JANUARY 23, 2018

By K R Ramankutty, CA

1. MODVAT credit scheme was introduced in 1986 to allow set off of duty paid on input material from the duty payable on final product falling within specified Chapters of Central Excise Tariff Act. Subsequently, capital good credit was introduced in 1994. Perhaps the most litigated area in central excise since 1986 was the various issues relating to the admissibility of credits or on the validity of the various documents on the basis of which credit was availed. The law became settled after series of decisions of various judicial forums and the circulars issued by the CBEC from time to time. When the input credit mechanism has been re-drafted for GST, it appears some of the rules in Cenvat credit scheme which provided relief to the tax payer is left out thereby triggering another round of litigation for disallowance of input credit. As it is not the policy of the Government to increase the number of litigations, it is suggested to make the necessary changes in law to avoid frivolous litigation. Some of the issues are discussed below.

Procedural requirements for documents for availing credit

2. The availment of input credit is subject to the conditions prescribed in section 16 of the CGST Act, 2017. Though the input credit is getting credited to the electronic credit ledger of the taxpayer, possession of a tax invoice or debit note issued by a supplier registered under the Act is mandatory. Rule 36 (a) to (e) of the CGST Rules, 2017 prescribes the documents and conditions for claiming input credit. It has been mandated in sub rule (2) of rule 36 that input credit shall be availed by a registered person only if all the applicable particulars as specified in the provisions of Chapter – VI are contained in the said document and the relevant information as contained in the said document is furnished in GSTR-2 by such person. Chapter VI deals with the rules with regard to issue of invoice, credit and debit notes, manner of issue of invoice etc. Rule 46 of the CGST Rules, 2017 prescribes that an invoice issued under section 31 shall be issued by the registered person containing the various particulars specified in (a) to (q) of the said rule. Further, rule 48 of the CGST rules prescribes the manner of issue of invoice where conditions are specified for supply of goods and services. In the case of goods the invoice shall be marked as "original for recipient" "duplicate for transporter", "triplicate for supplier". In the case of supply of service the invoice shall be marked "original for recipient" and duplicate marked as "duplicate for supplier". The serial numbers of invoices issued during a tax period shall be furnished electronically through common portal in form GSTR-1.

Issues leading to denial of credit on account of insufficient particulars in the document

3. If the input credit is availed on the basis of any invoice which does not contain all the particulars specified in (a) to (q) of Rule 46 of the CGST Rules, 2017 or the markings "original", "duplicate for transporter" specified in rule 48 credit availed is likely to be lost because of the wordings used in section 36(2) "only if the all the particulars as specified in the provisions of Chapter VI are contained in the said document" .

4. Let us learn from history how such a situation was overcome in Modvat/Cenvat schemes. Subsequent to the introduction of Modvat scheme in the year 1986, litigation mounted on account of the validity of the documents where the invoice did not contain all the particulars specified by law. A situation equivalent to the present scenario, where the credit is likely to be lost if mandatory conditions of rule 46 and 48 are not complied with. To reduce the litigation on account of defect in the documents, CBEC had issued Circular number 441/7/99-CX dated 23.02.1999 and the Central Excise Rules 57G and 57T were amended to relax the conditions for allowing the credit by the Assistant Commissioner,if the invoice contained minimum information. Equivalent provisions were incorporated in rule 9(2) CenvatCredit Rules, 2004 also to allow the credit subject to the minimum information in the invoice.

5. Provisions should be introduced equivalent to proviso to rule 9(2) Cenvat Credit Rules, 2004 to allow input credit even if all the conditions prescribed in Rule 46 and 48 of the CGST Rules are not complied fully complied with but minimum prescribed information are contained in the invoice to ensure that the service was received or goods was received and paid to a registered person.

6. As the law is new, there can be chances of mistakes being committed during the transitional period. As held by the Apex Court and consistently followed by various other judicial forums, substantive benefit cannot be denied for procedural lapses.

Anti-profiteering measure and input credit disallowance

7. Any disallowance of input credit has an impact,if the credit is to be passed on by virtue of the provisions regulating anti-profiteering. Section 171 of the CGST Act, 2017 inter alia provides for the passing on of input credit to the recipient by way of reduction in the price. Anti-Profiteering Rules, 2017 also has been released where rule 7 of the said rule states that the authority may determine methodology and procedure for determination as to whether the benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices. In the context of Anti-profiteering law the disallowance of input credit assumes more importance inasmuch as there can be a compulsion to pass on the credit and there can be a disallowance of credit either on account of a defect in the document or on account of ineligibility of the item which can arise any time within the period for a department action. This results in double jeopardy which has to be avoided. If credit has to be passed on, there should be an assurance from Government side that the eligibility of the credit will not be disputed at a later stage.