Input Tax Credit Arbitrary & Deficient Provision

Input Tax Credit Arbitrary & Deficient Provision

INPUT TAX CREDIT – ARBITRARY & DEFICIENT PROVISION

By

Pradeep K Mittal[1]

B.Com,LLB,FCS

Section 16 of Model GST Law released in November, 2016, (hereinafter called MGL) provides for eligibility and conditions for taking Input Tax Credit. Section 16 of MGL provides for taking of Input Tax Credit on :-

  1. Supply of goods;
  2. Services;
  3. Pipeline and telecommunication towers fixed to earth by foundation or structural support including foundation and structural support thereto.

2:The close perusal of Section 16 of MGL does not provide for taking Input Tax Credit in respect of capital goods except Pipeline and Telecommunication Towers fixed to earth by foundation or structural support including foundation and structural support thereto. The proviso to sub-section 1 of Section 16 of MGL, inter-alia, provides for various stages at which the Input Tax Credit in respect of Pipeline and Telecommunication Towers shall be taken, but, however, conspicuously silent as to how and in what manner, the Input Tax Credit on Capital Goods could be taken by the assessee unlike the provisions of Rule 3 of Cenvat Credit Rules, 2004 - though the definition of Capital Goods is given in Section 2(19) of MGL.

3:The sub-section 2 of Section 16 of MGL provides for taking on credit only when the supplier of goods or services has paid the tax to the account of Appropriate Government. However, it is quite unlikely that the recipient of goods or services may have paid the tax to the supplier but the supplier, in turn, may not have paid to the appropriate Govt. Legally speaking, the supplier of goods or services, who has not paid the tax to the Government should be penalized in a strongest way and not the recipient of goods or services who has acted as a law abiding citizen by paying the consideration including the tax payable to the supplier – yet such party is denied of its valuable right of ITC just because supplier, in a fraudulent and dishonest, manner had not paid the tax to the government.

4:Similarly, the provision of sub-section 2 of Section 16 of MGL provides that credit can be taken only upon receipt of last installments when the goods have been received in various installments. Ideally speaking, as and when the goods are received by the recipient in one or more installments, the recipient should be allowed to avail the benefit of ITC.

5: The Sub-section 4(a) of Section 17 of MGL provides that the input tax credit shall not be available on motor vehicle. The professional uses the vehicle both for official as well as personal purposes and, therefore, the input tax credit on motor vehicle should be proportionately allowed restricting the credit for professional use may be in the ratio of 50:50.

6:The Clause (b) of sub-section 4 of Section 17 of MGL disallow ITC on “Outdoor Catering” except when the same is used for making outward taxable supply of the same category of goods or services. In trade and industry, many times, Seminars, Sales Conferences, Workshop for Technicians, Trade Meets are held either for the dealers, engineers, staff, customers either within the organization or outside the organization and, therefore, there is absolutely no reason as to why the ITC paid on “Outdoor Catering” be disallowed.

7:Likewise, ITC on “Rent-a-Cab” is sought to be disallowed even in cases where the rent-a-cab has been used for the purpose of business of the Company. Disallowing the credit of ITC for rent-a-cab is totally arbitrary and without any logic or reason. In the case of Reliance Industries Limited Vs. CCE MANU/CM/0374/2016, Bombay Bench of CESTAT has observed as under – though in respect of period post 2.4.2011 notwithstanding the amendment having been done dis-allowing cenvat credit on “outdoor catering” and “Rent- a-Cab”.

Now the question that arises is regarding services which were excluded by the amendment after 2.4.2011 to the definition of Rule 2(1) of the Cenvat Credit Rules, 2004. The said services are - outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees such as Leave or Home Travel Concession. The amendment indicates when such services are used purely for personal use for consumption of any employee, the CENVAT Credit cannot be allowed. On perusal of the records, we find that the appellants have been taking a consistent stand that in their case Outdoor Catering services, Club or Association service, Health and Fitness Services are three services on which CENVAT Credit from 1.4.2011 is sought to be denied relying upon the said amendment to Rule 2(1) of the Cenvat Credit Rules, 2004, which is incorrect as these services are utilized for the business meetings held at various places including AGM.

6.4 On perusal of the records, show-cause notices and Orders-in-Original, we find that the appellants have been taking the stand that the charges on Club or Association service, Health and Fitness Centre service and Outdoor Catering Services are paid by the company and said claim of the appellant is not dispelled by the adjudicating authority in their findings. It is not the case of the Revenue that these services used for personal consumption of employees. In the absence of any such dispelling, it is to be held that these services on which CENVAT Credit have been availed are not for personal consumption of the employee but it was billed for service provided for business meetings. In our considered view, the judgment of the Tribunal in the case of J.P. Morgan Services (I) Pvt. Ltd. Vs. Commissioner of Service Tax, Mumbai MANU/CM/0723/2015 : 2016 (42) STR 196 (Tri-Mum), will cover the issue in favour of the appellant in respect of these three services for the period after 1.4.2011.

8:At the same time, as per Clause (d)of sub-section 4 of Section 17 of MGL, if the immovable property is sought to be constructed for the purpose of providing logistic services even then, cenvat credit is sought to be dis-allowed on the immoveable property i.e. building, godown or premises. In my view, there is absolutely no reason as to why the Input Tax Credit for construction of immovable property should be disallowed.

9:Further, under clause (f) of sub-section 4 of Section 17 seek to deny ITC on goods or services used for personal consumption. However, I do not find any provision in the MGL, which exempts payment of tax on goods or services used for personal consumption. When the tax is payable even for goods or services used for personal consumption, therefore, there is no reason as to why the ITC should be allowed on such goods or services used for professional consumption. It is contrary to the basic tenant and principle of Cenvat.

10:The clause (g) of sub-section 4 of Section 17 further disallows input tax credit when the goods have been disposed off by way of “Gift” or “Free Sample”. Once again, it is beyond the comprehension of any one as to why the input tax credit is sought to be disallowed, when undoubtedly, MGL does not exempt gift or free sample from the levy of GST. It is a cardinal principle of cenvat credit, in case, when there is a levy of tax on either gift or samples, the natural corollary is the assessee should be entitled to avail the Input Tax Credit.

11:Sub-clause (h) of sub-section 4 of Section 17 further disallows the Input Tax Credit of Duty/Tax paid U/s 67, 89 and 90 of MGL. Again, it is cardinal principle of law that once the duty/tax has been paid by the assessee, he should be entitled to Cenvat credit as has been held by the Supreme Court. The Supreme Court in the case of the Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd. reported in MANU/SC/0467/1999 : 1999 (112) E.L.T. 353 (S.C.) at para 17 held as under:--

"17. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken. in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit-can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available."

12:It is not very uncommon that when the demands are raised invoking larger period of limitation and when the demand is confirmed, assessee pays the tax along with interest and penalty – many a time penalty is equal to duty as proviso to Section 11A of Central Excise Act. Therefore, the assessee should be atleast allowed to take credit of Input Tax Credit - otherwise it will be a double jeopardy. On the one hand the assessee is not allowed Input Tax Credit and on the other hand he is paying interest and penalty when the demand is confirmed U/s 67,89 & 90 of MGL

13:In my humble view, there is a need to have re-look to the above provision of law to make it more trade and industry friendly.

[1] Past Central Council Member, Institute of Company Secretaries of India.

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