MAY 02, 2020

By CA Neetu Sukhwani

AVAILMENT of CENVAT credit on capital goods was a relatively easy task in the erstwhile regime when compared to the provisions contained in the CGST Act, 2017. According to Rule 6(4) of the Cenvat Credit Rules, the credit was denied only in case the capital goods were exclusively used for providing exempted goods or services. To put in simple words, if capital goods were exclusively used for providing taxable goods/ services or were partly used in providing exempted goods/services and partly used for providing taxable goods/services, assessee was eligible for full credit without there being any need for reversal with respect to part usage of capital goods in provision of exempted goods/services. However, there is material departure as regards availability of input tax credit and the requirement of credit reversal in case the capital goods are partly used for providing taxable supplies and partly used for providing exempted supplies in the GST era.

COMPUTATIONAL DIFFICULTIES:

The mechanism of credit reversal in such cases is provided in Rule 43 of the CGST Rules, 2017 which has undergone substantial change vide amending Notification No. 16/2020-Central Tax dated 23.03.2020 w.e.f. 01.04.2020.

Earlier, the amount of input tax credit that was credited in the electronic credit ledger on the date of change in usage of capital goods was required to be reduced at the rate of 5% points for every quarter or part thereof on account of usage of such capital goods in provision of exclusive exempted goods/service. However, the amended Rule 43 seeks to provide that the entire credit will be credited to the electronic credit ledger but the ineligible credit attributable to the period during which such capital goods were exclusively used in provision of exempted goods/services calculated at the rate of 5% points for every quarter or part thereof will be added in the output tax liability of the tax period in which common credit is being claimed. If one looks at the computational aspect, it is found that two formulas are being mentioned:-

The amount of input tax credit attributable to a tax period on common capital goods during their useful life, denoted as "Tm' is calculated as- Tm= Tc÷60

The amount of common credit attributable towards exempted supplies, denoted as 'Te' is calculated as- Te= (E÷ F) x Tr

where,

'E' is the aggregate value of exempt supplies, made, during the tax period, and

'F' is the total turnover in the State of the registered person during the tax period

It is worth mentioning that the meaning of "Tr" was earlier given in clause (f) of Rule 43(1) but has been omitted vide the Notification 16/2020-Central Tax .

The clause (f) as omitted read as follows:-

[(f) the amount of input tax credit, at the beginning of a tax period, on all common capital goods whose useful life remains during the tax period, be denoted as 'Tr' and shall be the aggregate of 'Tm' for all such capital goods;

As of now, there is no meaning assigned to Tr in the amended Rule and in the absence of any one limb of the formula, it is impossible to compute the amount of credit to be reversed.

In continuation to the above discussion, reference should also be made to second proviso to section 43(1)(e) which reads as follows:-

Provided further that where the registered person does not have any turnover during the said tax period or the aforesaid information is not available, the value of 'E/F' shall be calculated by taking values of 'E' and 'F' of the last tax period for which the details of such turnover are available, previous to the month during which the said value of 'E/F' is to be calculated.

The above proviso indicates that the computation of credit reversal is to be made by considering the turnover made during the tax period and in case the details of turnover are not available, the details of last tax period for which turnover is available should be taken. However, this provision puts an assessee starting a new business in an advantageous position.

For better understanding, suppose M/s ABC intends to start a new business and in order to avail input tax credit, takes registration in the month January, 2020. M/s ABC will be engaged in manufacture of product X which is taxable and product Y which is exempt. The machinery required for production of both the products requires considerable time in installation and working. Suppose, the machinery is purchased in January, 2020 and is finally operated for commercial production w.e.f. 01.04.2020. As it is known that the machinery operated during trial phase does not contribute to any turnover and so no turnover is available for the period from 01.04.2020 to 31.03.2020. Now, the question arises is that since no turnover is available during the period 01.04.2020 to 31.03.2020, the constituents of formula being "E" and "F" are not determinable. Therefore, M/s ABC would not be required to reverse any input tax credit on the capital goods commonly used by it during the trial phase.

HURDLE IN CREDIT AVAILMENT:

It is provided in Rule 43 that in case where the capital goods which were earlier exclusively used for supply of exempted goods/service are subsequently used commonly for supply of taxable and exempted goods/services, the input tax credit will be credited to the electronic credit ledger of the assessee while the assessee will have to pay ineligible input tax credit pertaining to period during which capital goods were exclusively used in provision of exempted goods/services. It is quite possible that the change in usage of capital goods as stated above takes place at much later date.

For example - capital asset purchased on 01.01.2018 was exclusively used for provision of exempted goods but w.e.f. 01.04.2020, it is decided to use the said capital goods commonly for provision/supply of exempted and taxable goods/services. Now, the question arises is the eligibility of the assessee to avail input tax credit of the capital goods which was purchased on 01.01.2018 as on 01.04.2020 vis-à-vis provision contained in section 16(4) of the CGST Act, 2017 which states that a registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of relevant annual return, whichever is earlier.

It is worth noting that as of now, the only exception where the time limit of section 16(4) does not apply is the case where re-credit is being taken by the assessee of the credit reversed due to not making payment to the supplier of goods within a period of 180 days from the date of invoice as contained in Rule 37(4) of the CGST Rules, 2017.

However, neither section 16 of the CGST Act provides for such exception nor does Rule 43 specify that the time limit prescribed in section 16(4) of the CGST Act, 2017 shall not be applicable in case where capital goods earlier opted by the assessee to be used exclusively in exempted goods is intended to be partly used for taxable goods at future point of time.

Therefore, eligibility to avail such input tax credit will also be a question that needs to be answered, particularly with regard to the fact that the said invoice would have already been reflected in GSTR-2A for the month of January, 2018 and in which assessee would have mentioned it as ineligible credit. It is also doubted whether credit originally reflected as ineligible can be claimed as eligible credit at a subsequent point of time or not.

NOT ALL SITUATIONS COVERED BY RULE 43:

As mentioned, Rule 43 is far complicated than the erstwhile provisions contained in Cenvat Credit Rules, 2004 inasmuch as it is observed that the requirement of Rule 43 to reverse credit in case of change in usage of capital goods from exclusively exempted to partly exempted & partly taxable adds to compliance burden for the assessee.

If we talk of central excise/service tax era, the intention to use capital goods on the date of purchase was of significant importance and subsequent change in usage had no impact on the credit already availed.

But this is not the case in GST era because subsequent change in usage of capital goods attracts situation of credit reversal/credit availment. However, Rule 43 does not take into account all possible permutations and combinations of shift in usage of capital goods as tabulated below:-

It is hoped that the CBIC takes cognizance of the aforesaid legal quagmire and clarifies accordingly by issuance of requisite amending notification(s).

(The author is Senior Consultant at Pradeep S Jain & Associates and the views expressed are strictly personal.)