Credit of Cess is not allowed to be carried forward under GST – Madras HC
Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, multiplicity of taxes, classification issues, taxable event, and etc., and leading to a common national market. On introduction of GST, the credit of taxes under the previous laws, predominantly Central Excise, Service Tax and Value Added Tax, was allowed to be carry forwarded vide the transitional provision either as Central Goods and Service Tax (CGST) or State Goods and Service Tax (SGST) as the case may be. Accordingly, taxpayers did carry forwarded the credit by filing transactional credit by filing Form TRAN -01.
Is Credit of Cess transferrable as ITC under GST?
The common observation of the department during the transitional credit verification is that the closing credit balance of the Education Cess, Secondary and higher Education Cess, Krishi Kalyan cess (Cess credit) is not eligible for the transfer into GST. According to Section 140(1) of the CGST Act, A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed. Government vide Clause 28 of CGST (Amendment) Act, 2018 had made the retrospective amendment w.e.f. 01.07.2017 in the Section 140(1),by replacing “eligible credit” for “CENVAT credit” to disallow the carry forward of the Cess credit into GST. By virtue of this amendment, the closing balance of Cess credit was not transferable as ITC under GST.
Let us refer to the judgement of the Madras High Court (HC) in the case of Assistant commissioner of CGST and Central excise Vs. M/s Sutherland global services where the main issue under consideration was whether Assessee could claim any Input Tax Credit (ITC) with respect to such Cess paid by it against the GST liability, which law came into effect from 01.07.2017 or not?
Reasons given by HC for Cess being not eligible for carry forward, transition and set off against the Output GST Liability
Section 140 of the CGST Act, 2017, provides for transitional arrangement of Input Tax Credit.
Only the seven specified duties as “Eligible Duties” (namely Additional Excise Duty under Additional Duties of Excise (Goods of Special Importance) Act, 1957, Additional Duty under Custom and Tariff Act, 1975, Additional Custom Duty on Taxable Articles, Duty of Excise in the First Schedule to the Central Excise Tariff Act, 1985 and National Calamity Contingency Duty under Section 136 of the Finance Act, 200) in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed date i.e. 01.07.2017 will be eligible to be carried forward and adjusted against GST Output Tax Liability.
Education Cess and Secondary and Higher Education Cess or Krishi Kalyan Cess are absent from the seven categories. Therefore, the Court could not include the aforesaid three types of Cesses, in the terms of “Eligible Duties and Taxes” or “Eligible Duties” to be carried forward and transitioned under Section 140 of the Act.
The imposition or levy of Education Cess and Secondary and Higher Education Cess and Krishi Kalyan Cess did not operate after 01.07.2017. Specifying that any kind of Cess would be excluded for the purpose of Section 140, made the intention of the Legislature very clear.
Since the cross utilization of Education Cess and Secondary and Higher Education Cess was not allowed against Excise Duty and other duties under existing law prior to GST Regime and they could be set off only against the Output Education Cess and Secondary and Higher Education Cess liability, once the levy itself ceased and dropped in 2015, the question of their carry forward and utilization became academic.
The contention of the Assessee that it was having a centralized registration and Input Education Cess and Secondary and Higher Education Cess being CENVAT under Cenvat Rules, 2004, deserved to be carried forward and allowed as set off against GST Liability, merely because it had carried forward the same in the Centralised Electronic Credit Ledger, had no substance.
Merely because the revenue authorities, after the cessation of levy of Education Cess and Secondary and Higher Education Cess in the year 2015 did not take any action in the contemporary period, until the impugned communication was issued to the Assessee on 09.02.2018, which triggered the filing of the writ petition and asked the Assessee to reverse that entry in the Electronic Ledger, it did not mean that the Assessee became so entitled to carry forward even a dead claim of unutilised Education Cess and Secondary and Higher Education Cess against the Output GST Liability after 01.07.2017.
The set off and such adjustments could be allowed only if it clearly fell within the definition of “Eligible Duties” or “Eligible Taxes and Duties”. Explanation 3 of Section 140 clearly excluded Cess to be so eligible for carry forward and set off. Therefore, there was no iota of doubt that Cess of any kind except National Calamity Contingent Duty (NCCD), which was so specified in Explanations 1 and 2 of Section 140 specifically could be allowed to be carried forward and adjusted against Output GST Liability.
HC found considerable force in the contention raised on behalf of the Revenue that credit of such Education Cess and Secondary and Higher Education Cess which could not be utilised against the Output Education Cess and Secondary and Higher Education Cess Liability, while the said impost was in force prior to Finance Act, 2015, became a dead claim in the year 2015 itself and therefore, there was no question of allowing a carry forward and set off after a gap of two years against the Output GST Liability with effect from 01.07.2017
GST Law subsumed 16 indirect taxes which were applicable prior to 01.07.2017. The transition of unutilised ITC could be allowed only in respect of taxes and duties which were subsumed in the new GST Law.cAdmittedly, the three types of Cess, namely Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess were not subsumed in the new GST Laws, either by the Parliament or by the States.
Therefore, the question of transitioning them into the GST Regime and giving them credit under against Output GST Liability cannot arise.
The plain scheme and object of GST Law cannot be defeated or interjected by allowing such Input Credits in respect of Cess, whether collected as Tax or Duty under the then existing laws and therefore, such set off cannot be allowed.
Therefore, HC held that the Assessee was not entitled to carry forward and set off of unutilised Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess against the GST Output Liability with reference to Section 140 of the CGST Act, 2017.