The indirect tax regime underwent a paradigm shift with the Law on Taxation of Goods and Services of 2017 (hereinafter referred to as the “GST Law”), which came into force on July 1, 2017. What is officially known as the Constitution (One Hundred and First Amendment) The 2016 Act, the GST Act, gave the Union as well as the state government, including the territory of the Union with the legislature, concurrent taxation powers, laws to collect taxes on every transaction of the Waive delivery of goods or services or both.
The GST Act sought to group various indirect tax laws at the central and state levels, which appears to be nothing more than a multitude of taxes levied at different levels. Eliminating the “cascading tax effect” has always been a complex task in relation to indirect tax legislation, as has the GST Act. The cascading effect in the truest sense of the word is called a tax on taxes. This occurs when the goods or services, or both, are taxed at each stage of production and continue to the end user. This means that each subsequent taxable transfer will include the tax levied or levied in the previous stage.
Cascading tax effect in the period before the GST regime
The committee of inquiry for indirect taxes formed in 1976 under LK Jha recommended, among other things, the introduction of a pre-tax credit mechanism for value added tax at the manufacturing level (MANVAT). In 1986, the Jha Committee’s recommendation, which was called Modified Value Added Tax (MODVAT), was partially implemented. Input tax credit basically means reducing the tax liability at the time of sale by drawing the tax credit to the extent that it was paid at the time of purchase. In the beginning, however, it was limited to the selected inputs and manufactured goods that show a one-to-one correlation between manufactured good and input.
In 1991, the Tax Reform Committee was appointed, which recommended expanding the tax system by placing services under the tax area. As explained above, the credit for manufacturing was provided under MODVAT, and with the introduction of the service tax, credit was also granted for those services that can be classified as the input service necessary for the ultimate provision of the services. In 2000, MODVAT was then replaced by a uniform provision that enables the mutual use of credits, known as Central Value Added Tax (CENVAT). CENVAT was a central concept within the framework of the earlier indirect tax system and has contributed fruitfully to largely eliminating the cascade effect. It has served as a beneficial legal act by broadening its scope, which allows the credit of services, intermediate consumption and capital goods to be used for the payment of the central consumption and service tax. In terms of indirect tax legislation at the state level, the introduction of VAT eliminated the cascading effect by offsetting both taxes on intermediate consumption and taxes on past purchases and was again an improvement over the previous sales tax regime. However, both CENVAT and VAT are still struggling with the lack of co-ordination. At the state level, there are still certain taxes such as entertainment tax and luxury tax that are not covered by sales tax, and therefore sales tax could not be used to pay those taxes.
As India moved towards VAT at both the central and state levels, a daunting task of integrating VAT and state VAT was still a vivid illusion. As an inevitable consequence of the reform process, the government figured out the riddle of integrating the center’s VAT and state VAT, and eventually launched one of arguably the largest tax reforms in the country, the GST Act.
Cascading tax effect in the period after the GST regime
The GST law was implemented with the aim of eliminating the cascade effect and reducing the tax burden for the end consumer. The GST had to be more cautious in eliminating the cascading effect as it would only deal with the GST accrued credits, ie the pre-tax credit, but would also include the credits already accrued under the previous indirect tax. not used ie transitional loan.
Implementing or replacing the new tax law from an older version has never been easy as there are barriers to moving from the old to the new law. In order to remove these obstacles, the law provides transitional provisions. The GST Act is no different when it comes to transitional provisions. The transitional regulation for the input tax credit is provided for in section 140 of the GST Act, which initially read as follows:
“(1) A registered person who does not choose to pay taxes in accordance with Section 10 is entitled to record in their electronic credit book the amount of the CENVAT credit of the eligible duties carried over for the end period on the day immediately before the appointed day established by him in accordance with applicable law within the prescribed time and in the prescribed manner. “
The provision was issued in such a way that the allowable amount of the advance payment under the applicable law and GST regime could be asserted. The purpose of making transitional provisions was evident to remove the cascading effect taxpayers may face as taxpayers step out of the gate of the old law and step into the new law. The way to apply for a transitional credit was determined in accordance with rule 117 of the 2017 CGST rules, which also provides for a period of 90 days for submitting the GSTR TRAN-1 form to apply for a pre-tax credit. It is interesting that the legislature made a mistake when it did not grant legal authority to set a deadline according to Section 140. Instead of providing under the main provision, it has been provided under the delegated legislation.
Realizing the mistake, the government introduced an amendment to Section 140 (1) of the Central Tax on Goods and Services Act of 2017, adding “within that time” 07/01/2017 which came into effect on 05/18/2020 kicked. The change, which went into effect on 05/18/2020, clearly has retroactive effect and this is the result of a ruling passed by various high courts across the country that accepts that the transitional loan is a vested right and that this cannot be taken away by a provision. Time frames in rules and time prescribed therein are directory-related and not mandatory. Therefore, the assertion of a transitional loan is also permissible after the specified period has expired.
However, the transitional arrangement provided for under the GST Act has been the subject of debate since its inception. Various courts across the country have developed their own case law, exempting taxpayers from the government’s hit-and-run method.
Judicial Intervention
The matter was brought before the Punjab and Haryana High Court as Adfert Technologies Pvt. Ltd. v Union of India, in which the court ruled the matter in favor of the experts, held the transition loan to be admissible even after the time had expired. The controversy also resulted in the doors of the Bombay High Court and Court being laid new stones to resolve the controversy in the Nelco Ltd. case. against the Union of India to concretize the transitional loan as a vested right of an appraiser and the same cannot be taken away by prescribing a time limit in the rules. It was also noted that the normally prescribed period is directory related and not mandatory. The Delhi Supreme Court took a similar view in the case of Brand Equity Treaties Ltd. against Union of India. It stated that the deadline prescribed by Rule 117 of the CGST Rules of 2017 for filing claims of transitional credit in the directory is in nature and would not result in loss of right.
It is interesting to see that the SLP filed against the order of the Punjab and Haryana High Court was dismissed by the Supreme Court. The Supreme Court has appealed the order of the Delhi Supreme Court.
On May 16, 2020, the government put into effect Communication No. 43/2020 on Central Tax, which aims to bring into force the amendment in Section 140, as introduced in the Finance Act 2020. The actions of the central government show that an attempt has been made to fill the loopholes in the law and to repeal the effects of orders issued by various high courts. The government’s actions, however, would make little difference.
analysis
The retrospective amendment to Section 140 of the Central Tax on Goods and Services Act of 2017 would hardly make a difference, as even the amended provisions would not lead to the expiry of the credit. The government’s approach to contesting the Delhi Supreme Court ruling appears to be devoid of logic. On the one hand, the government is implementing systems such as the Sabka Vishwas Legacy Dispute Resolution Scheme (“SVLDRS”) to promote liquidity in the market, raise funds and resolve ongoing disputes related to the pre-GST regime, and on the other hand, by No credit allows to the appraisers lead to unjustified litigation.
Views are personal.
(The author is a practicing attorney at the Rajasthan High Court, Jaipur Bench)