MAY 15, 2018

By Anupama Ravindran, Adv.

ERSTWHILE Cenvat Credit Rules, 2004 allowed for credit of Central Excise Duty/Service tax to be taken by a manufacturer or producer of final products or a provider of output services, credit of inputs, capital goods, and input services received by such person.

Rule 3 (5B) of the Cenvat Credit Rules, 2004 states that if the inputs or capital goods are written off fully or partially on which Cenvat Credit was taken, an amount equivalent to the Cenvat credit taken in respect of said input or capital goods shall be paid back.

Similarly, in the GST Regime, Section 16 of the CGST Act, 2017 states that a registered person is entitled to 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. Section 17(5)(h) of the CGST Act provides that input tax credit shall not be available in respect of goods that are written off.

For the purposes of illustration, let us consider that a business has purchased inputs in the erstwhile Central Excise regime with the intention of using it in manufacturing finished products. The business would have taken Cenvat Credit on such inputs. Such Cenvat credit would have been transited as CGST Credit under Section 140(1) of the CGST Act.

During the GST Regime, consider that the business has decided to discontinue the product line for which the inputs has been purchased, and decided to "write off" the inputs. Under Section 17(5) (h) of the CGST Act, businesses are not eligible to take input tax credit on inputs that have been written off. Consequently, the business has decided to "reverse" the transited input tax credit.

The crux of the article is with regard to the nuances of reversal of Input tax credit on account of written off inputs. The article does not dwell on whether input tax credit is reversible at all under the said circumstances. Rule 42 of the CGST Rules provides for the "Manner of determination of Input Tax Credit in respect of inputs or input services and reversal thereof". Rule 42(1) of the CGST Rules refers to attributing input tax credit to inputs and input services which are used for business and personal purposes and partly for effecting exempt and taxable supplies. Here the method of computation has been provided for input tax credit availed during the relevant period. Since the credit being discussed herein is transited credit, the said Rule may not be relevant.

Table 11 of Form GSTR-2 has been provided to furnish information on "Input Tax Credit Reversal / Reclaim". The relevant line item in Table 11 of GSTR-2 is 11(A)(h) "Any other liability (Specify)", where it seems possible to furnish the details of transited input tax credit to be reversed.

I have a few observations here. Businesses have received Central Excise Duty Credit on the inputs as CGST Credit during transition. Now, when they have written off the transited inputs, they are attempting to reverse the CGST credit under line item "Any other liability (specify)". However,when we enter the amount in Central Tax column, the equal amount is also getting reflected under State/UT Tax column.Same is the story in Form GSTR-3B which is a monthly return. When we enter the CGST amount to be reversed under Table 4(B)(2) as "Others" ITC Reversed, the same amount is appearing in SGST column.

If the business, therefore, chooses to deposit half of the amount as CGST, so the equal amount gets remitted as SGST, is the business safe from a future litigation for CGST Dues.

Also, all other line items in Table 11 of GSTR-2 specify "Amount in terms of …", however the line item that is used for reversal in the instant case states "Any other liability". Businesses are interpreting the term to mean Amount to reverse. That is, the same amount that has transited as CGST is being reversed here.

The larger issue is that no mechanism has been indicated for computation or method for reversal of the transited input tax credit when such inputs are written off. Perhaps a rule stating that the relevant amount is to be reversed and under what heading, will help in avoiding litigations in future.

Just as an aside, are the IT systems going to constrain businesses into declaring what they do not intend to. In the instant case, IT system is making the business defaulter and makes the business end up paying interest on the ineligible ITC. Can the Government not think about providing auto-filled values, but leaving the fields editable, so the return truly reflects the self-assessments of the businesses?

(The author is associated with Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)