2023 (10) TMI 853 - HC - GST

HC Strikes Down Unreasonable GST Migration Condition, Restores Input Tax Credit for Businesses Seeking Fair Transition

HC ruled in favor of petitioner regarding GST migration, quashing an unreasonable condition requiring retrospective forfeiture of input tax credit. The ... Validity of GST registration certificate granted w.e.f 1.6.2018 instead of with retrospective effect i.e. 1.7.2017 - Whereas GST liability confirmed w.e.f. 1.7.2017 - Condition (no 4) of foregoing the benefit of Input Tax Credit (ITC) for the period prior to 1.6.2018 - HELD THAT:- The petitioner is ready and willing to comply with the conditions in the impugned notice. However, the petitioner expressed his difficulty to comply with the 4th condition to forgo the Input Tax Credit. The reason stated in the impugned order is that the validity is being granted retrospectively, then the petitioner ought to forgo. It is seen that the petitioner is already as assessee under VAT. The petitioner is seeking to migrate from VAT to GST. Input Tax Credit is available in VAT regime also. In such circumstances the petitioner would have the details and evidence to substantiate his claim of Input Tax Credit and there cannot be difficulty to avail Input Tax credit for the said period. Therefore, the impugned order directing to forego Input Tax Credit is unreasonable and cannot be sustained and the same is liable to be quashed. The impugned order is hereby quashed as far as the 4th condition is concerned. The petitioner shall furnish the details as stated in other conditions and thereafter the respondents shall consider the application for migration. The Input Tax Credit shall be granted based on the details and evidence that would be submitted by the petitioner. Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a condition requiring an applicant seeking retrospective GST registration to forgo Input Tax Credit (ITC) for the retrospective period is lawful and reasonable. 2. Whether an assessee who migrated from VAT to GST and who had VAT-era input tax entitlements can claim ITC for the period between commencement of GST liability and the date from which GST registration validity is granted. 3. What documentary prerequisites may legitimately be imposed when considering an application for retrospective GST registration and attendant ITC claims arising from migration from VAT to GST. ISSUE-WISE DETAILED ANALYSIS Issue 1: Lawfulness and reasonableness of a condition requiring the applicant to forgo Input Tax Credit for the retrospective period Legal framework: Migration from a pre-GST tax regime (VAT) to GST requires registration under GST law; registration validity may be granted with retrospective effect to the commencement of GST liability. Input Tax Credit is a recognized tax entitlement under both VAT and GST frameworks, subject to statutory and evidentiary conditions. Precedent Treatment: The judgment does not cite or apply any prior judicial precedent specifically addressing the permissibility of conditioning retrospective registration on the forfeiture of ITC; therefore, no precedent was followed, distinguished, or overruled on this point in the decision. Interpretation and reasoning: The Tribunal observed that the petitioner was an existing VAT assessee and therefore would possess records and evidence necessary to substantiate any ITC claim arising from the VAT regime for the period preceding formal GST registration. The impugned condition - that retrospective validity would be granted only if the applicant undertook to forgo ITC for the retrospective period - was characterized as arbitrary and unreasonable because it required abandonment of a tax entitlement (ITC) despite the applicant's potential ability to prove entitlement through available records. The Court reasoned that conditioning retrospective recognition of registration on forfeiture of substantive tax rights lacks rational nexus where the applicant can furnish supporting details and evidence to establish ITC entitlement. Ratio vs. Obiter: Ratio - It is unreasonable and unsustainable to impose as a condition for retrospective GST registration a blanket requirement that the applicant forgo Input Tax Credit; such a condition is quashable where the applicant can substantiate ITC claims with records. Obiter - The decision does not explore broader policy rationales for permitting administrative waiver of ITC in other contexts; the finding is limited to the reasonableness of the specific condition in the facts before the Court. Conclusion: The Court set aside the impugned condition that required forfeiture of ITC (the fourth condition) as unlawful/unreasonable and directed that ITC claims be considered on the basis of submitted details and evidence rather than by preconditioned abandonment. Issue 2: Entitlement to Input Tax Credit for the period between GST commencement and date of granted registration where migration from VAT took place Legal framework: Where a taxable person migrates from VAT to GST, GST liability commences as prescribed by law; entitlement to Input Tax Credit under GST depends on statutory eligibility and evidentiary proof. Records maintained under the prior VAT regime may supply the required evidence to substantiate ITC claims for the transitional period. Precedent Treatment: No specific prior authorities were relied upon or considered in the judgment for determining entitlement to ITC in migration scenarios. Interpretation and reasoning: The Court accepted that the petitioner, being an erstwhile VAT assessee, would have maintained details of outward supplies, inward supplies, and corresponding tax payments/credits. Given that ITC is available under both the VAT and GST schemes subject to proof, the Tribunal found no principled basis to deny ITC where the applicant can substantiate the claim for the period from the commencement of GST liability to the retrospectively granted registration date. The Court therefore required the administration to consider the ITC claim on the merits based on documentary evidence, rather than deny it categorically. Ratio vs. Obiter: Ratio - An applicant migrating from VAT to GST may be entitled to ITC for the transitional/retrospective period, and such entitlement must be adjudicated on the basis of submitted particulars and supporting evidence; automatic denial by imposing a forfeiture condition is impermissible. Obiter - The Court did not lay down a detailed evidentiary checklist for ITC entitlement beyond directing consideration of the particulars, so ancillary points about specific documentary sufficiency remain open. Conclusion: The Court directed that ITC shall be granted if substantiated by details and evidence submitted by the applicant; entitlement cannot be denied by a precondition of forfeiture when documentary proof exists or can be furnished. Issue 3: Permissible documentary prerequisites for consideration of retrospective registration and ITC claims Legal framework: Administrative consideration of retrospective registration and ITC claims may lawfully require the applicant to furnish particulars of outward supplies, inward supplies, output liability after adjustment of ITC, and supporting evidence; such requirements must, however, be reasonable and connected to the statutory purpose of determining tax liability and entitlement to credit. Precedent Treatment: The decision does not cite precedents on permissible documentary requisites for migration or retrospective registration; the Court confined itself to assessing reasonableness of the specific requisitions in the impugned order. Interpretation and reasoning: The impugned order's first three conditions - furnishing details of outward supplies, inward supplies for which ITC is claimed, and output liability after adjustment - were held to be acceptable and reasonable; the petitioner expressed willingness to comply with these. The Court required the petitioner to furnish those particulars and directed the respondents to consider the application on that basis. Only a requirement that goes beyond evidentiary needs and effectively extinguishes a substantive right (i.e., forgoing ITC) was struck down. The decision thus distinguishes between legitimate documentary/preliminary conditions for administrative verification and illegitimate preconditions that negate statutory entitlements. Ratio vs. Obiter: Ratio - Authorities may legitimately require details of outward supplies, inward supplies, and resultant output liability as preconditions for considering retrospective registration and ITC claims; such documentary requirements are permissible so long as they are not used to require forfeiture of substantive tax rights. Obiter - The Court did not enumerate the precise form or evidentiary standard for each category of particulars, leaving administrative assessment of sufficiency to the respondents subject to legal constraints. Conclusion: The Court upheld the reasonableness of requiring particulars of supplies and adjusted output liability (conditions 1-3) but quashed any condition that forces forfeiture of ITC; the respondents must consider the application and grant ITC based on the documentary evidence furnished. Relief and Directions (operative conclusion flowing from the analysis) The impugned condition requiring forfeiture of Input Tax Credit for the retrospective period is quashed. The applicant is directed to furnish details of outward supplies, inward supplies for which ITC is claimed, and output liability after adjustment (the acceptable conditions). Thereafter, the authorities shall consider the migration application and ITC claim on the basis of the submitted particulars and supporting evidence and grant ITC if entitlement is established.