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The grey aspects of input tax credit under GST regime

Ever since the beginning of the system of input tax credit (be it MODVAT/ CENVAT credit under central excise/ service tax regime or ITC under GST regime), it has always been one of the biggest source of litigation under the indirect taxation system in India. 

Firstly, the dispute arises over the very eligibility of input tax credits on various capital goods, input goods or input services. It is often contested by the department and the taxpayers according to their own interpretation.

Secondly, the integration of fake input tax credits (availed on the strength of fake invoices of non-existent firms) in the supply chain has been persistent headache for the tax administrators. It has led to high amount of revenue leakage from the system and requires a lot of investigation skills, multiple permissions and timeless energy to catch such cases.

Thirdly, the liability of interest and penalty upon excess claim of input tax credit is another grey area for disputes. There was complete ambiguity upon the meaning of the words “availed or taken” and “used or utilised”. The different interpretations of these words by taxpayers and the department led to a lot of litigation.

 During the initial implementation of system of credit, the act of taking of the credit itself (whether it was utilised or not) was liable for interest as well as penalty. However, amendments were made in the cenvat credit rules (Rule 14&15 of cenvat credit rule 2004) in 2012 which made availment and utilisation of cenvat credit liable for interest, a further clarification came into the rules in 2015 where it was specifically mentioned as two different cases. First as Cenvat taken but not utilised and second as cenvat taken and utilised, with this amendment the ambiguity on interest was put to rest. However, Penalty remained on the act of availment of excess credit irrespective of the fact whether utilised or not.

These grey aspects of input tax credit came to haunt in GST regime as well. Numerous cases have already been booked by the tax authorities for fake passing on of input tax credit in the supply chain. This amounts to more than Rs 15000 crores of revenue leakage in one year of GST implementation according to the answer given for a parliamentary question recently. 

Further, the ambiguity on levy of interest and Penalty on excess claim of input tax credit also continues in GST. According to section 73 of the CGST act, if any input tax credit has been wrongly availed or utilized, the taxpayer is liable to pay interest as determined according to section 50 along with penalty as per the provisions of CGST act. This penalty may extend upto 100 percent of the tax amount. This means that even if the input tax credit is not utilized for payment and only claimed wrongly, the taxpayer is liable for interest. This is in gross contravention of the amendment which was brought in 2015 for service tax and central excise where interest was levied only for the portion of excess claim utilised for payment.

This ambiguity has started to give rise to litigation in cases of verification of transitional credit wherein the wrong or excess transitional credit is being reversed by the taxpayer but they are resisting against payment of interest and penalty on the same especially when they have not utilised the credit so taken. The GST council must come up with clarification on the issue to do away with such undue disputes between the taxpayer and the government.

All the more, the GST regime has opened up a new dispute over interest and penalty on input tax credit. In GST regime, one needs to set off his complete liability while filling the returns which is different from the erstwhile system of taxation. There is no system of partial payment of liability and until the complete liability is paid the tax will not be considered as paid and hence interest and penalty will be charged upon the whole amount. This is causing a lot of discomfort to business where even if they have good amount of input tax credit lying in their credit ledger they have to pay interest and penalty on their complete liability. This can be understood with the help of the following example.

Mr “A” has to pay a tax of Rs 100 for the month of say Jan 2019. He has Rs 80 in his input tax credit ledger and thus he requires to pay Rs 20 through cash. He is short of cash in the month of January. So in the present system, he cannot set off his Rs 80 of tax liability from ITC. He will have to wait till the time he has Rs 20 in cash to set off his complete liability of Rs 100. Further at the time of filling of return he will be charged interest and penalty on the whole liability of Rs 100. 

This seems completely unreasonable and against the principle of natural justice. Hence the issue was taken up before the GST council. In the 31st meeting of GST council, it was recommended to consider interest and penalty only on the cash portion of the total tax liability. However, this recommendation is yet to be implemented through proper notification. At present, there is a confusion whereby the taxpayer is relying upon the recommendation of GST council and the government is issuing demands based on the fact that there is no notification yet in this respect. Thus, it is heading towards a further large number of disputes and litigation, which can be put to rest only through proper amendment in the law and timely enforcement of GST council recommendations.

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