DECEMBER 30, 2020

By Dr G Gokul Kishore

WORLD-over, GST is the value added tax, to the maximum extent possible. This latter caveat is to provide for human failings, economic peculiarities of nations and federal or quasi-federal political pressures between the federal and sub-federal governments. India started introducing traits of VAT in its commodity and services taxation beginning with Proforma credit, MODVAT of 1980s and 1990s under Central Excise, re-christened as CENVAT credit later and encompassed Service Tax as well subsequently. Replacement of Sales Tax with VAT meant input stage credits were available for offsetting output liabilities under such State-level regime also.

This great journey of taxing value addition alone, as everyone thought, reached apparently the destination on introduction of GST in 2017. Decibel level on seamless credit being the foundation of GST reached crescendo and on seeing Section 16(1) of CGST Act providing for ITC on goods or services used or intended to be used in the course or furtherance of business, there was boundless joy. But destiny had other plans. This 93rd part intends to find the justification to term ITC story as a tragedy and to explore the possibility of changing the sub-plots.

Stormy transition to GST

The seeds of seamless credit being a make-believe construct were sown in the form of innumerable hurdles placed for transitional credit. All validly taken credits of pre-GST regime suddenly faced an uncertain future left to the play of provisions under Section 140 of CGST Act and the forms designed for transition. The obsession to block an entitlement through barriers like time-limit was all too manifest, as otherwise, accrued rights cannot be extinguished by procedural fetters like limitation. The department is bent on amending retrospectively such provisions to emphatically convey that ITC under GST is not seamless and such words are reserved only for policy documents and not for practical implementation of the so-called grand tax reform.

That the department is intent on denying such credits is again obvious from the manner in which such litigation is being fought in High Courts and now before the Supreme Court. The kind of stormy transition that most taxpayers had while entering the GST regime belies the assurances of the tax reform being business-friendly ostensibly aimed at promoting ease of doing business. Unless transitional credit issues are resolved, GST will be perceived as having snatched what was available in books overnight and, therefore, confiscatory.

No-entry on the ITC highway

What is given by one hand is taken away by another. While Section 16(1) proclaims seamless credit of all things put to business use, Section 17(5) presents a sub-regime of discrimination by enforcing a no-go zone for several goods, services and situations. Constitutionally, when discrimination is alleged in writ proceedings, reasonable classification has been held to be not amounting to discrimination. However, whether the classification or segregation of goods or services for ITC embargo is reasonable or not, does not require expertise to answer. It is unreasonable and irrational, as otherwise, credit would not be barred for pipelines laid outside the factory premises. Large pipelines can neither be misused nor put to personal use. Similar is the case with ITC on motor vehicles with artificial distinction of seating capacity being primary determinant of credit rather than use in business. One can easily see through most of the restrictions and the barrenness as to reason or rationale.

Seamless flow of restrictions

In the past one year or so, there has been a seamless flow of restrictions on availing ITC. To compel the suppliers to report their outward supplies, the onus has been shifted to recipients by capping the ITC available on invoices not uploaded / furnished in GSTR-1 by suppliers to 5% (to be reduced from 10% w.e.f 01.01.2021). Rule 36(4) of CGST Rules is a unique piece of legislation whereby tax administration shares its responsibility of ensuring compliance with taxpayers. Till the time, buyers or service recipients are able to convince their suppliers on total compliance, their ITC will be dented. Then came Rule 86A to block use of credit ledger in suspected cases of evasion or fraud. Though the rule requires "reasons to believe" before invoking such power and such reasons to be recorded in writing, the draconian nature lies in the very presence of such extreme power in the hands of the tax authorities. Scores of writ petitions are being filed in an attempt to keep such harsh measures at bay.

Now, Rule 86B has joined [w.e.f 01.01.2021] this league of infamous restrictions by compelling specified taxpayers to restrict use of credit ledger upto 99% of liability and pay at least 1% of tax by cash. Section 49(4) of CGST Act makes utilization of amount in electronic credit ledger subject to conditions as may be prescribed and, therefore, utilization of credit account is not an unconditional right. This along with general rule making power under Section 164 will be taken as the basis by the government in the proceedings challenging such provision. But the question as to whether such general powers can be used for placing such restrictions and whether conditions can be seen as not amounting to hostile discrimination need to wait till judiciary intervenes. The industry is disappointed and demands are being raised for a rollback. However, such measures are routinely justified as targeted towards curbing fraud and not to harass honest taxpayers.

Reasons as to curbing fraud apart, it is an undeniable fact that the above three ITC related amendments effectively constrict use of credit lying in books / ledger and force taxpayers to use cash in a cashless economy. While delegated legislation of rule-making can be undertaken without fetters so long as the same is within the mandate of legislature, such measures on ITC front neither furthers the implementation of the law nor facilitates the trade. The fear of misuse of ITC has come to rule the mind of tax administration and in this process, the scrupulous among the industry suffer. System-based risk assessment and management should be the key for anti-evasion strategies rather than measures that have the effect of painting all the taxpayers with the same brush and deny / restrict ITC. The quantum and severity of the changes need to be re-looked for definite course correction, as otherwise, GST may become the most despised tax reform and derail the real objectives of introduction of such system.

[The author is an Advocate, Gokul & Subha Advocates, Chennai. Views expressed are personal.]

See Part 92.