Amendments in Transitional Provision - Too Ambiguous?

TOO AMBIGUOUS ……… GROSSLY UNFAIR.

Fiscal statutes are a bit different from the general laws in the sense that it has to be read plainly and there is no scope for “read between the lines”. Equity or intendment has no place in interpretation of a taxing statute. In this background let us examine the amendment done in the section140 of the GST Act, 20117.  Amendment done in Section 140 of the CGST Act, read as follows:

Amendment of Section 140.

28. In Section 140 of the principal Act, with effect from the 1st day of July, 2017, -‘

(a) in sub-section (1), after the letters and word “CENVAT credit”, the words “of eligible duties” shall be inserted and shall always be deemed to have been inserted;

(b) in the Explanation 1 -

(i) for the word, brackets and figures “sub-sections (3), (4)”, the word, brackets and figures “sub-sections (1), (3), (4)” shall be substituted and shall always be deemed to have been substituted;

(ii) clause (iv) shall be omitted and shall always be deemed to have been omitted;

(c) in the Explanation 2

(i) for the word, brackets and figure “sub-section (5)”, the words, brackets and figures “sub-sections (1) and (5)” shall be substituted and shall always be deemed to have been substituted;

(ii) clause (iv) shall be omitted and shall always be deemed to have been omitted;

(d) after Explanation 2 as so amended, the following Explanation shall be inserted and shall always be deemed to have been inserted, namely:

Explanation 3. For removal of doubts, it is hereby clarified that the expression “eligible duties and taxes” excludes any cess which has not been specified in Explanation 1 or Explanation 2 and any cess which is collected as additional duty of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975.’( 51 of 1975).

The aforesaid explanation 3 in section 140 is inserted afresh while there is an amendment in the other sub-clauses. The relevant clauses of Section 140 of the CGST Act in which the amendment has been done are as follows: 

140. Transitional arrangements for input tax credit.

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:

Now after amendment only eligible duties has to be carried forward and not the CENVAT Credit which was given initially.

Others amendments are in the explanation 1 and Explanation 2 of Section 140 of the CGST Act, which are as follows:

Explanation 1.   For the purposes of sub-sections (3), (4) and (6), the expression “eligible duties” means

1. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
2. the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
3. the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;
4. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
5. the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;
6. the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001;

in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.

Explanation 2. For the purposes of sub-section (5), the expression “eligible duties and taxes” means

• the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
• the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
• the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;
• the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
• the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;
• the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985;
• the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001; and
• the service tax leviable under section 66B of the Finance Act, 1994, in respect of inputs and input services received on or after the appointed day.

Effect of amendment in Explanation 1:

After the amendment the words sub section (3) &  (4) has been substituted with the words (1), (3) & (4).

Explanation 2.

In the Explanation 2 also the words sub-section 1 has been inserted.  

Clause (ii) and clause (iv) from the Explanation 2 has been omitted.  

When we read the pre-amendment and post-amendment provisions of section 140 it is clear that by the amendment the words “amount of Cenvat Credit” is ostensibly replaced by the words “amount of eligible duties”. The implication of amendment is too obvious as the words “amount of eligible duties” shrink the ambit of credit taken by defining the same narrowly.

The definition of eligible duties means a specified list of duties in respect of inputs held in stock and contained in semi-finished or finished goods held in stock on a particular day. Apparently, two vital elements of the credit taken i.e. credit of the service tax and credit taken on the capital goods are left out. It means that service tax credit taken as an eligible credit on the transitional provision of the GST can now be denied through this “retrospective amendment. Earlier even the credit of the Service Tax was not defined as eligible duties but through the express provision of the law, it was part of the CENVAT Credit which can be carried forward with the help of substantive provisions of the Transitional Provision (Section 140 of the CGST Act).

Once the eligible credit is allowed under Section 140 of CGST Act, 2017 the same should not and can not be taken away through the retrospective amendment. The rights once given through a valid legislation cannot be disturbed by a retrospective amendment. The law on the retrospective amendment is well settled and these amendments have been done in direct conflict of the law settled in this regards. The Hon’ble Apex Court on various occasion reiterated the principle that substantive law can be brought upon only with the prospective effect and not otherwise. The Hon’ble Apex Court in the matter of UNION OF INDIA Versus MARTIN LOTTERY AGENCIES LTD, 2009 (14) S.T.R. 593 (S.C.) is held as under:

35. Reverting to the decision of a Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] wherein Gujarat High Court’s judgment was followed, this Court noticed that explanation was not held to be a declaratory one but thereby the scope of Section 9(1)(ii) of the Act was widened. The law in the aforementioned premise was laid down as under :

“17. As was affirmed by this Court in Goslino Mario (supra), a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. [See also: Reliance Jute and Industries v. CIT [(1980) 1 SCC 139]. An Explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section (See: Sonia Bhatia v. State of U.P. [(1981) 2 SCC 585 at 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force (See: Shyam Sunder v. Ram Kumar [(2001) 8 SCC 24 (para 44)]; Brij Mohan Laxman Das v. CIT [(1997) 1 SCC 352 at 354], CIT v. Podar Cement [(1997) 5 SCC 482 at 506]. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used are ‘it is declared’ or ‘for the removal of doubts’.

18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been judicially defined in S.G. Pgnatale (supra) by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.

19. When the Explanation seeks to give an artificial meaning ‘earned in India’ and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (Emphasis supplied)

36. It is, therefore, evident that by reason of an explanation, a substantive law may also be introduced. If a substantive law is introduced, it will have no retrospective effect.

The notice issued to the assessee by the appellant has, thus, rightly been held to be liable to be set aside. Subject to the constitutionality of the Act, in view of the explanation appended to this, we are of the opinion that the service tax, if any, would be payable only with effect from May, 2008 and not with retrospective effect.”

Recently a constitutional bench of Hon’ble Apex Court in the matter of Commissioner of Cus. (Import), Mumbai versus Dilip Kumar & Company, 2018 (361) ELT (S.C.) examined the concept of interpretation of taxing statute and held as follows:

“Indeed, it is well-settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification. Equity has no place in the interpretation of a tax statute. Strictly one has to look to the language used; there is no room for searching intendment nor drawing any presumption. Furthermore, nothing has to be read into nor should anything be implied other than essential inferences while considering a taxation statute.

Apparently, there appears to be an attempt to shrink the ambit and scope of “Transactional Provision” and it requires immediate attention considering the wide impact it is going to have on the persons who have rightly availed the CENVAT Credit of the Service tax and bonafidly carried forward with the advent of the GST regime.