Madras High Court allows transition of accumulated credit of cesses into GST

Upon introduction of Goods and Service Tax (‘GST’), the credit of taxes pertaining to erstwhile law, i.e. Central Excise, Service Tax and Value Added Tax, was allowed to be carry forwarded as per the transitional provision either as Central Goods and Service Tax (‘CGST’) or State Goods and Service Tax (‘SGST’) as the case may be. Accordingly, taxpayers carry forwarded the credit by filing Form Tran-1. 

Section 140(1) of CGST Act, 2017 (‘CGST Act’) provides that register person shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forwarded in the return relating to the period ending with the day immediately preceding the appointed day. 

As per the CENVAT Credit Rules, 2004 (‘CENVAT Rules’), Education Cess, Secondary and Higher Education Cess, Krishi Kalyan Cess (‘Cesses’) are also considered as CENVAT. The term ‘eligible credit’ is defined but not made applicable to Section 140(1) ibid and hence there was not any restriction for carry forward of such credit. Based on the above understanding, many taxpayers have carried forwarded the closing balance of Cesses into GST via Form Tran-1.

The Government vide CGST (Amendment) Act, 2018 has made the retrospective amendment w.e.f. 1 July 2017 in the Section 140(1), to contextualise the phrase ‘CENVAT credit’ with the term ‘eligible duties ‘, to disallow the transition of accumulated credit of the Cesses into GST. By virtue of this amendment, the closing balance of credit available under Cesses is not transferable as input tax credit under GST.

The Revenue Authorities while verifying transitional credit balance examines whether the taxpayers have transitioned accumulated credit of the Cesses into GST or not, since the same are not eligible for transfer into GST.

Recently, in a landmark judgement, the Madras High Court  has allowed transition of accumulated credit of Cesses into GST regime. In this case, the taxpayer claim for transition was rejected on the ground that the Explanations to Section 140 of the CGST Act do not include Cesses as ‘duties and taxes’ eligible to be carried forward into GST. The taxpayer filed a writ petition against a show cause notice issued by the Revenue Authorities asking the taxpayer to reverse the alleged erroneous transition of credit, pertaining to Cesses, into the GST regime.

The High Court, upon examining plethora of judicial precedents, held that the credit of the Cesses could be transitioned and utilised for payment under the GST. The High Court while passing the order has made following observations:

• There is no circular / notification / instruction, that has expressly provided that the accumulated credit of Cesses would lapse. Additionally, the Revenue Authorities was not able to provide any mention of a policy document by CBIC indicating the complete lapse of such cess credit.
• The intention of the Government was evidently to provide a seamless model for transitioning all CENVAT credits hitherto availed by a taxpayer under the erstwhile Service Tax / VAT and other indirect taxes levied to the GST regime.
• All conditions of sections 140(1) and 140(8) were satisfied by the taxpayer, and the embargo placed by Rule 3(7)(b) of CENVAT Rules was long gone with the introduction of GST.
  
• Sections 140(1) and 140(8) of the CGST Act and the explanation there-under makes it clear that all available credit as on the transition date would be available to the taxpayer for set-off.
  
• Section 140(1) of the CGST Act, was amended to contextualise the phrase ‘CENVAT credit’ with the term ‘eligible duties’. 
  
• However, Section 140(8) of the CGST Act, governing the transition of CENVAT credit by service providers operating under a centralised registration, was not similarly amended. Accordingly, any taxpayer having a centralised registration under the erstwhile regime becomes entitled to claim transitional credit of Cesses under Section 140(8) of the CGST Act.
  

This decision of the High Court is based on the doctrine of vested rights accruing to a taxpayer to avail credit, as envisaged under GST. Separately, since the amendment to Section 140(1) of the CGST Act did not extend to Section 140(8), an exception has been drawn for service providers with a centralised registration. This will effectively create an inequality qua other category of taxpayers. Further, this ruling takes different approach from a circular issued by the CBIC and accordingly, the Revenue Authorities could continue to deny the transition of credit of the Cesses and litigate on this issue.

It may be noted that, against the retrospective amendment restricting the transition of accumulated cesses, writs have been filed before various High Courts. 

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¹Writ Petition No. 4773 of 2018 & WMP Nos. 5916 & 13148 of 2018