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of <h1>Sections 16(2)(c) and 16(4) CGST/SGST Act upheld as constitutional regarding Input Tax Credit restrictions and time limits</h1> <h3>M/s. M. Trade Links, Puthanangadi Industries, MKHK Techstream Private Limited, M/s. Lalukkas Mobiles, M/s. Ultraprime Cements India Pvt. Ltd., Yohanan Thyparampil Easow, P.J. George (Proprietor) M/s Janatha Agencies, Salahudheen, Challiyil Vijayan Shan, M/s. Mall of Joy Pvt Limited, Versus Union Of India, Central Board Of Indirect Taxes And Customs, State Of Kerala, Commissioner Of Kerala State GST, Chief Commissioner Of Central Taxes, Ernakulam, Goods And Service Tax Council, Goods And Services Tax Network, Infinite Technology Solutions, Assistant Commissioner (WC & LT) Works Contract, State Goods & Service Tax Department.</h3> The Kerala HC upheld the constitutional validity of Sections 16(2)(c) and 16(4) of the CGST/SGST Act regarding Input Tax Credit (ITC) restrictions and ... Restriction of availing Input Tax Credit (ITC) - Constitutionality of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act - Time limit for availing the credit - Provisions infringe the Constitutional provisions or not - refund of unutilized ITC. What are the grounds on which a taxing Statute can be held to be unconstitutional? - HELD THAT:- The Central Legislature and the State Legislature have been given concurrent power to enact laws to impose a tax on the supply of goods or services. GST legislation has been enacted under Article 246A, which empowers the Central and State legislatures to enact such a law. In view of the said provision, it cannot be said that the CGST/SGST Act has been enacted by the Legislature with no competence. It is also not the contention of the petitioners that the tax on the supply of goods and services is not for public purposes. The taxing statute can be declared unconstitutional if it infringes the fundamental rights guaranteed under Part III of the Constitution of India including Article 14. However, in view of the inherent complexity of fiscal adjustment of diverse elements, a larger discretion has to be permitted to the Legislature for classification so long as there is no transgression of the fundamental principles underlying the doctrine of classification. The Legislature must enjoy a wide and flexible power to enable the Legislature to adjust its system of taxation in all proper and reasonable ways - the mere fact that the tax is more on some goods/persons or categories is no grounds to hold the provisions invalid. A Constitutional Bench of the Supreme Court in VIVIAN JOSEH FERREIRA & ANR VERSUS MUNICIPAL CORPORATION OF GREATER BOMBAY & ORS [1971 (11) TMI 160 - SUPREME COURT] has culled down the principles emanating from several previous decisions to hold a tax to be a valid tax - In the case of THE STATE OF KARNATAKA VERSUS M/S. M.K. AGRO TECH PVT. LTD. [2017 (9) TMI 1308 - SUPREME COURT] it has been held that taxing statutes are to be interpreted literally, and further, it is the legislature's domain as to how the tax credit is to be given and under what circumstances. Considering the decisions and discussions, it can be said that both Central and State legislation have the power to enact the CGST/SGST Act, and the Constitution prescribes no limitation for enacting such legislation. Therefore, these legislations are valid legislations. What is the nature of the claim to Input Tax Credit under the scheme of the GST Act and the Rules made thereunder? - HELD THAT:- The Input Tax Credit is in the nature of a benefit or concession extended to the dealer under the statutory scheme. Even if it is held to be an entitlement, this entitlement is subject to the restrictions as provided under the Scheme or the Statute. The claim to Input Tax Credit is not an absolute right, but it can be said that it is an entitlement subject to the conditions and restrictions as envisaged in Sections 16 (2) to 16 (4), Section 43, and Rules made thereunder - In the case of GODREJ & BOYCE MFG. CO. PVT. LTD. & OTHERS VERSUS COMMISSIONER OF SALES TAX [1992 (7) TMI 292 - SUPREME COURT], the Supreme Court, while dealing with Rules 41 and 41A of the Bombay Sales Tax Rules 1959, held that the rule-making authority would be empowered to provide for abridgement or curtailment while extending a concession. Thus, the nature of the claim for ITC by the dealer is in the nature of concession or entitlement, which is not an absolute right and is subject to the conditions and restrictions as per the scheme of the GST legislation. This Court, therefore, does not find substance in the submissions of the learned Counsel for the petitioners that Section 16 (1) of the GST Act provides an absolute right to claim Input Tax Credit and conditions in sub-section (2) of Section 16 cannot take away the right conferred under sub-section (1) of Section 16. Whether Section 16 (2) (c) and Section 16 (4) of the CGST/SGST Act infringe the Constitutional provisions and are unsustainable? - HELD THAT:- The Supreme Court in RESERVE BANK OF INDIA VERSUS PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. ORS. AND VICE [1987 (1) TMI 452 - SUPREME COURT] in paragraph 37 has held that the text and context of a taxing statute cannot be construed in isolation. The context and scheme of the Statute give meaning, and therefore, the same has to be taken into consideration while interpreting a Statute - In WILLOWOOD CHEMICALS PVT. LTD. VERSUS UNION OF INDIA [2018 (10) TMI 261 - GUJARAT HIGH COURT] it has been held that granting tax credit cannot be allowed to linger on indefinitely, for it would impact revenue collection for each financial year and budgetary allocations and, in rem, revenue deficit. When the ITC is not an absolute right but is an entitlement subject to the conditions and restrictions prescribed under the Statute, the conditions, restrictions and time limit specified by law form the fulcrum on which the grant of ITC and tax collection for each financial year are balanced. The Scheme of the Act also provides that only tax collected and paid to the government could be given as input tax credit - The State legislations had to balance this linear bar. Under the VAT law, the ITC did not cross the originating State. The Central Sales Tax levied on inter-state sale of goods was assigned to the original State. Without Section 16 (2) (c) where the inter-state supplier’s supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period - this renders the whole GST laws and schemes unworkable. Therefore, as contended, the conditions cannot be said to be onerous or in violation of the Constitution, and Section 16 (2) (c) is neither unconstitutional nor onerous on the taxpayer. The non-obstante clause in the negative sentence in Section 16 (2) restricts the eligibility under Section 16 (1) for entitlement to claim ITC. Section 16 (2) is the restriction on eligibility and Section 16 (4) is the restriction on the time for availing ITC. These provisions cannot be read to restrict other restrictive provisions, i.e., Section 16 (3) and 16 (4). If Section 16 (2) is read in the manner as contended by the learned counsel for the petitioners, i.e., once the conditions under Section 16 (2) are met, the timeline provided for availing the input tax credit under Section 16 (4) is arbitrary and unsustainable and cannot be accepted. Few High courts have upheld the constitutional validity of Section 16 (2) (c) and 16 (4). The Andhra Pradesh High Court in THIRUMALAKONDA PLYWOODS, VERSUS THE ASSISTANT COMMISSIONER – STATE TAX, ANANTAPUR CIRCLE – 1, [2023 (7) TMI 1226 - ANDHRA PRADESH HIGH COURT] has held It should be noted, when a non obstante clause is a mere restricting provision, an interpretation that the other restricting provisions will not have effect or that the restricting provision will restrict other restricting provisions cannot be accepted for the reason that there is no contradiction between the restricting clause followed by non obstante and other restricting provisions. In WILLOWOOD CHEMICALS PVT. LTD. VERSUS UNION OF INDIA [2018 (10) TMI 261 - GUJARAT HIGH COURT], in Paragraphs 30 and 35, it has been held that conditions restrictions and time limit are crucial for granting ITC and collection of tax of each financial year, otherwise, it would impact revenue collection, budgetary allocation and in rem revenue deficite. Partial relief for the Period for 2017-18 and 2018-19 - Refund of unutilized ITC - Extension of time limit for furnishing annual return - HELD THAT:- The liberty is granted to the petitioners, who can claim the benefit of the two Circulars, namely, Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 to make their claim within one month from today before the appropriate authority who shall examine the claim of the individual dealer and process the claim - The time limit for furnishing the return for the month of September is to be treated as 30th November in each financial year with effect from 01.07.2017, in respect of the petitioners who had filed their returns for the month of September on or before 30th November, and their claim for ITC should be processed, if they are otherwise eligible for ITC. Petition disposed off. Issues Involved:1. Grounds on which a taxing statute can be held unconstitutional.2. Nature of the claim to Input Tax Credit (ITC) under the GST Act and Rules.3. Constitutionality of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act.Summary:Issue I: Grounds on which a taxing statute can be held unconstitutionalThe judgment outlines that a tax can be valid if it is within the competence of the legislature imposing it, for a public purpose, and does not violate fundamental rights. Article 246A empowers both Central and State legislatures to enact GST laws. The taxing statute can be declared unconstitutional if it infringes fundamental rights, including Article 14. The legislature must have wide discretion in classification for taxation purposes, provided there is no transgression of fundamental principles. The judgment cites several cases, including Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay and State of West Bengal v. Kesoram Industries Limited, emphasizing that the power to levy tax is a sovereign power controlled only by the Constitution.Issue II: Nature of the claim to Input Tax Credit (ITC) under the GST Act and RulesThe judgment states that ITC is a benefit or concession extended under the statutory scheme, not an absolute right. It is subject to conditions and restrictions as per Sections 16(2) to 16(4), Section 43, and related rules. The Supreme Court in Godrej & Boyce Manufacturing Company Pvt. Ltd. v. Commissioner of Sales Tax and India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes held that the rule-making authority can provide for abridgement or curtailment while extending a concession. The judgment also references Union of India & others V. VKC Footsteps (India) (P) Limited, which upheld restrictions on ITC refunds, emphasizing that ITC is subject to statutory conditions.Issue III: Constitutionality of Section 16(2)(c) and Section 16(4) of the CGST/SGST ActThe judgment discusses that Section 16(2)(c) and Section 16(4) are not unconstitutional. Section 16(2)(c) ensures that ITC is granted only when the tax has been paid to the government, preventing revenue loss. The judgment cites Willowood Chemicals v. Union of India and Mahalaxmi Cotton Ginning Pressing and Oil Industries v. State of Maharashtra, which upheld similar provisions under different tax regimes. The judgment also references Union of India v. Bharti Airtel and others, explaining the procedure for availing ITC under GST laws. The judgment concludes that the conditions and time limits for availing ITC are reasonable and necessary for the tax collection framework.Conclusion:The judgment rejects the challenge to the constitutional validity of Section 16(2)(c) and Section 16(4) of the CGST/SGST Act. It grants liberty to petitioners to claim benefits under specific circulars within a month and directs authorities to process claims accordingly. The time limit for furnishing returns for September is treated as 30th November retrospectively from 01.07.2017, considering initial implementation difficulties.
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