Has the Government inadvertently killed the ‘soul’ of GST? – By S Sivakumar, B.Sc., LLB, FCA, FCS, ACSI, Advocate – 04-01-2021

AS TIOL readers know, the concept of seamless flow of input tax credit is one of the primary objectives behind the introduction of the GST law, as stated in “Statement of Objects & Reasons”  in the Constitutional Amendment (122nd) Bill, 2014. Thus, one can perhaps say that ITC is the very ‘soul’ of the GST law. But, most unfortunately, it would seem that the steps taken by the Government, over the past three and half years, would go against saving this very soul of the GST law.

One would have expected ITC to be made available to all sectors under the GST law, save exceptions like the composition scheme. But, look at what the Government has done, in a very large sector like Realty. With effect from April 1, 2019, the Government has forced this Sector to shift to a new regime wherein, ITC is completely denied in respect of new projects launched on or after April 1, 2019 or in respect of ongoing residential and commercial projects as of March 31, 2019 on the basis of the option exercised by the realty players, albeit with lower GST rates. One wonders as to the basis on which this rather hasty decision was taken by the Government, which is definitely not benefitting the Realty Player. The very fact that realty players opted to go under the earlier scheme for most of their ongoing projects as of April 1, 2019 goes to prove the fact that these players found the earlier scheme to be more beneficial. Not content with having forced the Realty sector to shift to the new scheme, the Government has also denied utilization of the ITC rightfully availed before April 1, 2019, for payment of GST under the new scheme that has come into effect from April 1, 2019. Such is the disdain of the Government towards ITC for such an important sector like Realty. A similar scheme has also been forced on sale of food by restaurants, outdoor catering, etc., where lower GST rates have been prescribed along with complete denial of ITC. One would wonder as to what distinguishes the Realty Sector from the other sectors/industries to deserve complete denial of ITC under the new scheme, as aforesaid.

Given the glorious objective of ensuring seamless flow of ITC, one would have expected the GST law not to continue to have provisions that had denied credit under the erstwhile service tax and central excise law. As TIOL readers know, under the erstwhile Cenvat Credit Rules, 2004, cenvat credit was denied on a host of input services such as construction and works contract services used for construction of immovable property that was let out or was used as corporate office, services used for ‘personal consumption’ by corporate assessees, rent-a-cab services, etc. One can understand these restrictions, given the requirement under the CCR that, credit was available only when the input services were used to provide output service. How on earth can the Government justify denial of ITC on a variety of input supplies, when, under Section 16(1) of the Act, 2017, the registered person shall be entitled to take credit of input tax charged on any supply of goods or services, or both, to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. If the registered person takes a property on lease and sub-lets it, ITC is allowed, while ITC is denied if the same registered person decides to buy land, construct a shopping complex, create employment and significantly contribute to the country’s economy and pays GST on the rents received by him. Where is the justification to continue to deny ITC to the commercial realty sector even under the GST law, Sir? Even when the Orissa High Court, in the Orissa Retreats case – 2019-TIOL-1088-HC-ORISSA-GST, read down Section 17(5)(c) and (d) to allow ITC to the registered person who has constructed a commercial property that is let out, the rentals on which is being subjected to the GST levy, the Government contests the judgment and takes the matter to the Apex Court.

Most unfortunately, the list of input supplies on which ITC is denied has only expanded under the GST law, as compared to what existed under the erstwhile service tax. This is a case of where the Government takes away with both hands, what it purports to give with one hand.

The ITC related provisions contained in the GST law have not spared even the exporting community, unfortunately, insofar as the refund of ITC is concerned. In terms of Rule 89(4) of the Rules, 2017 which only refers to inputs and input services, it is clear that, the exporter cannot seek refund of the ITC of the GST paid by him on capital goods. Thus, while the GST paid on capital goods is available as ITC to the exporter who is supplying goods or services as zero rated supplies, the same cannot be claimed as refund by the hapless exporter.

If one thinks that, there is a seamless flow of ITC, at least in cases, where the Government does not contest its eligibility, one only has to look at the conditions laid down in Section 16(2). This Section, as we know, contains some pre-conditions for availment of ITC, some of which are clearly impossible to be met by the registered persons. For instance, under Section 16(2)(c), for availing ITC, the registered person has to ensure that his supplier has not only paid his own output tax but has also rightly availed his own ITC. The Government expects and requires the registered person to be so powerful as to control the affairs of his suppliers, if he wants to avail of ITC.

While under the erstwhile Cenvat Credit Rules, 2004 we did not have such impossible pre-conditions for availment of credit, we did have similar provisions under the VAT laws of some States like Delhi. Of course, the Delhi High Court was pleased to strike down this provision in the DVAT Act [which seems pari materia with Section 16(2)(c)] in terms of which the purchasing dealer could take input tax credit only after the selling dealer has remitted the tax collected to the Government, in ON QUEST MERCHANDISING INDIA PVT LTD – 2017-TIOL-2251-HC-DEL-VAT. Of course, the Apex Court was pleased to dismiss the SLP filed in the case of ARISE INDIA LTD 2018-TIOL-11-SC-VAT. The Delhi High Court had held that that when the legal obligation to deposit taxes collected from the purchasers was on the supplier, it would amount to gross injustice if the purchaser is denied credit. If the purchaser is buying goods from registered suppliers having TIN, denying credit for the failure of the supplier to deposit tax in the government treasury was also held as  violative of Articles 14 & 19  of the Constitution of India. In the case of Kirloskar Electric Co Ltd v State of Karnataka, – 2018-TIOL-131-HC-KAR-VAT, the Karnataka High Court held that the claim of credit of input tax under the VAT law is indefeasible, as was the case of CENVAT under Excise law and such credit of ITC under VAT law which is equivalent to tax paid in the chain of sales of the same goods, and the same cannot be denied on the anvil of machinery provisions or even provisions relating to time frame which is law of limitation and it only bars the remedy rather than negating the substantive claims under the taxing statutes.

One had hoped that the Government would have learnt from these judicial pronouncements rendered in the context of the VAT law as well as the central excise and service tax laws, as well as, from the binding judgments of the Apex Court’s landmark judgments like Daiichi Ichi Karkaria – 2002-TIOL-79-SC-CX-LB and Eicher Motors – 2002-TIOL-149-SC-CX-LB and ensured that the ITC related provisions in the GST law did not contain conditions such as the one contained in Section 16(2)(c). Sadly, not content with continuing to have this impossible condition, the Government has taken several steps to impose this restriction forcibly on the registered persons, notwithstanding the several writ petitions that are pending in the various High Courts contesting the constitutional validity of this condition, in terms of Articles 14 and 19. As TIOL readers know, in terms of the amendments carried out effective from January 1, 2021, the registered person is not eligible to avail of ITC, more than 105% of the ITC reflected in his GSTR-2A in terms of the amended Rule 36(4) and, in terms of the draconian Rule 86B, his registration can even be cancelled for violation of Rule 36(4). Readers might refer to my earlier article carried by TIOL on these draconian amendments.

Be that as it may…even the time limit for availment of ITC under the GST law, continues to be highly controversial, haunting the taxpayers. As we know, in terms of Section 16(4), the registered person has to take the ITC, in respect of any invoice or debit note for supply of goods or services or both, before the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. It is very clear that the return referred to in Section 16(4), in terms of the Rules, is the GSTR-3 which is yet to be notified and not GSTR-3B, which is only a stop gap arrangement.

The Gujarat High Court, in the AAP case – 2019-TIOL- 1422 -HC-AHM-GST, had held that GSTR-3B cannot be treated as the return referred to in Section 16(4). Instead of graciously accepting this judgment, the Government goes on appeal to the Apex Court and gets this judgment stayed 2019-TIOL-543-SC-GST. In the meanwhile, the Government also introduces Rule 61(5) with retrospective effect, to deem GSTR-3B as the return within the meaning of Section 16(4), setting in motion, unending litigation related to the time limit for availment of ITC.

Lastly…. the Government, with much fanfare, has introduced the QRMP scheme effective from January 1, 2021 for smaller players with turnovers of less than Rs 5 crores, in terms of which, these players can file quarterly returns instead monthly returns but still have to pay GST on a monthly basis. With customers not willing to pay the GST element unless such credit is reflected in their GSTR-2A and with the dangle of cancellation hanging on their heads, I would wonder as to which registered person would opt for this supposedly GREAT scheme. Had the Government allowed these small taxpayers to pay GST on a quarterly basis, on lines similar to the ones that existed under the erstwhile service tax law, it would have been really beneficial. To expect the small taxpayer to pay GST on the monthly basis but wait to collect the same from his customers on a quarterly basis, seems to be a cruel joke.

Before concluding….

It cannot be denied that the ITC related frauds have played havoc with the GST law, prompting the Government to add to the draconian restrictions that are already existing, on availment of ITC. But, the fact that the very vast majority of the taxpayers are honest are also going to be drastically affected vis-à-vis ITC, seems to have fallen on deaf ears.

The fact remains that GST continues to be a hastily introduced law, given the fact that even after three and half years, several important forms like GSTR-3 have not been enabled. It does not talk highly of a country, with a commitment of ‘ease of doing’ business, that the very important IT infrastructure, which is the backbone of the GSTIN portal, is still imperfect, requiring the Government to embarrassingly postpone the due dates for filing of the GSTR-9 and 9C, on a repeated basis.

As regards the ITC related frauds…one cannot but wonder if, GSTR 1, 2 and 3 returns had been enabled (as was mandated by the GST Act) from July 1, 2017 and if we had had a robust IT infrastructure to start with, we could possibly have minimized these frauds.

Given the Government’s antipathy towards ITC, may I suggest that the GST law should be amended to allow registered persons to opt for lower GST rates without ITC, on lines that are similar to the new regime that has been introduced for the Realty sector with effect from April 1, 2019? Of course, I will go out of work and so will the majority of Advocates and CAs who practice in IDT.

We sincerely hope that the Government lives up to its promise of ensuring ‘seamless input tax credit’ to the taxpayers and which was the only reason why taxpayers welcomed the Good and Simple Tax in the first place!

[The views expressed are strictly personal.]

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