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Need to Rationalize provisions of Input Tax Credit under the Revised Model GST Law

February 13, 2017[2017] 78 taxmann.com 132 (Article)
266 Views

Dr Arpit Haldia

CA

Introduction

1. This article analyses and highlights certain provisions under the Input Tax Credit, which require reconsideration under GST. These provisions do not take forward basic theme of GST, i.e., seamless flow of credit between the businesses until the goods or services reach the final consumer.

2. Denial of Input Tax Credit of the GST Paid on Construction of Factory Building

2.1 Section 17(4) (c) and (d) of the Revised Draft GST Law provides:

(4) Notwithstanding anything contained in sub-section (1) of section 16 and sub-sections (1), (2), (3) and (4) of section 18, input tax credit shall not be available in respect of the following:

(c) works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service;

(d) goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;

Explanation 1.- For the purpose of this clause, the word "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Issue

2.2 The issue now arises, suppose a person constructs a Factory Building, Hotel Building or a building which he has let out on rent, therefore, as per provisions of Section 17(4) (c) and (d) of the Revised Draft GST Law, credit of any taxes paid on construction of Immovable property would not be allowed.

2.2.1 Clause (c) and (d) denies Input Tax Credit in both the cases, firstly-wherein entire works for construction of Factory Building has been awarded to a contractor and he gets the building constructed and secondly, where the goods or services are received by a taxable person for construction of immovable property on his own account and he gets the property constructed with his own labour.

Another Example

2.3 Take another example wherein renting of building is taxable under the law and taxes would be levied on the rent being received by the person, however, such person would not be allowed credit of the taxes paid on the construction of the building which is being rented out. This is against the provision as at one place lawmakers are going to the extent-levying taxes on the free supplies of goods and at other place, they are rejecting legitimate claims of the Input Tax Credit.

Comment

2.4 The provisions under Section 17 relating to the Input Tax Credit needs to be rationalized and brought at par with the simple concept that, if outward supplies of a person are taxable then the inward supplies of the goods and/or services should be allowed as credit. Immovable Property in case of Hotel Industry, Industries and used in Letting out on rent forms an important part of the supply chain and cannot be treated as being used for self consumption.

3. Denial of ITC on delayed Registration

3.1 The Business Process Document on Registration in Point No. 2 to Para 2.0 provided as follows

"The taxpayer would, however, not be eligible for ITC in respect of his purchases prior to the date of registration in case the registration application is not filed within the prescribed time limit of 30 days,"

3.2 The GST Draft process provided that if application is filed beyond the given period of 30 days then in such case the ITC should be allowed from the date of registration and no ITC should be allowed for the period prior to the date of Registration.

3.3 Section 18(1) of the Draft GST provides

A person who has applied for registration under the Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall, subject to such conditions and restrictions as may be prescribed, be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act.

Therefore, law only provides for the allowability of the Input Tax Credit for person applying for registration within thirty days from the date on which he becomes liable for registration and does not provide for person applying for registration beyond the period of thirty days.

3.4 Comments

  This is not the correct stand. The law is trying to penalize the person on wrong front. It is agreed that the person has not taken registration within the prescribed time-limit. He should be penalized for that with stringent penalty provisions. It is further agreed that while enacting fiscal legislation, the Legislature is entitled to a great deal of latitude but the person should not be penalized by not allowing Input Tax Credit.
  It has to be understood that Output Tax would be collected from the person from the date when he became liable for registration and when output tax is being collected from the person from the date of person becoming liable for registration, then in such case as a principle of Natural Justice, he should be allowed to set off the tax paid on the material on which output liability is being created.

4. Denial of ITC on Capital Goods held as on date of registration

4.1 Section 18(1) of the Revised Draft GST Law provides:

"A person who has applied for registration under the Act within thirty days from the date on which he becomes liable to registration and has been granted such registration shall, subject to such conditions and restrictions as may be prescribed, be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act."

Thus the section provides Input Tax Credit "in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock. Further, the credit would be limited to the stock lying "on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act".

4.2 The definition of Inputs as contained under section 2(52) provides:

"(52) "input" means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;"

Thus, Input means any goods but does not include capital goods.

4.3 Comments

  Therefore, if any person has got himself registered within 30 days of the date from which he becomes liable for registration; even then he would be able take credit of the Input Tax only in respect of the goods lying in stock but he would not be able take Credit of Input Tax in respect of Capital Goods.
  This would tantamount to force the person to take registration in GST from the time when he intends or even think to start the business, even though he is not liable to be registered under GST at that point of time. If he fails to obtain registration at that time and thinks that that he would take the registration once the business is set-up, then, although he would be allowed the credit of the Input Tax in respect of the goods lying in stock, but whatever capital goods he has purchased till that date, he would not be allowed to avail of Input Tax Credit in respect of the same.
  This is the situation when a person has taken registration within 30 days of the date from which he becomes liable, leave aside if he takes the registration after the statutory period of 30 days. In that case there is a complete denial of Input Tax Credit, both in respect of stock and also for capital goods.
  In case of capital intensive Industries, registration would have to be taken right at the time of commencement of set up of business and before any purchases have been made, otherwise any delay might result in a huge loss of Input Tax Credit paid on Purchase of Capital Goods. This would be a major setback for the business and should be reconsidered.
  This would also put businesses obtaining registration within the statutory period of 30 days from the date of becoming liable for registration in a disadvantageous position as compared to businesses who have obtained registration even before any goods were purchased. Although in above cases, both the persons are within the statutory time-limit, still one has the benefit of availment of Credit of Input Tax in respect of Capital Goods and the other one is denied the benefit of Credit of Input Tax in respect of Capital Goods. The law should not discriminate between the two, as both are following the law.
  Further, there should be no denial of credit of Input Tax on Capital Goods even in case the registration is taken beyond the statutory time-limit of 30 days, as by denying the benefit of credit of Input Tax on Capital Goods, law is trying to penalize the assessee on wrong end. A person should be penalized for late registration in form of penalty but not in the form of denying the Input Tax Credit.
  Another view point is that wherein there is restriction on availment of Credit of Input Tax after one year from the date of issue of tax invoice relating to such supply in case of new registration, then why there should be any restriction in case of availment of credit of input tax in respect of capital goods.?
  In case of new registration there should not be any restriction on availment of Credit of Input Tax in respect Capital Goods lying as on the effective date of registration. Denial of Input Tax Credit would be negative, both for Capital Intensive Industries and for other businesses as well, as such denial would result in increase in the business cost.

4.4 Delay in PAN may result in loss of ITC for New Registrations

4.4.1 Section 23(4) of the Revised Draft GST Law provides:

Every person shall have a Permanent Account Number issued under the Income Tax Act, 1961 (43 of 1961) in order to be eligible for grant of registration under sub-section (1), (2) or (3):

4.4.2 It has been amply made clear in the document that PAN would be the bedrock on which entire GST structure would be based. However, as PAN would be the bedrock for registration in GST, Registration under GST would be the bedrock for the claim of Input Tax Credit.

4.4.3 The person is liable to file application of registration within 30 days of the date when he becomes liable for registration. Further, as per present proposed draft person would be allowed Input Tax Credit from the date he becomes liable to registration in case he has filed the application and has been granted registration within 30 days of occurrence of event and no input tax credit would be allowed if the application is filed beyond the period of 30 days.

4.4.4 It is also a known fact that PAN is not mandatory for every citizen of India. Therefore, it's not expected that every person would be having PAN. In case of newly constituted concern, i.e., Private or Public Limited Company, Partnership Firm, LLP, etc., it would be mandatory for them to first apply for PAN and then apply for registration under GST. In some cases there is no threshold available for registration and registration has to be applied in case any supply is made. Thus, it would be a long drawn process. If for any reason allotment of PAN is delayed then the person would be suffering from loss of Input credit and penalty for delay in filing of application would also be levied on him.

4.4.5 If registration is applied and granted beyond the period of 30 days from the date when the person becomes liable to be registered in GST, then the person suffers from the loss of Input Tax Credit on the stock lying with him on the date he became liable for registration in GST.

4.4.6 Not only the above issue but if a person is not liable for registration in GST, he is not able to get PAN in due time and for that reason, filing of application for registration is delayed, then he loses claim of Input Tax credit on Capital Goods on purchases prior to the date of registration. Loss of Input Tax Credit on the Capital Goods would be an even bigger loss.

4.4.7 Thus, the entire issue boils down to the fact that, it an agreed and acceptable argument that PAN should be the bedrock for GST. However, a temporary registration can be granted to a person in case he has applied for PAN and he could be asked to update the PAN within a prescribed time on the portal. The concept of Temporary Registration is present in enforcement cases. The business process document provided for temporary registration in case of enforcement cases and then converting the temporary registration to PAN based registration.

Comment: It is suggested that as was provided in the draft report, allot temporary registration in case of enforcement cases and then converting the temporary registration to PAN based registration. A temporary registration may also be allotted in normal cases till PAN is allotted with a maximum time period of 15 days to update PAN and, subsequently, converting the temporary registration to PAN based.

5. Credit of CGST paid in one State against CGST payable in another State

5.1 Let's start the discussion with a brief history. By the end of 2004-05, Credit of Excise was allowed against Service Tax and vice versa as well. Thus, both major sources of revenue for the Centre from Indirect Taxes leviable in the supply chain of goods and services were creditable against each other. By the end of 2006, State Revenue in terms of VAT, Input Tax Credit of VAT was allowable against VAT payable in that particular State and no set off of CST paid in other State was allowed as Credit against VAT.

5.2 Thus, before going into GST, all major taxes levied by Centre were creditable inter se in the supply chain upto the point they had constitutional power to levy taxes except for Central Sales Tax and other minor taxes including SAD, etc. However, on the State side, revenue of each State was considered on an individual basis and credit of taxes paid was allowed within the territory of Individual State except for certain minor taxes like Entry Tax, Luxury Tax, etc. In a nutshell, both Central Taxes and State Taxes were creditable respectively within their respective Jurisdictions except for minor exceptions, i.e., Central Taxes for taxes paid anywhere in the country and State Taxes for taxes paid in the State.

5.3 If we see the present structure of SGST, it is a true replicate of the existing VAT Structure wherein credit of SGST is allowable in that particular State and not against SGST payable in any other State. The only exception being CST which would now been abolished and would be replaced with IGST, however, credit of entire taxes paid in IGST would be allowed and that's why there is demand for paying compensation to the States with the removal of CST.

5.4 So far so good, now we come to Central Taxes wherein prior to implementation of GST, tax paid in respect of Service Tax and Central Excise was allowable as credit against either of the taxes payable anywhere in the country. But somehow in the present GST Structure, Centre seems to have limited its jurisdiction to each State and CGST paid in each State would be allowed as credit in respective State only.

5.5 The entire issue boils down to the fact that when CGST has been levied and collected by the Central Government then why credit of CGST paid in another State is not allowable as credit of CGST payable in another State. Is the Centre not indulging itself in unjust enrichment? Credit of CGST paid in one State and not allowed as credit in another State would be a step backwards as compared to the present scenario wherein under present system credit of Central Taxes is allowed as credit in the entire country but under GST credit would only be allowed for each State.

5.6 One of the arguments in favour of not allowing credit of CGST paid in one State against CGST payable in another State is that CGST is separately leviable only in case of Intra State Trade and not in Inter State Trade. Thus, it does not allow Cascading Effect and further, if the business within the State procures it for further consumption, it is allowed as credit against CGST in case of Intra State Trade and is allowed as credit against IGST in case of Inter State. IGST. Further, if it is consumed within the State then there is no question of Credit.

5.7 The question is when a person has Credit of CGST available in a State and CGST is payable in another State, then by not allowing him the set-off whether Centre is not indulging in making him pay the tax which he has already deposited with the Centre? For centre it may mean different pockets but for the registered taxable person having same PAN, it's his same pocket from where he has paid the tax, even though in different States.

5.8 The next issue which arises is that if Revenue Neutral Rate in GST for Centre has been calculated by treating credit of CGST limited against CGST payable in that State then it was an error as Input has not been allowed to have a free flow between businesses when the tax is being levied and collected by the same government. It's fact that SGST payable in one State is not allowed as credit against SGST payable in another State as it is levied and collected by each State Government separately but in case of CGST it is inexplicable and should be avoided.

5.9 CGST paid in one State should be allowed as a set-off against CGST paid in another State on two counts-, firstly that it is levied and collected by the Central Government across the country and, therefore, it should have been allowed as a set-off against CGST payable anywhere in the country and secondly, the present system of service tax and central excise also allows set off of the taxes of the Central Government paid anywhere in the country. The present system should be one step ahead and not a step backwards as compared to past system.

Comment: If the benefit of adjustment of excess credit of CGST in one State is not allowed to be set off against CGST payable in another State then it would be resulting in unjust enrichment by the Centre whereby they would be collecting tax twice from the person, even though he has an Input Tax Credit in another State. The situation should be avoided and set off should be allowed.

Treatment of balance ITC wherein Person opts for Composition Scheme or Goods and/or Services are exempted from Tax

6. The provision requires reconsideration as it seems to talk about lapse of entire Input Tax Credit lying in the electronic credit ledger and it puts the registered taxable person in adverse position and takes away rights which have been vested in him under the law prior to opting for composition scheme or goods and/or services being exempted from taxation. Any right which has accrued to the person in a law cannot be taken away by happening of a subsequent event. That right should remain vested in the person unless the time-limit for claiming the respective right under the law has expired.

6.1 Section 18(7) of the Draft GST Law provides that once a person opts for composition scheme or where the goods/services supplied by him become absolutely exempt under the law then the person would be required to pay by debiting to electronic cash or credit ledger, an amount equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock and on capital goods on the day immediately preceding the date of such switch over or absolute exemption of goods and/or services.

6.2 The proviso to the section provides that after payment of amount by way of debit to the electronic cash ledger or credit ledger equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.

6.3 The provision fails on two aspects under the law which are as follows:

(a) Person dealing in Multiple Goods/Services and one or some of the goods and/or services have been exempted from levy of tax

  The provision to the section is not very clear whether it speaks of lapse of entire Input Tax Credit in electronic credit ledger of the taxable person or Input Tax Credit relating to goods or services which have been exempted from tax.
  It seems that lawmakers have only thought of the situation where the registered taxable person is dealing only in only single category of goods and/or services. It might be possible that a particular goods and/or services have been exempted and rest of the goods and/or services supplied by the person might be taxable.
  Therefore, in such case the credit should lapse only to the extent of the goods which have been exempted from the levy of tax and it should not be that the entire tax credit should be reversed. The law needs to provide for the same clearly.

(b) Situation where excess Credit lying in the Electronic Credit Ledger of the Taxable person after debiting the amount relating to Input Tax Credit on the goods lying in stock and Capital Goods, relates to Export of Goods and/or service earlier made or due to Inverted Duty Structure

  Let's discuss the case wherein the taxable person is dealing only in a single commodity and supposedly, it is exempted from levy of tax from a particular date or he opts for composition scheme from a particular date.
  The registered taxable person has excess Input Tax Credit lying in his Electronic Credit Ledger even after debiting the amount relating to Input Tax Credit on the goods lying in stock and Capital Goods, which relate to Export of Goods and/or service earlier made or due to Inverted Duty Structure. The person had not claimed refund of such Input Tax Credit which was due on account of Export of Goods and/or services or inverted Duty Structure.
  The balance left in Electronic Cash Ledger on account of inverted duty structure or export of goods and/or services earlier made should be refunded to the taxable person. However, law provides that balance input tax credit lying in the electronic credit ledger would lapse.
  This would be an unfair position, how earlier rights would be affected by a subsequent event. The amount for which a registered taxable person was earlier entitled to claim of refund should not be affected merely by a subsequent change of events. The person should be allowed to claim refund provided the claim of refund is within the time-limit prescribed under the law.
  This treatment of entire Input Tax Credit having lapsed would render the person who had not claimed the refund in an adverse position to the person who had claimed refund of such taxes at a date earlier than such goods/services would have been exempted from the tax or opting for composition scheme. This on account of no fault of the person who had not claimed refund and rights to both the person under the law to claim the refund accrued on account of similar reasons which are valid under the law i.e. either on account of export of goods and/or services or account of inverted duty structure.
  The total liability of the person who had earlier claimed refund would only be restricted to payment of the input tax credit in respect of inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock and capital goods on the day immediately preceding the date of such exemption or opting for composition scheme. However, the total liability of the person who has not claimed would have his liability enhanced and his entire credit would lapse, even though balance Input Tax Credit relates to export of goods/services or inverted duty structure.

Comment: The proviso should clearly provide that where the goods are made absolutely exempt, then in such case the Input Tax Credit in the electronic ledger would only lapse to the extent it relates to inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock and capital goods on the day immediately preceding the date of such exemption.

In case the person is dealing in only single goods or services, then the person should be allowed to opt for refund of such excess amount left in the electronic credit ledger after debiting the amount of Input Tax Credit relating to inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock and capital goods on the day immediately preceding the date of exemption of goods and/or services from levy of tax under the law, provided such amount pertains to export of goods and/or services made earlier or on account of inverted duty structure. Further, if the registered taxable person is dealing in multiple goods and/or services then the registered taxable person should be allowed to adjust that balance Input Tax Credit lying in his account. The entire credit should not lapse.

In case of a registered taxable person opting for composition scheme, such person should be allowed to apply for refund if any amount is left in the electronic credit ledger after debiting the amount of Input Tax Credit relating to inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock and capital goods on the day immediately preceding the date of opting for composition scheme, provided such amount pertains to export of goods and/or services made earlier or on account of inverted duty structure.

Need to revise the deadline set for claim of ITC

7. The deadline to claim Input Tax Credit in respect of any invoice should be linked with the due date rather than actual filing of the return. The provision relating to actual filing of the return makes compliance based system dependent upon the whims and acts of a particular person.

7.1 Provisions of Section 16(4) of the Draft GST Law provides :

"A taxable person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services after furnishing of the return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier."

7.2 The provision is similar to proviso to Sections 32(3) and 34(5) of the Revised Model GST Law relating to rectification of omission or error in GSTR-1 and GSTR-2 but is different from the proviso to Section 34(9) relating to rectification or omission in GSTR-3.

7.3 The provision contains that a person would not be entitled to take input tax credit of an invoice or invoice relating to such debit note pertaining to a financial year :

(a)   After furnishing of return under section 34 for the month of September following the end of financial year to which such invoice or invoice relating to the debit note pertains to, or
(b)   Furnishing of the relevant annual return, whichever is earlier

Condition (a) above links the deadline with furnishing of return for the month of September of next financial year and not the due date for filing of return for the month of September. Condition (b) also links the deadline with furnishing of Annual Return of the relevant financial year and not the due date for filing of return for the relevant financial year.

7.4 The important thing to observe here is that the law is not restricting the time-limit by the due date of filing of the return for the month of September following the end of the financial year, as has been provided in proviso to Section 34(9).

7.5 Thus a person who has forgotten to claim Input Credit of the invoice for the month of March 2018, can claim credit of that invoice till he files return for the month of September 2018 or files annual return for the period 2017-18, whichever is earlier. His time-limit is not restricted to the due date of monthly return of September 2018 or annual return of Financial Year 2017-18.

7.6 It is not to be forgotten that the entire system is compliance based. The compliance by the person making the outward supplies makes it possible for the person receiving the inward supplies to claim the Input Tax Credit. The compliance by the person receiving the inward supplies makes it possible for the person making the outward supply to accept/reject the details of inward supply submitted by the person receiving the inward supply. Thus, submission of an entry relating to an inward supply supposedly after submission of the returns by the outward supplier would create issues in supply chain.

For e.g., a particular invoice for which the "A" finds that a credit has been erroneously claimed by him in his return and intends to change GSTR-2 and GSTR-3. The outward supplier to such person, i.e., "B" and person to whom A has made supplies, i.e., "C" has filed their returns for the month of September following the end of the financial year. Now if "A" rectifies his return, then such rectification would be affecting :

(i)   Details filed by "B" in GSTR-1, if any correction is required at the end of "B" in his GSTR-1
(ii)   GSTR-3 of "A", but no such change would be possible if due date for filing of monthly return for the month of September of Next Financial Year has passed (Limitation in proviso to Section 34(9)),
(iii)   Tax liability of "C" as now tax is payable by "A" on such erroneous credit alongwith Interest. If "A" does not pay the due tax or is not able to reflect the same in his due tax, then the claim of Input Tax Credit of C of the supplies received from "A" would also be reversed.

In this case B and C also cannot rectify their returns in GSTR-1 and GSTR-2, respectively, as they have filed their returns for the month of September following the end of financial year. The whole system would come to a standstill due to such erroneous due dates.

7.7 The deadlines for rectification in GSTR-1, GSTR-2 and GSTR-3 for a particular financial year and deadline for section 16(4) for claim of Input Tax Credit pertaining to an invoice for a financial year should be brought in consonance and should be common, preferably lined with due date rather than filing of a particular return. Presently, deadline for rectification in GSTR-1, GSTR-2 and section 16(4) year differs from deadline provided for rectification in GSTR-3.

If a supplier supposedly finds error or omission in respect of credit claimed by him pertaining to an invoice pertaining to the month of March 2018 and rectifies GSTR-1 in November 2018, how would he be able to rectify GSTR-3 as the time-limit for rectification of GSTR-3 is due date for filing of monthly return for the month of September of next financial year. Further, if tax is payable by him in GSTR-3 on account of rectification GSTR-3, then how would he reflect the changes in GSTR-3 as he cannot rectify the same. Whether such non-reflection of payment in GSTR-3 would not be treated as non-payment of due taxes and would not be affecting the claim of Input Tax Credit of the person who has received the supply from such person.

7.8 Another shortcoming of linking the deadline of claim of Input Tax Credit pertaining to a financial year with the filing of return would be that if a particular return is substantially delayed by the person receiving the inward supply due to any reason then entire supply chain would have to suffer and would be dependent upon the whims and actions of such person.

7.9 The deadline to claim Input Tax Credit in respect to any invoice should be linked with the due date rather than actual filing of the return. The provision relating to actual filing of the return makes the whole system dependent upon the whims and acts of a particular person.

Comment: If we analyse the provisions in the law and the compliance based system developed in GST, it would be appropriate that the deadline in proviso to Section 32(3), 34(5), 34(9) and 16(4) are linked with respect to the due date of filing of return for the month of September following the end of financial year rather than actual filing of the Return for the month of September of the next financial year or annual return, whichever is earlier.

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