India: Transitional Credit If Not Claimed In Tran-1, Lost Forever?

1. Upon introduction of the new tax regime of Goods & Service Tax [GST] w.e.f 01.07.2017, all the suppliers/service providers/manufacturers/dealers etc., were migrated from erstwhile regime of indirect taxation to the new regime i.e. GST. Under the GST regime, every registered person was required to file electronically FORM GST TRAN-1 concerning availment of unutilised input tax credit of duties and taxes paid under the erstwhile tax regime. Further, appropriate rules were framed for its revision as per the time and manner prescribed.

2. After several orders issued from time to time, 27^th December 2017 was prescribed¹ as the last date for migrating Cenvat Credit/Input tax credit [ITC] of the erstwhile tax regime to the GST regime. Accordingly, the registered person should file FORM GST TRAN-1 for such transfer. Technically, transition credit can be availed in the manner prescribed² under rules³. On perusal of the rules, it can be analysed that the instant rule attaches timelines with it which is beyond the scope of the section as it merely states that rules will specify the manner of filing whereas it nowhere speaks about any timelines. Accordingly, it appears that the timelines so prescribed in the rules are ultra-vires.

3. Accordingly, all such persons who could not transit their ITC into the new GST regime for whatsoever reason knocked the doors of the courts across the country. There was chaos and more than 100 petitions were filed before each High Courts in the country. From the perusal of numerous judgments, it can be said that broadly there are two types of cases-
   1. Registered persons who did/could not file FORM GST TRAN-1 by 27.12.2017 and have no evidence of an attempt to load FORM GST TRAN-1
   2. Registered persons loaded FORM GST TRAN-1 by 27.12.2017 but there is a mistake and they want to revise already loaded FORM GST TRAN-1.

4. The courts allowed ITC in majority of the cases broadly on following grounds-
   1. Rules have acted far beyond the scope of the act and hence such arbitrary timelines implied by the rules should be set aside and the registered person should be allowed to carry forward transitional ITC.
   2. GST is in "trial & error"⁴ phase and FORM GST TRAN-1 could not be uploaded due to technical glitches in GST portal for which the registered person should not be punished.

5. Meanwhile, the instant legal anomaly mentioned in point 4(a) supra was resolved with a retrospective amendment vide Finance Act, 2020⁵ wherein relevant amendments⁶ were made under the GST Act, 2017 w.e.f. 01.07.2017 to facilitate the relevant rules to determine timelines for filing FORM GST TRAN-1. The instant amendment was made applicable⁷ on 18th day of May 2020 after much celebrated decision of Delhi High Court⁸. Hence, it appears that the argument mentioned supra in point 4(a) is done away. Accordingly, only such registered persons who could not submit FORM GST TRAN-1 by the due date on account of technical difficulties and are recommended by the GST Council can file FORM GST TRAN-1 uptill 31.03.2020⁹.

6. Accordingly, does the instant amendment suggests that no more ITC can be availed w.r.t. transitional credit? Further, does it suggest that all such ITC will be lapsed? Further, does it also suggest that, for cases whose GSTIN's are not recommended by the GST Council & are allowed by the respective courts or in cases where courts have allowed for the filing of manual FORM GST TRAN-1 applications will face recovery notices?

7. All these are golden questions which would be better answered by courts which brings another point that they might have to rush courts again and hence one can expect recovery notices from a tax officer if his/her case does not fall in the framework¹⁰ designed under the GST laws. Thus, it means such persons classified in point 3(a) supra where courts have allowed ITC, under changed circumstances, the law warrants a tax officer to recover it which will ultimately be put to test again.

8. Thus, the instant amendment is a googly which has been very well played by the tax authorities. On a conservative note, such persons should deposit so much of the amount to avoid mounting interest and also to prove bonafide which will help them escape from the clutches of penalties.

KSAA Comments:

9. In our opinion, transitional ITC should not be reversed as there is merit in this idea which should be tested before the courts. In our opinion, if such credits are reversed or not availed the fundamental rights under Article 14, 19(1) (g) & 300A of the Constitution of India of a person are violated. The rule¹¹ of construction states that if the co-existence of the two sets of provisions are destructive of the object with which the latter Act was passed, the Court would treat the earlier provisions as impliedly repealed which is also supported by the instant act¹².Thus, it means that transitional ITC which is a property of every registered person would be repealed if not transferred which is against the Constitution of India¹³ which expressly states that no person shall be deprived of his property by any authority of law.

10. Given the fact that GST is in "trial & error" phase, the registered persons who wish to transit their credits should be given a reasonable time. Thus, in our opinion imposing stringent timelines under such law is unreasonable ultimately lead to deprivation of such ITC to such person. Reasonableness is an important consequence of right of quality¹⁴ which is violated in the instant case. Further, deprivation of ITC will have direct impact on their business which will render them incapable to practice their business which is a breach of right to freedom¹⁵.Therefore, in our opinion, it is a good case that should be tested before the court of law.

Thank you for patient reading.

Footnotes