JUNE 14, 2024

By S Rahul Jain, Partner - M2K, Chartered Accountants

THE Goods and Services Tax (GST) regime in India has faced numerous legal challenges since its implementation, especially in terms of availment of ITC. Numerous onerous conditions have been enumerated under law which requires a cumulative satisfaction for an assessee to retain the ITC. One of the key conditions prescribed under the law is the time limit prescribed for availment of ITC. The history of prescribing time limit for taking ITC can be traced to Rule 57G of the Central Excise Rules, 1944 introduced by Notification No. 28/95-C.E. (N.T.) wherein a time limit of six months was prescribed under law.

After the liberalization of the scheme relating to ITC under the central tax laws, the Cenvat Credit Rules, 2004, as introduced, did not for a large period prescribe any time limit for the availment of ITC. Subsequently, in the year 2014, the conditions for time limit were reintroduced.

The GST law continued with this condition, albeit in a newer avatar, where an outer time limit for availment of ITC has been prescribed under Section 16(4). Recently, the vires of this provision along with certain other concomitant provisions of law was a subject matter of challenge before the Hon'ble Kerala High Court [M/s M Trade Links 2024-TIOL-968-HC-KERALA-GST].

This article delves into the legal grounds raised by the petitioners, the key questions of law considered by the courts, and the detailed decisions rendered by the High Court in addressing these issues and the bonus benefits granted by the Court.

Legal Grounds

The petitions challenging the provisions of the Section 16(2)(c) and Section 16(4) CGST/SGST Act brought forth several significant legal grounds:

1. Violation of Article 14 of the Constitution:

- Petitioners argued that the provisions of the CGST/SGST Act violated Article 14, which guarantees equality before the law. They contended that the denial of ITC based on the actions of the supplier (such as non-payment of tax) was arbitrary and discriminatory. This ground was rooted in the belief that the recipient should not be penalized for the supplier's non-compliance.

2. Arbitrary Denial of ITC:

- The arbitrary nature of ITC denial was another major ground. Petitioners claimed that the provisions were unreasonable and lacked a rational basis, leading to unwarranted financial burdens on the taxpayers. The retrospective application of certain provisions exacerbated this issue, causing significant hardship to businesses.

3. Retrospective Application of Provisions:

- The retrospective application of the ITC provisions was challenged on the grounds that it led to unforeseen financial burdens and disrupted business operations. Petitioners argued that such retrospective changes were unjust and violated the principle of legal certainty.

Questions of Law

The High Court identified and addressed several crucial questions of law:

1. Constitutionality of Taxing Statutes:

- What are the grounds on which a taxing statute can be held unconstitutional? This question necessitated an examination of the principles governing the validity of tax laws, including legislative competence, public purpose, and adherence to fundamental rights.

2. Nature of ITC under GST Act:

- What is the nature of the claim to Input Tax Credit under the GST Act and Rules? This involved determining whether ITC was an absolute right or a conditional entitlement subject to statutory compliance.

3. Validity of Sections 16(2)(c) and 16(4) of CGST/SGST Act:

- Do Section 16(2)(c) and Section 16(4) of the CGST/SGST Act infringe constitutional provisions and are they unsustainable? These sections impose conditions and time limits on claiming ITC, and their validity needed to be assessed in light of constitutional rights.

High Court Decisions

1. Constitutionality of Taxing Statutes

The High Court extensively examined the constitutionality of the provisions under scrutiny, drawing from established principles and major judicial precedents:

- Doctrine of Classification:

- The Court reiterated that a taxing statute must adhere to the principle of classification, ensuring that any differentiation between classes of taxpayers is based on an intelligible differentia with a rational nexus to the objective of the law. This principle was derived from landmark cases such as State of West Bengal v. Anwar Ali Sarkar and Budhan Choudhry v. State of Bihar.

- Legislative Competence and Public Purpose:

- The Court emphasized that a tax must fall within the legislative competence and serve a public purpose, as upheld in R.K. Garg v. Union of India. It observed that the GST law, including ITC provisions, was enacted within the legislative framework and aimed at a broader public purpose of streamlining the indirect tax regime.

Court's final finding

- The Court upheld the constitutionality of the GST provisions, stating that they were within the legislative competence and did not violate Article 14. The provisions were deemed to have a rational basis, serving the public purpose of ensuring compliance and preventing tax evasion.

2. Nature of ITC under GST Act

The High Court analyzed whether ITC constituted an absolute right or a conditional entitlement:

- Statutory Conditions:

- The Court noted that ITC claims are governed by specific conditions and restrictions outlined in the CGST/SGST Act and Rules. It emphasized that ITC is not an inherent right but a benefit conferred by the statute, subject to compliance with the prescribed conditions.

- Balancing Fiscal Administration:

- The Court highlighted the importance of maintaining a balance between granting ITC and ensuring effective tax collection. The ITC scheme was designed to eliminate the cascading effect of taxes while ensuring that tax credits are transferred only upon meeting statutory requirements.

Decision:

- The Court following various Supreme Court decisions, ruled that ITC is a conditional entitlement, not an absolute right. Taxpayers must comply with the statutory conditions to claim ITC, thereby ensuring fiscal discipline and integrity in the tax system.

3. Validity of Sections 16(2)(c) and 16(4) of CGST/SGST Act

Sections 16(2)(c) and 16(4) impose specific conditions for claiming ITC:

- Section 16(2)(c):

- This section mandates that ITC can be claimed only if the supplier has paid the tax. Petitioners argued that this condition unfairly penalized the recipient for the supplier's non-compliance. However, the Court emphasized that this provision was crucial for ensuring tax compliance and preventing revenue leakage.

- Section 16(4):

- This section imposes a time limit for claiming ITC. Petitioners contended that this time limit was arbitrary and restrictive. The Court, however, observed that the time limit was necessary for maintaining fiscal discipline and ensuring timely tax settlements.

Decision:

- The Court upheld the validity of Sections 16(2)(c) and 16(4), stating that they were reasonable and necessary for the effective functioning of the GST system. These provisions were found to align with the broader objective of preventing tax evasion and ensuring timely compliance.

Granting retrospective application to time limit

Though the Hon'ble Court had upheld the validity of the constitutional provisions, the Court also granted relief to assessee by extending the time limit prescribed for availment of ITC

- The Court noted that the legislature has amended the deadline for filing returns for the month of September to 30th November in each succeeding Financial Year.

This amendment, aimed at easing the difficulties faced during the initial implementation of the GST regime, was held to be procedural in nature and Court held that the same is to be given retrospective effect from 01.07.2017. Consequently, the Court held that dealers who filed their returns for September between 1st October and 30th November, and claimed Input Tax Credit (ITC) before 30th November, are entitled to have their ITC claims processed if they are otherwise eligible.

Conclusion

The High Court's detailed examination and decisions in these cases have significant implications for the GST regime in India. By upholding the constitutionality of the ITC provisions and emphasizing the conditional nature of ITC claims, the Court has reinforced the legislative framework's integrity. The rulings underscore the importance of statutory compliance and fiscal discipline, ensuring that the GST system functions effectively and fairly. At the same time, the findings of the court that the time limit prescribed for availment of ITC being procedural is extremely important as many such provisions exist in the Act and this finding of the Court can be applied to many scenarios. It is a trite law that non-compliance with procedural conditions is condonable. Thus, the benefit of this decision can be extended to many other scenarios.

[The views expressed are strictly personal.]