherland Global Services Pvt. Ltd. against a show-cause notice issued by the revenue authorities, requiring the petitioner to reverse the alleged erroneous transition of credit pertaining to cesses into the GST regime.
The revenue authorities alleged, that since the justification offered in the transition provision of the CGST Act i.e., section 140, does not allow transition of Cesses, carry forward of the same into GST, is illegal and needs to be reversed.
In review, the decision of the single bench judge was denied on grounds:
- The character of levy in form of cesses like EC, SHEC and KKC were stand-alone levies and their input credit even under CENVAT Rules which were applicable mutatis mutandis did not permit cross input tax credit, conferred a much less vested right especially after levy itself was dropped.
- Explanation (3) to section 140 could not be applied in a restricted manner only to specified sub-sections but would rather apply to the entire section 140 and since cess was excluded from the purview of explanations 1 and 2, the carry forward and utilization of the same against GST would not arise.
Analysis
The court in para 28 of the judgement stated that there exists,
“no intendment or equity about taxation and both charging, as well as exemption provisions in taxing statutes, have to be strictly construed and golden rule of interpretation of plain language being given plain meaning is the cardinal principle applicable to taxing statutes”.
In para 41, the court preferred adopting purposive interpretation while interpreting section 140 (8) which is erroneous and open to being argued that based on a strict interpretation of the provision, the assesses holding centralised registrations may carry forward CENVAT credit of cesses into the GST regime owing to the language of the Act as the words “eligible duties” or “eligible duties and taxes” are not inserted in the sub-section.
Therefore, even if it is assumed that the absence of the words “eligible duties” or “eligible duties and taxes” in section 140 (8) is merely an oversight, no words can be read into the provision to supply for the assumed deficiency.
The court has heavily relied on explanation (3) to section 140 which specifically excludes cesses from the term “eligible duties and taxes”, but it has not observed that the said term is neither employed in section 140 (1) nor 140 (8). In addition to this, the very insertion of explanation (3) to section 140 by means of retrospective amendment can be challenged considering the same is manifestly arbitrary as it takes away accrued right of the taxpayer to carry forward legitimate credit earned in the erstwhile tax regime, which is against the objective of GST law.
Arising out of the impugned final judgement and order dated October 10, 2020, in WA No. 53/2020 passed by the Mad HC. The final judgement is reserved for August 27, 2021.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein.
Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources – CBIC, LiveLaw and Manupatra
[1] Circular No. 87/06/2019-GST
[2] MANU/TN/8761/2019
[3] Sutherland Global Services Pvt. Ltd. v. Asstt Comm.; MANU/TN/6068/2020