Exploring the Status of Credit in Contemporary Tax Law: A Vested Right or a Lost Status?

[Shoubhik Bose]

A controversial dispute in Indian taxation has been about whether the Input Tax Credit (ITC) under the Goods and Services Tax (GST) is vested or it is a mere concession of the government. This provision allows the businesses to offset the tax paid on inputs to the tax paid on outputs. Therefore, businesses are allowed to make the payment of the tax to the authorities at each stage of the process and have the tax already paid by them redeemed. Thus, this serves the purpose of removing the cascading effect of taxes and eventually eases the businesses’ overall tax burden.

The genesis of this benefit is 1986, India, during the time of the now-defunct MODVAT (Modified Value Added Tax). MODVAT, was established to offer manufacturers credit for the excise duty they paid on capital goods and inputs used to produce finished goods. Key amongst the objectives of MODVAT was to enhance the efficiency of tax administration, reduce double taxation incidences, and promote tax transparency. MODVAT was later enhanced and transformed into the CENVAT (Central Value Added Tax) system, which also maintained the principle of allowing credit for input tax payment.

The switch from MODVAT/CENVAT to GST caused big problems and shifts which left people worried about ITC under the new rules. The aim of GST was to make taxes simple by combining all indirect taxes into one. But this change also set new rules on who could get and use ITC. This led to ongoing discussions and litigation about whether ITC is a vested or a concessional right.

Section 16 of the Central Goods and Services Tax (CGST) Act, 2017[1] sets forth the requirements and eligibility on who can get Input Tax Credits. A registered person can't get Input Tax Credit (ITC) for any invoice or debit note linked to giving goods or services after the date for filing the annual return report, if needed, or the return for September after the end of the financial year to which the invoice or debit note is associated. This is in Section 16(4).

This rule that stops for a time-limited restriction has been talked about a lot and taken for legal action. The courts check if it violates rights of taxpayers or if it's needed to make sure rules are followed and keep ITC safe from being used incorrectly.

The Calcutta High Court addressed about ITC being turned back because the supplier's returns were not right. The court spoke about the case of Suncraft Energy Private Limited vs. Assistant Commissioner, State Tax, Ballygunge Charge and Others.[2] The court said that in cases where the buyer acted good and right, tax authorities should go after the supplier first before asking the buyer for ITC reversal. The court said it's unfair to punish the buyer for the supplier's error. This rule says that it's not right for taxpayers to face challenges for things they can't control, and one need to be fair when we handle ITC. This decision underscores the fact that once the ITC has been earned through correct compliance, it should not be easily withdrawn implying that it confers a trait of vested right more than concessional right.

The transition from pre-GST environment to the GST regime presented a number of challenges to the concept of accumulation of credits. Wherever certain conditions apply, the Section 140 of the CGST Act[3] lays down certain provisions for Transitional Credit, by which the consumers can carry forward the CENVAT Credit into the Goods and Services Tax. However, certain cesses or surcharges, such as Krishi Kalyan Cess or the Education Cess, were removed by amending the Section 140, especially by virtue of Explanation 3 added later. Other taxpayers argued that these transitional credits in above situations infringed the vested right of taxpayers as transition and subjected to litigation and confusion.[4] Peculiar amendments have been criticised in several legal forums especially where they relate retrospectivity with the amendment’s impact on hitherto accumulated credits.

To address the issue of transitional credit under Section 140 of the CGST Act, the Gujarat High Court ruled in the case of M/S Siddharth Enterprises Vs. The Nodal Officer[5]. The petitioner M/S Siddharth Enterprises pointed that it was unfair and unjust for them not to be allowed to carry forward transitional credit to be set off with the proposed new tax regime. The court granted the petitioner’s prayer and ruled that petitioner was unjustly treated when the department refused to allow CENVAT credit under the GST regime once they have accrued it under the pre-GST law because it does become a vested right once a taxpayer has legitimately accumulated credit under the pre-GST regime. The ruling emphasized on the fact that credit is safeguarded by Article 300A of the constitution of India that belongs to a person as property right and they should not be denied of the accumulated credits which they are rightfully entitled to get by any kind of a retrospective amendment.

In Bharti Airtel Ltd. v. Union of India[6], the Hon’ble Supreme Court of India elaborate on issues relating to transitional credit under the goods and services tax act and treatment of errors in GST return. Bharti Airtel stated that while mis-match between form GSTR-2A and form GSTR-3B should not amount to credit denial, Bharti Airtel earnestly aimed at rectification of GSTR-3B along with availing additional ITC. That the principle of ITC being an integral part of the Goods and services tax structure should be protected was upheld by the court when it ruled that the taxpayers should be in a position to correct true errors and claim rightful ITC.

The ITC under the Tamil Nadu Value Added Tax Act was defined by the Tamil Nadu High Court in the case Jayam & Co. vs. Assistant Commissioner[7]. In this case, the court concluded that ITC is not basic right and it is a mere concession granted by the government. So, based on the ruling, it is comprehensible that to safeguard tax revenues and preserve rational tax administration, the government may stipulate certain restrictions and conditions on the utilization of ITC. This ruling went on to underline that, as a concession, the ITC is administered based on the legislatively recognized regimes to which the taxpayers need to adhere to so as to be able to enjoy the benefits. This decision was also affirmed in the case of ALD Automotive Pvt Ltd v The Commercial Tax Officer and Ors.[8]

As per the judgment made in the case of M/s PR Mani Electronics vs Union of India[9] by the Madras High Court, the Hon’ble court agreed with the notion in certifying that Rule 117 under the CGST Rules[10] validly prescribed a deadline for claiming transitional ITC. The court held that ITC is not an absolute right in an absolute term, rather it is a concession which is available with limiting statutes where time is of essence and also conditions. This judgment rendered strong evidence for beliefs that ITC, particularly transitional credit is contingent and subordinate to the legislative authority.

In SKH Sheet Metals Components v. Union of India[11], the Delhi High Court has observed to the effect that ITC is the heart and soul without which GST legislations does not make in as much as such legislations as are intended to prevent the cascading of taxes. The court examined the mandatory or directory character of Rule 117 of the CGST Act and decided that, “it is directory in the absence of provisions in the Act as to the consequences, if any, of flouting the time period and because, if construed as mandatory, it would be oppressive of the assessee”.

These issues have been raised as some of the main challenges arising from transition from CENVAT to GST regime, particularly in relation to the utilization and accumulation of ITC. Before the new regime took over, ITC was considered vested right exercised to enable the taxpayers offset the duties chargeable on the inputs used in the manufacture of dutiable goods. The Government of India has attempted to simplify the tax structure by implementing the GST; but later on, it imposed a lot of restrictions regarding the input tax credit claim, which lead to controversies and legal issues. Such a transition can be illustrated with reference to the case – The Union of India v Slovak India Trading Co. Pvt. Ltd.[12]. In this case, the Karnataka High Court ruled there was no prohibition to return CENVAT credit if the business has closed. This ruling also supported the notion that taxpayers should not be allowed to lose the amount of credits thereby adopting a principle that has been attained under tax legislation. Similarly, in the case of Nitin Industries[13], it was stated that credit cannot be denied if it has been legally earned and also pointed out the section 142(3) of the CGST Act[14] for seeking accumulated CENVAT credit as on the transition date.

A particularly prominent view being also endorsed by legal expert Tarun Jain, stating that once a taxpayer meets statutory conditions, it should be considered as a vested right. Continuing, Jain reiterated that rejecting ITC due to procedural failures or amendments retrospectively undermines certainty, which is a key requirement for stability in the tax system. It seems that his views are within the broader sense of the principles that can be observed in different judgements and policies.

The European Court of Justice thus drew a clear distinction between the concept of substantive requirements and procedural conditions for the provisions of the ITC rules and the Court decided that the ITC rules should be allowed if substantive requirements have been met though some of the procedural requirements have not been met. This view is parallel to the Indian scenario where the courts have observed that procedural errors should not be allowed to act as a cloak of exclusion to deny the ITC if substantive requirements have been met. For instance, in the case of mPortal India Wireless Solutions Pvt. Ltd vs. CST[15], the Karnataka High Court held that the act of registration with the department cannot be a precondition for claiming credit, supporting the argument that substantive compliance should take priority over procedural formalities.[16]

Indian courts have also not deviated from the said opinions. For instance, Eicher Motors Ltd. vs. Union of India[17], the Supreme Court of India formulated that when the CENVAT credit is properly claimed and rightfully taken it severally becomes an inalienable right of the taxpayer. In this regard the court further asserted that the concept of credit is to ensure that the input taxes are allowed to offset the output tax liability in the way that the cascading effect of the taxes are avoided. However, Jain also couched his arguments that the legal system of India permits ITC as a key component of the GST structure, but still not completely safeguarded like in the European scenario. The Indian courts have thus taken measures to ensure this right is aligned with procedural formalities and anti-evasion measures. For instance, in case Jayam & Co. vs. Assistant Commissioner[18] it has been held that ITC is a concession given by the government and the legislature is entitled to put some conditions and restrictions of its choice.

The current scenarios run evidence of this balance in the GST Council’s decisions. For example, a press release by the Council on the 18.10.2018[19] cleared that there is no automatic bar for denying ITC to the recipient on the basis of discrepancies in the supplier’s returns. This press release was intended to ease the burden on taxpayers affected by mismatch between GSTR-2A and GSTR-3B to provide protection to genuine taxpayers such that they are not erroneously penalized for procedural lapses by their suppliers.

ITC’s recognition by the Council, through its willingness to unblock and facilitate refunds with a prospective lens, especially for sectors facing inverted duty structures cannot be disregarded. The focus on proper reconciliation and use of ITC, as well as the procedures whereby it is to be recovered and managed implies that this is a crucial component for the achievement of tax certainty and, in turn, an enhancement of the working capital of enterprises.[20] The time and energy spent determining avenues to ease the process as well as to engage the taxpayer increases the perception of ITC as a form of entitlement received due to tax compliance rather than a concession.

On the other hand, the Council renders direct interference with ITC, which it manages in one or another manner, for instance, by proposing the lapsing of ITC balances and setting conditions for their use, as if ITC were a concession that can be regulated and adjusted to suit policy objectives. An ability to change cross-utilization provisions and put technicalities, including prohibitions of ITC claims unless goods or services were received, indicates that the government regards ITC as an instrument that can be tactfully adjusted to address fiscal and administrative concerns. Even the decisions regarding particular cases such as the inverted duty structure in the textile sector without making amendments retrospective that the Council has taken as and when necessary to address such situations also demonstrate the discretionary nature of ITC provisions, making a ground for view the ITC as concession given under certain regulatory framework above.

As, the issue whether ITC under GST has become a vested right issue or more a matter of concession remains a contentious issue which is still being debated constantly. Based on the above judicial interpretation and policy rationale with regard to ITC, it could thus be stated that while ITC is not an absolute right, but once the statutory requirements are met, it becomes a vested right. However, the conditions and amendments made in recent years have been the key reasons for numerous uncertainty and significant litigation.

To maintain a fair tax regime, it is significant for the tax authorities to take a reasonable approach in order focusing on the legal restored expectations of the taxpayers and the uncertain treatment of ITC. As GST embarks into its successive years of operation, it is the due requirement of the hour that judicial activism is complemented with policy intervention to tackle these issues and a fair, neutral GST regime is maintained in letter and spirit.

[1] Section 16, Central Goods and Services Tax Act 2017.

[2] SUNCRAFT ENERGY PRIVATE LIMITED AND ANOTHER VERSUS THE ASSISTANT COMMISSIONER, STATE TAX, BALLYGUNGE CHARGE AND OTHERS - 2023 (8) TMI 174 - CALCUTTA HIGH COURT

[3] Section 140, Central Goods and Services Tax Act 2017.

[4] 

[5] M/S SIDDHARTH ENTERPRISES THROUGH PARTNER MAHESH LILADHAR TIBDEWAL VERSUS THE NODAL OFFICER - 2019 (9) TMI 319 - GUJARAT HIGH COURT

[6] BHARTI AIRTEL LIMITED VERSUS UNION OF INDIA AND ORS. - 2020 (5) TMI 169 - DELHI HIGH COURT.

[7] JAYAM & CO., REPRESENTED BY ITS PARTNER, S. JAYAPRAKASH AND OTHERS VERSUS THE ASSISTANT COMMISSIONER (CT) AND OTHERS - 2013 (8) TMI 606 - MADRAS HIGH COURT

[8] ALD AUTOMOTIVE PVT. LTD. VERSUS THE COMMERCIAL TAX OFFICER NOW UPGRADED AS THE ASSISTANT COMMISSIONER (CT) & ORS. - 2018 (10) TMI 814 - SUPREME COURT

[9] M/S. P.R. MANI ELECTRONICS VERSUS UNION OF INDIA, THE GOODS AND SERVICE TAX COUNCIL, THE PRINCIPAL CHIEF COMMISSIONER OF GST & CENTRAL EXCISE, THE ASSISTANT COMMISSIONER OF GST & CENTRAL EXCISE - 2020 (7) TMI 443 - MADRAS HIGH COURT

[10] Rule 117, Central Goods and Services Tax Rules 2017.

[11] SKH SHEET METALS COMPONENTS VERSUS UNION OF INDIA & ORS. -2020 (6) TMI 385 - DELHI HIGH COURT

[12] UNION OF INDIA VERSUS SLOVAK INDIA TRADING CO. PVT. LTD. - 2006 (7) TMI 9 - KARNATAKA HIGH COURT

[13] M/S. NITIN INDUSTRIES (TRADE NAME) VERSUS COMMISSIONER OF GOODS & SERVICE TAX, NEW DELHI - 2022 (11) TMI 1090 - CESTAT NEW DELHI

[14] Section 142, Central Goods and Services Tax Act 2017.

[15] MPORTAL INDIA WIRELESS SOLUTIONS (P.) LTD. VERSUS COMMISSIONER OF SERVICE TAX - 2011 (9) TMI 450 - KARNATAKA HIGH COURT

[16] 

[17] EICHER MOTORS LTD. VERSUS UNION OF INDIA - 1999 (1) TMI 34 - SUPREME COURT

[18] JAYAM & CO., REPRESENTED BY ITS PARTNER, S. JAYAPRAKASH AND OTHERS VERSUS THE ASSISTANT COMMISSIONER (CT) AND OTHERS - 2013 (8) TMI 606 - MADRAS HIGH COURT

[19] Notification No. 47/2018.

[20] 28^th GST Council Meeting Minutes, Goods and Services Tax Council.