Retrospective amendments in Gst provisions have shocked business

When the new indirect tax regime came into effect on July 1 last year, the transition provisions allowed businesses to transition CENVAT credit as an input credit under GST. Many businesses took the position that the balance of total CENVAT credit carried forward in their last return was eligible for being transitioned into the GST regime. This included the remaining CENVAT credit of excise duties paid on inputs/ capital goods, service tax on input services and cesses, such as education cess as well as Krishi Kalyan cess.
However, tax authorities have disagreed with the interpretation that credit of cesses can be transitioned to the GST regime.
A recent amendment in Section 140 of the Central GST Act, with retrospective effect from July 1, 2017, exclude Krishi Kalyan cess and additional duties of excise (related to textiles) from the list of eligible duties and taxes for transition to the GST Input Tax Credit ledger.
“This retrospective amendment may expose billions worth of such credit transitioned across the country to unnecessary demands and litigation,” says Sudipta Bhattacharjee, partner, Advaita Legal.
Tax experts point out that the government probably wanted to restrict such transition of credit of cesses through this retrospective amendment. “The amendment is consequent to tax authorities’ line of thought that credit of such cesses was not utilisable for payment of excise duty or service tax in the earlier regime and therefore, it cannot be transitioned and used for payment of GST,” says V Lakshmikumaran, managing partner, Lakshmikumaran & Sridharan.
However, the way the amendments have been worded, it not only restricts the transition of credit of cesses but also puts a question mark on the entire amount of unutilised credit forming part of the last pre-GST return filed by a business. This includes credit related to service tax on input services, excise duty paid on inputs that were not held in stock as of July 1, 2017, and excise duty paid on capital goods.
Though this retrospective amendments in transition provisions are awaiting notification, many tax heads and CFOs are apprehensive of the outcome.
“I am sure once the notification is issued to give effect to the changes carried out in law, field officers will start harassing the assessees to reverse the credit and pay differential in cash. Interest will also be demanded as all those credits will be termed as wrongly availed,” says head of indirect tax in an Indian-owned multinational conglomerate.
Not surprisingly, many businesses are seeking legal help to deal with the situation. “This amendment is likely to be in various high courts through writ petitions on the ground of taking away vested rights of the assessees,” says Bhattacharjee.
Credits not allowed to be offset for output liability are costs to business. “Product or services are priced factoring input tax credits. Industry cannot retrospectively hike prices. Manufacturers which had substantial education cess balance, the service sector and the textile industry will be impacted,” says Lakshmikumaran.
Legal experts point out that it will not be easy for the government to undo any drafting error in statutory provisions. The retrospective amendment has already been passed by the legislature and received Presidential assent.
Issuing a ‘clarification’ or a ‘notification’ to rectify any drafting error will not be sufficient to deal with this problem, say experts. “It is a settled position that a circular which is contrary to the statutory provisions has really no existence in law,” says Bhattacharjee.
Legal experts say for immediate redressal, the way forward is to convene an emergency meeting of the GST Council to recommend necessary changes to this retrospective amendment. This has to be followed by Ordinances from the central government as well as state governments. The next legislative session of Parliament is still two months away.
Most experts find it disappointing that the government had to resort to retrospective amendments to bolster its interpretation of tax laws.
“The legislature no doubt has the competence and the power to enact a retrospective law, but that should be sustainable on the touchstone of constitutional principles,” says Bhattacharjee.
Laksmikumaran points out that the GST regime is founded on the principle of seamless credit. “The government could have allowed all credits validly earned under earlier laws to be transitioned to the GST regime. Retrospective amendments mean uncertainty for businesses and entering into litigation with attendant cost of interest and penalty. These are avoidable,” he says.
Many in the industry feel that the government should have been mindful of the wider ramifications of retrospective amendments done in haste and without consultation with stakeholders.
Some like Laksmikumaran are not sure if taking legal recourse to challenge these retrospective amendments would be a good idea.  
“In certain cases, courts have held credits accrued as vested rights. But, courts have held in favour of Revenue when cross-utilisation of credits was sought by the industry,” he says. Seeking judicial remedy may not be an option given the judicial precedents, he adds.
Clearly, businesses and the government would have to sit across the table to sort out the irritants.
Source: Business standards