APRIL 13, 2020

By Anshul Mathur (Partner) & Abhishek Ranjan (Principal Associate), Lakshmikumaran & Sridharan

IN the yester years, we had the concept of Cenvat credit in the realm of services and input tax credit under various VAT enactments. However, the tax paid on services was not available as set-off if the final output was in the form of goods amenable to VAT. The service tax so paid would become a cost. With the advent of GST, it was envisaged that goods and services would be on the same pedestal and cross utilisation of credit would be a reality. With this, one hoped that there would be seamless flow of credits and complete efficiency and ease of doing business. Even though it was expected that the implementation of GST would result in removal of cascading effect of taxes, GST has given rise to accumulation of input credit for certain classes of taxpayers. The accumulation of credit may be termed as one of the unintended and unexpected results of GST. Some of the peculiar situations due to which the accumulation of credit occurs are discussed below:

- Transitional Credit - Carried Forward

GST law allowed to carry forward the specified eligible credit in the erstwhile regime, as a balance in the GST credit ledger. Thus, there are many assessees who have huge amount of carried forward credit balance and the said balance is ever increasing due to the fact that they are receiving creditable inputs/input services/capital goods in GST regime also.

The assessees operating as job-worker for food and food products (falling under Chapter 1 to 22 of the Customs Tariff Act, 1985) under the Excise regime and paying excise duty on the manufactured goods (having operation in area based exemption zones) are also confused. Their activity has been classified as service (taxable @5%) but they have huge amount of carried forward credit which would take a long time to exhaust. Further, the situation of exporters, exporting goods under LUT is even more worrisome since they cannot get refund of the carried forward credit on account of exports made.

- New avenues of credit vs. RNR

Earlier, the traders were not eligible to avail the credit of service tax charged on input services and the service providers were not eligible to avail the credit of sales tax/VAT. Undisputedly, GST has streamlined and expanded the avenues of credit for all the taxpayers. The GST rates for goods and services were desired to be Revenue Neutral Rate (RNR) and to achieve this, various committees were formed and studies were undertaken. However, with introduction of GST, there have been many erratic changes in the GST rates of various goods and services and that has brought down the effective weighted average GST rate from 14.4 per cent at the time of inception to 11.6 per cent (as on September 2019). ¹ For some industries such as electric vehicle manufacturers, the reduction in rates has led to accumulation of credit, since the majority of inputs are still taxed at 18% / 28% whereas output GST rate on final product is 5%. On the other hand, some industries like restaurants, real estate players, have been forced to charge lower tax rate on their output supplies and not avail credit for the inward supplies received.

- Inverted Duty Structure- accumulation of service credit

The accumulation of credit due to inverted duty structure was a harsh reality in the erstwhile taxation regime and the same continues even under the GST regime. Interestingly, the law makers were aware of this problem and sought to resolve the same vide Section 54(3) of the CGST Act, 2017, which grants refund of the unutilised input tax credit (ITC) on account of GST rate of inputs being higher than the GST rate on output (goods). However, the same does not resolve the issue completely since the rate of GST on services has not been considered. ² Further, Rule 89(5) of the CGST Rules, 2017 was amended retrospectively (w.e.f 01.07.2017) vide Notification No. 26/2018-CT dated 13.06.2018, in order to ensure that only refund of taxes paid on inputs (goods) is granted in case of inverted duty structure.

Every business operating today receives certain amount of input services and it is probable that the GST rate on the same may be 18%, in many cases it leads to accumulation of credit but there is no recourse available for the same in the statute. It is also to be noted that the Central Government vide Notification No. 5/2017-IT(Rate) dated 28.06.2017 (as amended from time to time) had notified the (output) goods on which the refund of unutilised credit due to inverted duty structure shall not be granted.

- Exports - Restricted refund due to prescribed formula

Another issue due to which the businesses (especially those engaged in export of goods/services) face the problem of accumulation of credit is the formula in-built in the GSTN Portal for grant of refund of the unutilised ITC under Rule 89 of the CGST Rules, 2017. Even though Rule 89 itself prescribes a formula for the calculation of refund of the unutilised ITC on account of exports but the Circular No. 59/33/2018-GST dated 04.09.2018 and the GSTN portal grants refund of the lower of the three amounts - (i) ITC balance at the end of tax period for which refund is claimed; (ii)ITC balance at the time of filing of refund; (iii) Refund amount calculated as per the formula prescribed under Rule 89 of the CGST Rules, 2017.

- Interstate Transfer of business

Under GST, a taxpayer has to obtain separate GST registration in every State in which they carry out business operations. The separate GSTINs under the same PAN qualify as distinct persons under GST. One of the major issues being faced by the taxpayers at the time of transfer of business is that the balance credit cannot be transferred vide Form ITC-02 to the transferee having GSTIN of a State other than that of the transferor. Thus, if the business operations of the transferor GSTIN comes to halt in a State, the balance credit is of no use, even if, the business operations of the said entity continues in some other State. This is ultimately a loss to the transferor entity and goes against the idea of 'One Nation One Tax'.

- Inputs covered under GST output not covered under GST

The industry engaged in the supply of goods kept out of the net of GST (such as HSD, petroleum, liquor for human consumption, etc.) are one of the worst sufferers of the menace of accumulation of GST credit since they do not have any avenue to utilise the same.

GST was introduced with much fanfare that the problems of the earlier tax regimes would no longer haunt the industry and the businesses would enjoy the fruits of one Nation one Tax. However, as discussed above, the ghost of accumulated credit refuses to disappear even under GST. The businesses are at double loss since the accumulation of credit only appears as an asset on paper but in practical terms it's nothing more than a number appearing in the books of accounts and increase in the cost reduces the demand. The consumer, on the other hand, has to purchase at high prices.

Possible solutions for above scenarios

We would soon complete 3 years of the implementation of GST and, at this stage, it can only be hoped that the GST Council takes steps to resolve the problem at hand and provide relief to the assessees who have huge accumulated credit in their credit ledger. The above discussed issues can be possibly resolved, if the GST Council undertakes the following measures:

- The Council shall re-look into the existing GST rate of all the goods/services and also learn from the past wherein the reduction in rates have led to increase in accumulation of credit. If the rates on the inward supplies and outward supplies are realigned keeping in view the problem of accumulation of credit, then we may soon be able to at least slow down the menace of accumulation of credit, if not able to stop it completely.

- Although it can be argued that a conscious policy decision was taken by the Government to grant refund of unutilised credit only in cases where the inverted duty structure exists due to rate on inputs (goods) being higher than output (goods), but, one fails to understand the reasoning behind non-consideration of services for the same. Now that it is clear that the non-inclusion of the services contributes substantially to accumulation of credit, the GST Council shall recommend to the Government to re-consider the language employed in and Rule 89 of the CGST Rules, 2017.

- In case of transfer of business, the transferor having GSTIN in one State shall be allowed to transfer the credit of CGST+IGST to the transferee or the distinct person having GSTIN in another State.

- It has been a long-standing demand of the industries engaged in the supply of non-GST goods that they should be allowed at least partial refund of the accumulated GST credit, in order to reduce the burden put on them, without any fault of theirs. In view of the authors, the GST Council should start the debate/discussion on the same and provide the much-needed relief to the said industries.

Any of the above recommended steps taken by the GST Council would be a welcome relief for the businesses particularly in this time of prevailing pandemic.

[The views expressed are strictly personal.]

¹ Refer para 3.17 of RBI's report on 'State Finances - A study of Budgets of 2019-20' available at https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/STATEFINANCE201920E15C4A9A916D4F4B8BF01608933FF0BB.PDF

² Section 2(59) of the CGST Act defines 'input ' as goods other than capital goods used or intended to be used by the supplier in course or furtherance of business.