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Are the tax credit provisions ‘taxing’ under GST?

27 June 2017

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Any indirect tax structure is based on the fundamental concept of ‘tax on value addition’ whereby an assessee avails credit of taxes paid on procurement and hence effectively pays the tax only on the value addition, write Nishant Shah and Harsh Shah, partners at Economic Laws Practice. Accordingly, the tax credit provisions under the indirect tax legislations form the heart of the legislation.

In the context of India, currently, CENVAT Credit Rules, 2004 (the CENVAT Rules) govern the credit provisions for central legislations of service tax, which is a levy on provision of services and central excise duty which is a levy on manufacture. Similarly, there are separate input tax credit provisions in various state VAT legislations. Cross-credit restrictions w.r.t. centre and state legislations is one of the key concerns under the existing indirect tax regime and rightly so, elimination of cascading effect by allowing fungibility of credits is one of the most important reasons for introducing goods and services tax (GST) in India.

In light of the above background and the Central Goods and Service Tax (CGST) Bill, this article analyses the input tax credit provisions as given in the recent GST law vis-à-vis the CENVAT Rules under the present regime.

Input tax credit

Section 16(1) of the CGST Act is the enabling section for availment of credit. As per the said section: "every registered person, subject to conditions and restrictions as prescribed, be entitled to take credit of input tax charged on supply of goods or services or both which are used or intended to be used in the course of furtherance of business"

Further, section 2(62) of the CGST law has defined 'input tax' to mean "central tax (CGST), state tax (SGST), integrated tax (IGST) and union territory tax (UTGST) and includes:

  • IGST paid on imports;
  • CGST, SGST, IGST and UTGST paid on reverse charge; and
  • CGST, SGST, IGST and UTGST paid under reverse charge on procurements from unregistered suppliers.

The section is widely worded and seems to allow the credit of input tax on supply of goods or services. A quick and upfront comparison between the credits under the CENVAT Rules and the GST law indicates that, under the CENVAT Rules, credit can be taken only if the goods qualify as inputs or capital goods and the services qualify as input services. As opposed to this, a person making only taxable supplies liable at 18% or 28% under GST is eligible to avail credit of CGST, SGST, IGST charged on supply of goods or services.

Thus, terms like 'inputs', 'input services' and 'capital goods' that have been defined under GST also essentially have their relevance only in cases where a supplier under GST undertakes taxable supplies which have restrictions on availment of credit and/or exempt supplies.

Inputs and input services under the CGST Act

Section 2(59) "means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business".

Section 2(60) "means any service used or intended to be used by a supplier in the course or furtherance of business".

Both the definitions have been widely defined as compared to the CENVAT Rules. Even the goods or services intended to be used are covered, unlike the CENVAT Rules. A simpler definition tends to remove the litigation possibility on some of the issues that currently exist such as credit restrictions in cases of the use of services beyond place of removal. Similarly, litigation around terms like 'in relation to', 'means' and 'includes', coverage of the definition of input services etc. would tend to go away.

This is in line with the centre and state policy of ease of doing business in India.

Thus, while the availment of credit seems to be simpler under GST, credit restrictions continue to exist under GST in the form of Section 17(5) of the CGST Act which provides for the blocking of credits.

Capital goods under the CGST Act

Section 2(19) – "means goods, the value of which is capitalised in the books of account of the person claiming input tax credit and which are used or intended to be used by a supplier in the course or furtherance of business".

There is a complete overhaul of the definition when compared to existing definition of the said term in the CENVAT Rules. The existing definition is an inclusive tariff heading based definition. The definition under GST has been brought in line with the treatment given to the goods in the books of accounts. Hence, the treatment in books of accounts will determine whether the goods are capital goods or inputs. This is against certain judicial precedents which have held that the treatment in the books of accounts cannot determine the treatment for tax purposes.

To cite an example, mivan/shuttering material used in construction projects generally forms part of 'work-in-progress' in the books of the developer, however, the same qualifies as capital goods in terms of the CENVAT Rules. Under GST, the same would not qualify as capital goods if such purchases are not capitalised in the books of accounts.

Further, the entire credit in respect of capital goods can be availed in the year of purchase itself. There is no provision that defers part credit to subsequent year, unlike in the CENVAT Rules, where only 50% credit can be availed in the year of purchase and balance 50% in the subsequent year.

A major deviation in the context of capital goods credit is with respect to credit on such goods when used for taxable and exempted transactions. As per the CENVAT Rules, the entire credit on capital goods can be taken as long as such capital goods are not exclusively used for exempted goods/services. However, under GST, a proportionate reversal is required when capital goods are partly used for taxable supplies and partly for exempt.

Condition for availment of credit

As per the Section 16(2) of the CGST Act, the person can avail the input tax credit only upon fulfilment of the following conditions:

  • The person is in possession of a tax invoice or debit note as may be prescribed is issued by the supplier under this Act;
  • The person has received the goods or services or both;
  • Tax is actually paid by the supplier to the government; and
  • Details have been furnished in the returns.

In view of the above, credit is allowed only when the goods or services are 'received' by a person claiming input tax credit. Does it mean a person making an advance payment is not eligible for input tax credit?

Further, explanation to Section 12(2) and 13(2) of the CGST Act specifically states that "supply is deemed to be made to the extent it is covered by invoice or payment". Thus, for the purpose of payment of GST, it appears that a supply shall be deemed to have been made to the extent covered by the invoice (which needs to be raised even on receipt of advance). But, on the same analogy, can one be deemed to have received the goods/services to the extent it is covered by invoice or payment? Well, on a prima facie reading it appears that credit may be available only when goods/services are actually received. If so, then there would be timing issues (especially for advance payments) between a supplier treating goods/services as supplied and the receiver receiving the same.

Apart from the above, the credit under GST law is eligible only upon payment of tax to the government. This would mean that the recipient cannot avail the input tax credit until the time the supplier does discharge the tax.

This marks a significant move from long established CENVAT principles laid down in Apex court decisions of Collector of Central Excise vs. Dai Ichi Karkaria Ltd. [1999 (112) ELT 353 SC] and Eicher Motors Ltd. vs. Union of India [1999 (106) ELT 3 SC] which stated that CENVAT is an inherent right and is indefeasible.

Such a provision is, however, in line with the decision of the Bombay High Court in the case of Mahalaxmi Cotton Ginning Pressing and Oil Industries vs. State of Maharashtra [2012 (051) VST 001 BOM] wherein the court upheld the validity of granting credit only upon payment by the other person.

The provision is also against the legal maxim "Nemo Punitor Pro alieno delicto" which means no one should be punished for the crime of another.

Thus, one can summarise the credit provisions in light of the aforesaid provisions as per the below table:

Aspect under the credit provisions Change compared to the CENVAT Rules
Credit eligibility for a person making only taxable supplies at 18% or 28% Positive
Definition of input and input services Positive
Definition of capital goods Simpler
Credit restrictions Neutral
Capital goods commonly used for taxable and exempt supplies Negative, but logical
Conditions for availing credit
(i) Actual receipt of goods/services Negative
(ii) Payment of tax by the supplier Negative

One can thus conclude that similar to other provisions under GST, analysis of the input tax credit provisions needs a careful reading. As of now it appears that the law does not entirely speak the intention of the Act. However, one needs to wait and watch to unveil the pros and cons of the credit provisions and its impact on the industry.

Having said so, there are bound to be new challenges with the introduction of a new law, at least in the initial period. These challenges are likely to arise on account of multiple business scenarios, ever-evolving technological and marketing ideas which may not have been factored under the current law. However, the authorities may do well to adopt at least from the learnings under the existing legislation to ensure enough flexibility under the new law to facilitate business transactions.

  Nishant Shah and Harsh Shah
Economic Laws Practice






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