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Can Taxpayers claim the credit by filing TRAN-1 or not?

Tanya gupta 
on 28 May 2020

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Background

What oxygen is to the lungs, such was the Delhi High court judgment to all those taxpayers who couldn't avail the credit for the taxes paid in the earlier tax regime. It brought a ray of hope not only in case of Brand Equity Treaties Ltd. but the judgment passed on 05.05.2020 was made applicable to all, irrespective of the fact whether the taxpayer had approached the court or not.

It was one of the most welcomed judgment in the GST regime because the court held that the period of 90 days states in rule 117 of Central Goods and Service Tax Rules, 2017 ('CGST Rules, Rules, 2017') for claiming the credit of the tax paid in earlier regime is DIRECTORY in nature and not mandatory, virtue of which, a period of 3 years under the Limitation Act would apply and accordingly a person can claim the ITC by filing the Tran-1 by 30.06.2020 i.e. the date when we will celebrate the 3 year anniversary of our new indirect tax regime.

Though it brought smiles on the faces of the people, but it is often seen that journey to a destination isn't that easy and so Government of India ('GOI, govt') was preparing its own plan. Before stating the conclusion straight away, let's discover the journey from the beginning itself.

Unveiling the provisions of sec 140(1), (2) and (3) of CGST Act, 2017 along with the prescribed rules.

When on 1.07.2017, government rolled out Goods and Service tax ('GST') which subsumed majority of the indirect taxes, this section hold the back of the entire country and helped the taxpayers in dealing through the transition from old era to new era of indirect tax. It directed the taxpayers to deal with a given scenario through its 10 subsections along with rules.

Can Taxpayers claim the credit by filing TRAN-1 or not

• Sub section 1 is applicable on those registered person (a person who is registered under GST Act), other than composite dealers, who had mentioned the amount of the credit of the taxes paid in old regime in the returns prescribed in that era. In such a case, the person is allowed to carry forward the credit so mentioned under GST, provided

o The same should not be disallowed under GST or such credit relates to manufacturing of exempted goods as notified by the govt and;

o The registered person should furnish all the return prescribed under the existing law for the period of six months immediately preceding 1.07.2017.

Example 1: Mr A, the service provider, duly registered under GST, can carry forward the service tax paid under GST only if he had furnished all the service tax returns for the period starting from 1.10.2016 to 30.06.2017 as in service tax, a person was required to file half yearly return and the tax so carried forward should not be disallowed under GST.

Example 2: Mr B, a trader will only be allowed tax credit of the VAT paid as the same will be mentioned in the returns. Since in earlier regime, a trader was not allowed the tax credit of excise duty, the same will not be allowed by virtue of sec 140(1).

KEY POINTS

1. 6 months return should be filed;
2. The amount of tax should be carried forward in return.

• If a registered person under GST, other than the composite dealer, had unavailed CENVAT credit in his books of accounts in respect of CAPITAL GOODS which is not carried forward in the return, he can claim the credit of such tax paid with the help of provisions of subsection 2, provided

o The said cenvat credit should be admissible under the old law as well as should fall under the definition of input tax credit under GST.

Example 1: Suppose a manufacturing concern had purchased capital goods worth Rs. 1Cr and had even paid excise duty of Rs. 10lacs under old regime. The concern didn't avail any credit of the tax paid in return filed before 1.07.2017. So they can claim the entire amount of Rs. 10Lacs as ITC under GST, only if the same was admissible under both the laws.

Example 2: Continuing the above example, if the manufacturing concern had already availed the credit of Rs. 5 lac out of the said 10Lacs i.e. 50% as what was prescribed under the excise law, then the unaviled cenvat credit will only be of remaining 5Lacs.

KEY POINTS

1. Applicable on capital goods;
2. There should be unavailed cenvat credit which is not carried forward.

• And here comes the trickiest of all, the subsection 3. It states the following:

o A registered person;
o Who falls under the following criteria:

- Not liable to be registered under earlier law;
- Who was engaged in manufacturing of exempted goods or provision of exempted services;
- A works contract service provider;
- First stage dealer or second stage dealer;
- Registered importer;
- Depot of a manufacturer;

o Can claim credit in respect of duties paid on inputs

- Held in stock or;
- Contained in semi-finished or
- Finished goods as on 01.07.2017

 

Subject to,

o Such inputs or goods should be used or intended to be used for making taxable supplies
o The said registered person is eligible to claim the credit of said inputs under GST
o He should have in his possession the invoice/ document which can act as proof of payment of tax paid under the old law
o Such invoices/ document should be issued within the period commencing from 1.07.2016 to 30.06.2017
o The supplier of service is not eligible for any abatement under GST.

Provided,

o A trader registered under GST
o Is not in a possession of the aforementioned invoice/document evidencing the payment of tax under old law
o Shall be allowed to take the credit at the rate of 60% if CGST rate is 9% or more and at the rate of 40% if the CGST rate so applicable is less than 9%. Also, if IGST is applicable the credit is allowed at the rate of 30%, if IGST rate is 18% or at the rate of 20% if the rate is less than 18%.
o But subject to ANTI PROFITEERING clause

o Also the benefit is allowed only if the sale is made within 6 months
o And such person needs to furnish the details in FORM GST TRAN 2 by 31.03.2018.

As per rule 117 of CGST Rules, 2017, every registered person entitled to take credit on the input tax under section 140 shall, within 90 days from 01.07.2017, submit a declaration electronically in Form GST TRAN-1. Provided, the commissioner may on the recommendations of the council, can extend this period of 90 days by a further period of maximum 90 days.

Now comes the burning issue i.e. are taxpayers still eligible to claim credit by filing Tran-1 or not?
Let's now understand why there is much issue going on in the market, but before that lets see the roadmap GST TRAN-1 had followed till date.

Flowchart

 

So accordingly, every tax payer was required to file TRAN-1 maximum by 31.03.2020. Also as per the provisions of sec 128 of the Finance Act, 2020, govt seeks amendment in sec 140 by inserting the words'within such time' after the 'existing law' or 'appointed day'.

But even before when government could notify the said amendment, on 05.05.2020, the Delhi High court passed the judgment that the taxpayers should be allowed to claim the credit of the tax paid in earlier laws by filing TRAN-1 by 30.06.2020 stating that claiming the credit is the legal right of the tax payer and rule 117 is only director in nature.
But the government over ruled the judgement passed by the High Court by enforcing the notification no 43/2020 –CT dt 16.05.2020 which seeks to bring into force section 128 of the Finance act,2020 in order to bring retrospective amendment in Section 140 of the CGST Act.

Conclusion

Though the govt had made retrospective amendment in law but it will not be at par with the legal rights of the tax payer. The government had to inserted sub rule 1A under rule 117 owing to the technical difficulties on common portal faced by the taxpayers. Had it not been an issue, no need would have aroused for extending the due date. During the time when world is going through the corona outbreak and also where the period of 3 years is about to come to an end within a month, it will be interesting to see what consensus will be drawn.


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