JANUARY 08, 2019

By Lakshmi Ratna Kancherla, Advocate

VARIOUS manufacturers/traders/service providers had registered in multiple States under the GST Law as a consequence of realignment of their supply chain model/ presence of a fixed establishment in a particular state. However, the existing registrants are seeking to cancel the said registration due to re-alignment /closure of business etc.

In this article, the author attempts to highlight the fate of input tax credit on cancellation of registration under the GST Law.

The GST Law envisages a detailed procedure to be followed in case the registered person seeks to cancel his registration.

Section 29 of the CGST Act, 2017 lays down the situations in which the registration can be cancelled, which include closure of business, discontinuance of business etc.

Cancellation of Registration – Status of Input Tax Credit?

Section 29(5) of the CGST Act, 2017 lays down that every person whose registration is cancelled shall pay an amount, by way of debit in the electronic credit ledger or cash ledger, equivalent to the credit of the input tax in respect of:

i. Inputs held in stock and 

ii. Inputs contained in semi-finished or finished goods held in stock or

iii. Capital goods or

iv. Plant and machinery

on the date immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher, calculated in such manner as may be prescribed.

Rule 81 of the CGST Rules, 2017 provides that the registered persons intending to cancel the registration is required to file a final return (GSTR-10) furnishing the details of the input tax credit.

Net Effect

-  Input Tax credit pertaining to inputs and capital goods lying in stock on the date of cancellation is required to be paid back.

-  No express provision laying down the manner of obtaining refund in case of input services lying as balance in the credit ledger even after complying with the obligation under section 29(5).

Position under GST Law - Sacrosanct?

Although the Karnataka VAT Law and certain other State Laws, had a similar provision, insofar as input tax credit is concerned, it is interesting to note that there was no express provision under the Central Excise/Service Tax Law, to obtain a refund of the credit lying in balance at the time of closure of the unit or surrender of registration with the issue being highly contentious.

The issue under the erstwhile law was whether the assessees could obtain a refund of the CENVAT Credit lying in balance on closure of the unit, in terms of Rule 5 of the CENVAT Credit Rules, 2004.

In the case of Union of India v. Slovak Trading Co. Pvt. Ltd. reported at - 2006-TIOL-469-HC-KAR-CX wherein the issue was whether cash refund can be ordered even if there was no specific coverage in Rule 5 of the CENVAT Credit Rules, 2002. It was held that –

-  Rule 5 of the CENVAT Credit Rules, 2002 does not expressly prohibit the refund of the unutilised credit where there is no manufacture in the light of the closure of the factory.

-  Moreover, since the assessee had opted out of the Modvat scheme the refund of unutilised credit has to be made.

-  This case was maintained in the Supreme Court as well.

The Larger Bench of the Tribunal in the case of Steel Strips v. CCEx., Ludhiana reported at 2011-TIOL-656-CESTAT-DEL-LB held that refund cannot be granted where there is no express provision to grant refund under Rule 5 of CCR except in the case of exports. It was held that the claim for refund is inconceivable when the right to refund does not accrue under law and that the claim of refund is not a matter of right unless vested in law.

However, various judicial precedents were decided in the favour of the assessees granting refund of the credit lying in balance considering Slovak Trading supra as a precedent.

It appears that the Legislature while requiring the assessee to reverse credit or pay back credit attributable to the goods in stock has not included a specific provision for refund of balance after such utilisation. The non-inclusion of such a provision clearly indicates that only the Revenue wants to unjustly benefit itself without giving corresponding benefit to an assessee by way of refund of unutilised balance of credit on goods and services on cancellation of his registration.

Action Required…

Credit pertaining to Inputs/Capital Goods

The fact remains that the credit accrued is a vested right. 

The vires of the provision can definitely be challenged on the ground that the registered person has been divested of his vested right.

Under GST Law, the assessees have challenged/sought Advance Rulings on issues pertaining to carry forward of credit but they have not met with success in all such cases. Although, the cases under the erstwhile law and present law are on a different footing, the fact remains that the registered person should be entitled to the refund of the balance input tax credit in cash on cancellation of registration.

Input Tax Credit-Pertaining to Services

Insofar as the credit pertaining to input services is concerned, in the absence of any specific provision the assessees can definitely opt to claim a refund of the balance available. This may result into another round of litigation which would be settled in the favour of the assessee going by the judicial precedents under the erstwhile law.

Parting Remarks….

Any clarification from the Government will be useful to the stakeholders involved. It would be a welcome move if such registered persons are permitted to transfer the credit to another unit which is operational in another State or alternatively allow cash refund of the balance available after discharging the liabilities on inputs/WIP/CG lying in stock. Until then, the assessees have to work out different modalities which are in line with the legal provisions in order to avoid loss of input tax credit.

(The author is Principal Associate, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal)