Denial of pre-GST credit transition open to challenge


Section 28 of the Central Goods and Services Tax (Amendment) Act, 2018 (amendment act), has created ripples across the industry because of the insertion of explanation 3 to section 140(1), which retrospectively denies the transition of education cess (EC) and secondary higher education cess (SHEC) credits.

The levy of EC and SHEC on excisable goods and taxable services was introduced in the Finance Act, 2004, and Finance Act, 2007, respectively. EC and SHEC were also included within the ambit of central value added tax (CENVAT) credit under rule 3 of the CENVAT Credit Rules, 2004 (CCR). As per rule 3(1), EC and SHEC paid on inputs, capital goods and input services were allowed as credit but in accordance with a proviso to rule 3(7), the credit can be used for payment of output EC and SHEC only.

In 2015, EC and SHEC on excisable goods and services were withdrawn and the CCR was amended to disallow cross-utilization of EC and SHEC credits towards payment of excise duty or service tax. However, the unutilized EC and SHEC credits continued to remain as CENVAT credit.

Section 140 of the Central Goods and Services Tax Act provides for the transition of credit from the erstwhile regime to the goods and services tax (GST) regime. The unamended section 140 mandated the transition of EC and SHEC credits to the GST regime without stipulating any bar since no amendment was made to rule 3 of the CCR to exclude EC and SHEC from the ambit of CENVAT credit. Following this, various assessees transitioned their unutilized EC and SHEC credits to the GST regime. However, section 28 of the amendment act (implemented after the transitioning) retrospectively denied such transition.

On the basis of this amendment, GST officers have issued notices for reversal of the transitioned EC and SHEC credits. The assessees seem to have been left without a remedy unless a challenge is made to section 28.

A challenge can be explored on the following grounds:

  • The assessees have a vested and indefeasible right in the EC and SHEC credits accrued under the erstwhile regime.
  • Section 28 of the Amendment Act is bad in law as it has arbitrarily deprived the assessees of their vested right and has been carried out irrationally, capriciously and without an adequate determining principle.
  • The unamended section 140 of the CGST Act did not suffer from any ambiguity or vagueness that is sought to be supplied by the insertion of explanation 3 to section 28 of the amendment act and it cannot have a retrospective operation.
  • The amendment is not merely clarificatory in nature but amendatory and results in widening the scope of the liability of assessees and cannot have a retrospective application.
  • The legislature lacks the power to amend section 140 of the CGST Act insofar as it is in violation of the specific mandate of section 174 of the CGST Act as it affects the assessees’ rights, and liabilities accrued under the repealed acts.
  • It is a settled legal principle that while interpreting a taxing statute, a literal interpretation has to be adopted. The amended section 140(1) provides for the term “eligible duties” and explanation 3 restricting the scope of the term “eligible duties and taxes” to exclude the cesses cannot be applied to section 140(1) in the absence of such a phrase in the provision.
  • The terms “eligible duties” and “eligible duties and taxes” are different from each other and cannot be applied interchangeably. The fact that the two terms have been defined separately under explanation 1 and explanation 2 also substantiates that the intent, meaning, and application of these terms are separate and cannot be used in place of each other.
  • Further, in terms of para 3.2 of the clarification dated 2 January 2019 issued by the Central Board of Indirect Taxes and Customs (CBIC), it can be stated that the scope of the term “eligible duties” is wide and is not restricted to the duties listed under explanation 1 and explanation 2.
  • Paragraph 5 of the clarification issued by the CBIC is contrary to the provisions of the CGST Act.

We foresee several writs being filed in this regard in the coming months relying upon the above arguments and more.

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