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September 9, 2020

Is EC & SHEC balance as on 30 June 2017, which could not be transitioned to GST, refundable?

by CA Shivam Jaiswal in GST, GST Circular Notification

Is EC & SHEC balance as on 30 June 2017, which could not be transitioned to GST, refundable?

GST was a significant reform in the field of indirect taxes in our country. Multiple taxes levied and collected by the Centre and States were replaced by one tax called Goods and Services Tax (GST).

Before GST was implemented on 1st July, 2017, a number of taxes were being followed in the country. In the previous tax regime CENVAT Credit was in existence and not Input Tax Credit. CENVAT means Central Value Added Tax.

CENVAT credit is a credit in respect of central excise on inputs purchased for the manufacture or duty paid in relation to the manufacture of the final product. CENVAT credit was also available in respect of duty paid on capital goods, which included machinery, plant, spare parts of machinery etc.

In simple words, instead of paying cash towards central excise on shipment of goods, the exporter could adjust the excise duty paid on the inputs and machinery.

As GST consolidated multiple taxes into one, it was very essential to have transitional provisions to ensure that the transition to the GST regime was smooth and hassle-free and no ITC (Input Tax Credit)/benefits earned in the previous regime were lost.

Elaborate provisions were made to carry forward the credit earned under the previous law. Such credit was permissible under the GST law. Credit of various taxes under the previous laws (CENVAT credit, VAT etc.) would be carried forward under GST.

However would EC & SHEC balance as on 30.06.2017, which could not be transitioned to GST be refundable to the taxpayer? Let us refer to the Bharat Heavy Electricals Ltd. Vs Commissioner CGST, Central Excise & Customs, (CESTAT Delhi) to understand the same.

Facts of the Case

  • The appellant was engaged in the manufacture of Electrical and Mechanical Equipment and transmission, utilization, conservation and generation of power.
  • The appellant was supplying equipment for generation and transmission of electrical energy at Thermal, Hydro, and Nuclear Power Stations.
  • They were carrying the following un-utilized Credit Balances as reflected in their Returns on 30th June 2017, the date on which the new GST Regime came into force:-
  • Service Tax (ST) & Central Excise Duty Inputs Goods Credit
  • Education Cess
  • Secondary & Higher Education Cess
  • Krishi Kalyan (KK) Cess
  • The credit was accumulated as their products were exempted from payment of duty under the CENVAT Credit Rules 2004 which exempted the supplies to Mega /Ultra Mega Power Projects, SEZ, EOU, etc even when CENVAT credit was availed on the inputs.
  • The appellant was also executing orders for export.
  • Thus while credit of inputs and inputs services was admissible to them in respect of their clearances to Mega/Ultra Mega Power Project, SEZ and Physical Export, no duty of Central Excise or Cess was payable by them on bulk of their supplies, there by resulting in huge amount of un-utilizable accumulated credit being carried over the past several years.
  • The appellants did not go for refund of unutilized CENVAT credit on the expectation that they would be able to use the credits available with them on domestic clearances on the basis of their past clearances.
  • While the credit balance of service tax & central excise duty was carried over through TRAN-1 under the new GST Regime the credit balances of the three Cesses namely Education Cess, Secondary and Higher Education Cess and the Krishi Kalyan Cess remained un-utilizable as these Cesses were abolished in the new Tax Regime.

Order of Adjudicating Authority and Commissioner (Appeals)

  • The appellant filed refund claim of the unutilized cesses with the Adjudicating authority, which rejected the refund claim of the appellant on the ground that since there was no provision to carry over the impugned cesses under the GST regime and there was no provision for refund of the same and thus such credits would lapse.
  • Even the appeal filed by the appellant was rejected by the Commissioner (Appeals) on the same grounds.
  • Aggrieved with the order of the Adjudicating Authority and Commissioner (Appeals), the appellant filed an appeal against the rejection order of their refund claim of the Ed. Cess, S&H Cess and KK cess before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

Observations of CESTAT

  • According to CESTAT, there was no dispute that on 01/07/2017, credits of the cesses validly stood in the accounts of the assessee and were very much utilizable under the older provisions.
  • The appellants could not carry over the same under the GST regime. Thus the appellants were in a position where they could not utilize the same.
  • It was also not denied by the Revenue that the appellants had earned the credits and could not utilize the same due to substantial physical or deemed exports where no Central Excise duty was payable and under the existing provisions, had the appellants chosen to do so they could have availed refunds/rebates under the existing provisions.
  • There was no provision in the newly enacted law that such credits would lapse.
  • Thus merely by change of legislation, the appellants could not be put in a position to lose this valuable right.

Agreement with the appellant w.r.t reference to an older case

CESTAT agreed with the appellant that the credits earned were a vested right in terms of the Apex Court judgement in Eicher Motors case and would not extinguish with the change of law unless there was a specific provision which would debar such refund. The SC in this case had held that:-

  • The assessees became entitled to take the credit of the input instantaneously once the input is received in the factory on the basis of the existing scheme.
  • The right to the credit is absolute at any rate when the input is used in the manufacture of the final product.
  • The basic assumption that the scheme was being altered and, therefore, does not have any retrospective or retro-active effect, submitted on behalf of the State, did not appeal to SC.
  • Therefore, the scheme sought to be introduced cannot he made applicable to the goods which had already come into existence in respect of which the earlier scheme was applied under which the assessees had availed of the credit facility for payment of taxes.
  • It was on the basis of the earlier scheme that the taxes have to be adjusted.

Accordingly the ratio of such cases would be squarely applicable to the appellant’s case. Following the above judgement and similar other judgements/decisions, CESTAT held that the assessee was eligible for the cash refund of the cessess lying as cenvat credit balance as on 30/06/2017 in their accounts. Thus, EC & SHEC balance as on 30.06.2017, which could not be transitioned to GST, is refundable.

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