INPUT TAX CREDIT – A VESTED RIGHT?

Input tax credit

Section 2(63) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) defines the expression ‘input tax credit’ (‘ITC’ for short) as the credit of input tax.  Section 2(62) of the Act defines the expression ‘input tax’ in relation to a registered person, as the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes–

• the integrated goods and services tax charged on import of goods;
•  the tax payable under the provisions of sub-sections (3) and (4) of section 9;
• the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
• the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
• the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy.

Eliminating cascading effect

ITC is the central mechanism through which GST seeks to eliminate the cascading effect of indirect taxation. The basic principle is that the tax paid at an earlier state should ordinarily be available as credit against tax payable at the subsequent stage.

Provisions relating to ITC

ITC is the credit of Goods and Services Tax (‘GST’ for short) paid on eligible purchases of goods or services or both, which a registered person can use to discharge GST payable on his outward supplies. The following are the provisions in the Act dealing with the availing and utilising the ITC-

• Section 16 – Eligibility and conditions for taking ITC;
• Section 17 – Apportionment/restriction of ITC;
• Section 18 – ITC in special circumstances;
• Section 19 – ITC on inputs/capital goods in job work;
• Section 20 – Distribution of ITC by Input Service Distributor;
• Section 21 – Recovery of wrongly distributed ITC;
• Section 34 – Credit notes and debit notes affecting ITC.

Evolution of ITC in India

The concept of tax credit was introduced in the year 1986. Before 1986 a scheme called ‘proforma credit/set off schemes’ was introduced. This scheme has limited mechanism to reduce cascading.

In 1986 the concept of MODVAT (Modified Value Added Tax) was introduced in which the credit of excise duty paid on inputs against duty on finished goods was allowed.

During the year 1994, this scheme was extended to specified capital goods, called as Capital goods credit.

During the year 2000, the MODVAT was replaced by CENVAT (Central Value Added Tax). For this purpose, the Central Government made the ‘CENVAT Credit Rules, 2001’ in which more systematic credit for inputs and capital goods were introduced.

Levy of Service Tax was implemented from the year 1994 vide Finance Act, 1994. The credit facility was also extended to Service tax also.  The Central Government made ‘Service Tax Credit Rules, 2002. In this the service provider could only avail the tax paid on input services received by the Service Provider. The input tax paid could not be availed and utilised. Likewise, a manufacturer could avail input tax on inputs and capital goods but not the service tax paid in the course of manufacturing activities.

Because of the problems experienced by the manufacturers and services provides who could not avail and utilise the service tax credit, input tax credit respectively, the Central Government, in order to remove the this short coming framed ‘CENVAT Credit Rules, 2004’ which allowed to avail and utilise both the input service tax and input tax.

During the year 2005, State VATs VAT systems provided input-tax set-off at State level.

The Act has been enacted after subsuming all the indirect taxes and came into effect from 01.07.2017. The credit facility is also extended to GST also.

Restrictions

Originally, ITC was structured as a broad entitlement subject to statutory conditions. Over time, Parliament introduced increasingly stringent conditions concerning:

• possession of prescribed documents;
• receipt of goods/services;
• payment of tax to Government;
• filing of returns;
• supplier reporting of invoices;
• time limitation;
• restrictions under Section 17;
• reversal provisions.

For example, Section 16(2)(aa) now requires the relevant invoice/debit-note details to have been furnished by the supplier in the outward-supply statement and communicated to the recipient.

The transition provisions in Section 140 CGST Act also demonstrate how the legislature sought to carry forward eligible pre-GST CENVAT credit into the GST electronic credit leger subject to statutory conditions.

Vested right

The input tax credit can be availed and utilised for the payment of outward tax liability. Thus there is a right entrusted to the registered person to avail and utilise the input tax credit. Whether it may be told that availing and utilising the input tax credit as a vested right of the registered person?

A vested right is defined as a legal right that has become fixed, established and enforceable, rather than being merely conditional or expected. The vested right, generally, cannot loss it simply because circumstances or rules later change. Pension granted to an employee is a vested right. Pension is given to a retired employee if he has satisfied all requirements to earn certain pension benefits.

The Supreme Court decisions depict that the input tax credit is not a vested right. Only it is a statutory concession. In Jayam & Co. Versus Assistant Commissioner & Anr. - 2016 (9) TMI 408 - Supreme Court, the Supreme Court held that in the context of VAT that ITC is a concession created by a statute. There is no inherent right to ITC independent of the statute and the legislature can prescribed the manner and conditions for availing it.

In ALD Automotive Pvt. Ltd. Versus The Commercial Tax Officer Now Upgraded As The Assistant Commissioner (CT) & Ors. - 2018 (10) TMI 814 - Supreme Court, the Supreme Court reiterated that ITC is subject to the conditions prescribed by the relevant statute. The tax payer cannot claim ITC merely because tax was paid at the preceding stage. The statutory requirements must be fulfilled. Therefore, it is clear that the ITC is a conditional statutory entitlement, not an unconditional right.

Conclusion

While the right to ITC originates from statute and is subject to the conditions prescribed therein, upon fulfilment of the substantive conditions and valid accrual of credit, the assessee acquires an accrued statutory entitlement.   The ITC is mere a concession granted to the registered person by the Legislature. It is not an inherent or constitutional right.