The Value Added System of Taxation of Goods was introduced in order to address the issue of multiplicity of taxes and cascading effect of such taxes in the transaction chain. In the erstwhile single point taxation, goods which underwent any manufacture or processing where subject to sales tax on the new commodity emerging from such activity, resulting in additional tax burden over and above the value of the product itself. This resulted in inefficiencies in the tax structure and also promoted large scale evasion of taxes.
One of the key mechanisms of addressing this was to provide for a multiple point levy of state taxes and simultaneously provide for aset-off of the taxes paid on previous purchases (referred to as input tax) against the output tax of the seller.At the time of introduction of the Karnataka Value Added Tax Act, 2003 (KVAT Act), the State Legislature has categorically highlighted the importance of set-off in a VAT system by specifically stating in its Statement of Objects and Reasons that set-off of all tax paid at earlier points in respect of goods sold would be available against the output tax payable (also referred to as input rebating).In a way, the legislature was making a statutory promise of granting an input tax set-off in return for a multiple point taxation of sales tax.
Keeping in line with this intention, section 10 (more specifically sub-section (2) and (3)) of the KVAT Act was introduced at the time of the legislation of the KVAT Act to enable a dealer to claim set-off of the input tax paid on purchases against his output tax. Subsequent to the enactment of the KVAT Act, the state revenue department has however lost sight of this objective and attempted to deny the input tax credit to a dealer for various reasons (such as non-payment of tax by supplier or selling dealer, de-registration of the selling dealer, etc.). One of the most debatable reasons on which the department sought to deny the input tax credit was on account of the timing of claim of the input tax credit. While in the initial years, the revenue allowed the claim of input tax credit in any month, subsequently the revenue contended that the input tax credit should be claimed only in the month in which the purchase was made (ie with reference to the date on the purchase invoice). This contention of the revenue arose on the basis of clouded interpretation of the decision of the Division Bench of the Karnataka High Court in Centum Industries case [2014 (80) Kar L.J. 65 (HC)(DB)].
The issue in the Centum Industries arose on account of the dealer claiming the input tax credit on purchases beyond the period of six months (being the time limit to revise the return). The revenue contended that the input tax credit ought to have been claimed by the dealer in the respective period to which it pertains and hence disallowed the claim entirely. The Hon’ble High Court examined the provision of section 10(3) of the KVAT Act and basing its judgement entirely on the phrase ‘in that period as may be prescribed by law’, held that input tax credit should be claimed in that period, meaning the period in which the input tax credit has been paid. The Court referred to section 35 of the KVAT Act and erroneously held that the period prescribed for filing return is the period prescribed for claiming the input tax credit. The Court observed that once the law prescribes a period for filing of the return and also prescribes the period for revision of the return, the said limit would also apply to any claim of input tax credit in view of the above phrase. Respectfully, the Court lost sight of the very intention of the VAT system and proceeded to apply the law in a very strict sense. The interpretation in a way hampered a substantive right with reference to a procedural requirement of law, that too in a different context. The Court failed to appreciate that such a strict interpretation would lead to defeating the objective of the law itself and also result in practical implementation of the statute. The Court also distinguished its very own decision in K Bond Polymer’s case[2012 (73) Kar L.J. 429 (HC)(DB)] which held that once tax is paid under the KVAT Act, the assessee can claim the benefit of the input tax credit and any delay in claiming the input tax credit did not in any way adversely affect its right to claim the input tax.
The revenue on the other hand conveniently ignored the backdrop of the judgment as well as the object of the statute itself and went on a spree of passing adverse orders on the dealer denying input tax credit claimed in subsequent periods. This was done ignoring the ground reality that in many cases dealers the right to claim credit itself arose in a subsequent month such as receipt of the goods on a date later than the date of purchase invoice falling in a subsequent month. There were also bonafidecases where on account of quantity differences or quality checks, the dealer would delay the accounting and record the inward of the purchases resulting in claiming the input tax credit in subsequent months. There was large scale litigation between the dealer and the revenue on this very point and time and again the Centum Industries case was put forth by the revenue to support its stand ignoring that this defeating the very purpose of the VAT system. The revenue in the mode of tax collection ignored that credit is a benefit and availing a benefit was a prerogative of the dealer and not the department. Tax credit being availed at a later point of time infact resulted in an earlier revenue collection to the State.
In the midst of this issue, the State Legislature observing the litigation between the State and the dealers stated that it was necessary for amending the provisions of section 10(3) of the KVAT Act to facilitate the dealer in claiming the input tax credit as per their business practices of accounting. The law was amended (in 2015 as well as recently in 2016) permitting the dealer to claim in the input tax credit for a month with reference to purchase effected within the preceding five months. The Karnataka Appellate Tribunal in the case of Bharat Earth Movers Limited(2016 (84) Kar. L.J. 37 (Tri)(DB)] held that said amendment is retrospective in nature and therefore, input tax credit is available despite the verdict in the Centum Industries case.
Recently, two decisions of the Karnataka High Court, i.e. Manyata Promoters Private Limited [2015 (83) Kar. L.J. 375 (HC)(DB)]andSonal Apparel Pvt Ltd (Single member decision)[2016 (85) Kar. L.J. 1(HC)], the High Court has decided the issue in favour of the dealer. In the first case, the High Court held that the Act nowhere prescribes that input tax credit should be claimed in the month in which the invoice of the supplier/ vendor falls or that the purchasing dealer has to claim the input tax credit in the same period in which the bills are raised. This decision, though in the context of refund, specifically overturned the ruling in the Centum Industries case on the point that period prescribed in the return is the period limiting the claim of input tax credit.
The second case also follows this view thought slightly from a different angle. The Court quashed revenue’s stand that the input tax credit should be claimed in the month to which the purchase is made. Respectfully, the court ought to have taken a tougher stand by applying the VAT principles; rather it chose to arrive at the conclusion by holding that the amendment to section 10(3) being beneficial should be given retrospective effect from the date of its insertion itself. The Court also holds that the interpretation of the said section in Centum Industries case would result in illogical conclusion i.e. a dealer cannot be expected to claim the input tax credit in the same month and go ahead and file a revise return for any claim resulting in requirement to file two returns in all cases rather than only in cases where there is an error on the part of the dealer. The Court finally read down the provisions of section 10(3) prior to its amendment to enable a dealer to claim the input tax credit irrespective of the month in which the selling dealer raises its invoice.
This seems to more or less settle the dust on the timing input tax credit claim of dealers. Yet, there are some incidental issues which may crop up which in my view should answered giving the guiding principles of VAT system – whether this decision can be relied upon given that the Centum Industries case was a division bench ruling; whether the input tax credit is a statutory right and can be claimed even after six months or during the course of assessments of the dealer; whether the amendment is indirectly placing a cap to claim the input tax credit within six months; or whether the input tax credit can now be claimed within a period of twelve months (six months by statutory provisions and additional six months to revise the original return).
One school of thought is that credit is an indefeasible right of the assessee (as stated by the Supreme Court in the context of the Modvat scheme) and unless there is anything to the contrary, a person is entitled to take credit without any limitation in time. The Supreme court in the another case, again in the context of Modvat, said that credit is as good as tax paid. The KVAT Act (as amended even after 2016) is yet to place a specific restriction that input tax credit shall mandatorily be claimed in the same month only and not in any subsequent month. Going by the stand that credit is an indefeasible right and equivalent as tax paid, credit should be available as and when claimed for. Besides, the amendment (positively worded) enables a dealer to deduct input tax credit in respect of a tax period (i.e. each calendar month) based on the current month purchases as well as preceding give month purchases if the credit has not been availed in those months. It still does not specifically or directly restrict the input tax credit availment of earlier periods. Section 10(3) also states that the net tax payable of a dealer shall be the output tax payable less the input tax ‘deductible’ by him. This is contrast to phrase ‘input tax collected and payable’ under the Act u/s 10(2) or ‘tax paid’ as stated in the Statement of objects and reasons of the KVAT Act. This is significant as section 10(3) does not state that the input tax shall be paid in the same month in which the deduction is claimed. By reading section 10(2) and 10(3) one gets the impression that a tax acquires the character of input tax once it is collected or payable under the Act on sale of goods to him. Having acquired the character of input tax, the tax is deductible based on the prescription of the law in that period i.e. the phrase ‘in that period’ is with reference to the prescription of law in that period and not with reference to timing of claim of input tax credit. Reading the amendment in entirety gives the impression that the Statute is yet to place a restriction to curb this indefeasible right.
The other school of thought is that credit is a statutory benefit conferred to a dealer and not a constitutional right. In the absence of this scheme, the dealer has not right of claim of this input tax credit. Thus the entitlement is created by the statute and entirely governed by the Statute terms and conditions. Various high courts have adopted this stance when any challenge to any restriction on input tax credit provisions has come before it. Therefore, a strict interpretation of the amended provisions of section 10(3) could results in an interpretation that the claim of credit should only within the timeframe specified and no credit can be claimed beyond the said time frame.
To conclude, though a major part dispute on this issue seems to be moving towards a closure in favour of the dealer, the incidental issues should also be kept in mind while applying the statutory provisions.
The Author is a Partner of R. Singhvi & Associates, Chartered Accountants.The author can be reached at Rishabh@rsinghvi.com