OCTOBER 29, 2019

By Dr G Gokul Kishore

THE campaign for introduction of GST was dominated by one-nation-one-tax and seamless credit. In this series, several issues relating to input tax credit have been discussed in previous parts. The insistence on not amending certain provisions and bringing provisions to restrict credit have resulted in cracks in the pillar of seamless credit. This 61^st part intends to discuss on the need to reverse such transition.

Transitional credit - Compelling taxpayers to file writ petitions

Huge number of writ petitions are pending in various High Courts on transitional credit. Most of them relate to unfortunate taxpayers being unsuccessful in fighting with the GST portal at the time of filing TRAN-1 form and they form the 'glitches' category. Second category of petitions have been filed over validity of provisions or retrospective amendments, particularly those on education cesses and mistakes in entering values / amounts in TRAN-1 due to lack of understanding. The government is also engaging itself in spirited combat with the taxpayers without taking any pointer from such petitions which may enable it to appropriately amend the provisions and give a quietus to litigation.

Time-limit for transition should be abolished

The starting point appears to be incorrect. For transitioning credit from pre-GST laws to GST regime, there need not be any time-limit. Time-limit for credit itself is a manifestation of distrust that the bureaucracy has vis-à-vis taxpayers. When pre-GST credits are transferred from taxpayer's Cenvat credit or VAT ITC register maintained by the entity, they are already availed credits. At the time of transition through TRAN-1 form to GST regime, no new credit is taken. Purchases or procurement have taken place long ago. The goods have been received and in most cases, used and services have been consumed. What is transitioned is merely carrying forward certain entries from one register to another - a new register which is called electronic credit ledger. When certain entries are simply brought forward, the same is a routine accounting function. There is no fresh credit received or availed by the taxpayer.

No lien on ITC ledger for tax administration

In the pre-GST regime, companies maintained credit register in their system electronically or in physical form in their business premises. Because the GST system provided for the register in electronic form and that too, maintained in government's portal, the character of the ledger does not change from one that belongs to the taxpayer. The tax administration cannot have any claim or lien over credit ledger. If the fundamental distinction of register / ledger, accounting entries, book-keeping, etc., are properly understood, then time-limit for transfer of credit from pre-GST laws to GST law would not have been introduced. Private book entries by companies cannot become property of the government. One may say that as long as credit is availed in accordance with applicable statutory provisions, such rigours are necessary. But, as said earlier, transitional credit is not a special species of credit and it is not availed for the first time.

Time-limit for transition of credit is artificial and confiscatory

Taxpayers have been doing business paying applicable taxes since pre-GST regime and the credits lying in the books are being reflected in a new register in the GST dispensation. Time-limit is, therefore, both artificial as well as confiscatory. Artificial because, there is no eminent rationale for introduction of such fetter. Confiscatory because, what has always been available in a credit register or ledger is abruptly sought to be curtailed by prescribing procedural requirements like filing of TRAN-1 form within a specified time. When GST revenues are nose-diving and when evasion is being portrayed as a new phenomenon seen only in GST, an argument on doing away with time-limit for transitional credit may be difficult to get accepted. However, if the intentions are genuine and if the taxpayers are to be spared from the agony of filing numerous writ petitions, then scrapping the time-limit for transitional credit is doable.

Ensuring compliance through taxpayers

The recent amendment to CGST Rules to restrict ITC to the extent of 20% at the hands of recipient when suppliers have not uploaded invoice details in GSTR-1 is an eloquent example of lack of trust in taxpayers and compelling taxpayers to suffer for inadequacies in the systems and processes. As noted in earlier parts, the return system is still a work-in-progress. The administration's learning curve is steep as every change is being tested live on taxpayers through trial and error method. By restricting credit, recipients are forced to partner with the tax administration in ensuring compliance by others. While compliance should be voluntary, checking compliance should be the responsibility of the administration and the onus cannot be shifted or shared with taxpayers.

If the provision requires a person to upload his supply details and he defaults, for such offence, somebody else cannot be arraigned as a party and penalised. Such measures are not hallmarks of progressive tax system of GST with professed objective of extending seamless credit. Restrictions of this type frustrate both the spirit of GST system as well as create hurdles in smooth implementation. If the system gets complicated requiring recipient to avail only 20% of eligible credit in such a scenario, the simplified tax system traverses in the opposite direction. Indulging in circular trading through supplying invoices only without actual sale of goods by a few unscrupulous persons cannot be used to paint the entire industry black. The credit restriction precisely attempts such an adventure. Prudence lies in realizing that such amendments neither significantly contribute to revenue nor make the life of taxpayers easier. This amendment should be withdrawn without hesitation. Transition from seamless credit to restricted credit regime should be reversed.

[To be continued...]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 60