Introduction
The concept of input tax credit (‘ITC’) (previously CENVAT credit) was introduced under GST to remove the cascading effect of indirect taxes. The availability of ITC is one of the fundamental reasons because of which the idea of GST was accepted and implemented.
Recently, in the departmental audits conducted by the GST Department, it has come into light that various recipients have failed to discharge their tax liability under Reverse Charge Mechanism (RCM). RCM is a concept in which the tax on inward supplies is paid by the recipient of the supply, directly to the Government. Accordingly, non-payment of GST under RCM has resulted in the Department raising demand notices for recovery of such tax. In this regard, the question that arises is – whether the recipient can now claim ITC of the tax paid under RCM?
The issue forms the scope of the present article and an attempt has been made by the author to address the issue in light of the provisions of law and judicial pronouncements of different courts.
Framework under the GST Law
Section 16 of the CGST Act governs the provisions related to ITC. The availability of ITC, conditions for availment of ITC and time limit for availment of ITC are prescribed under Section 16.
The relevant extract of Section 16(2) of the CGST Act is reproduced as under:
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
……..
In this regard, it is relevant to refer to Rule 36 of the CGST Rules which prescribes the documentary requirements and conditions for claiming input tax credit as follows:
(1) The input tax credit shall be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely,-
…..
(b) An invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax.
Section 31(3)(f) of the CGST Act provides that in case of supplies attracting GST under RCM, the recipient shall issue an invoice (hereinafter referred as self-invoice) in respect of goods and/or services received by him. The provision states as follows:
A registered person who is liable to pay tax under sub-section (3) or subsection (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both.
A conjoint reading of the above-mentioned provisions reveals that a self-invoice, which is issued by the recipient himself, is a valid piece of document in order to claim ITC in cases of RCM, provided such tax liability under RCM has been duly paid by the recipient of goods/services.
Aṭ this juncture, reference is drawn to the relevant extract of Section 16(4) which prescribes the time limit for availment of ITC, as under:
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Cause and Concern
The issue relating to the eligibility of input tax credit under reverse charge basis is primarily gaining importance because of the audits being conducted by the GST Department. Cases are being discovered where tax liability under RCM relating to financial years 2017-18 or 2018-19 are now due and being paid by the recipient of supplies liable to RCM, at this stage after a lapse of a couple of years. This raises the concern as to whether the recipient shall be eligible to claim input tax credit after the lapse of such time when the last date as per Section 16(4) would be the due date of filing the return under section 39 for the month of September of the next financial year (now amended to 30th November of the next financial year).
In this regard, it is highlighted that in Section 16(4) supra, the time limit is computed from the date of such invoice or debit note. It does not cover specifically the other tax paying documents like bill of entry, ISD invoice or self-invoice. However, as per Section 16(2) it is clear that ITC of tax paid under RCM shall be available on the basis of a self-invoice, subject to payment of tax.
It is a settled principle of law that as per the principle of harmonious interpretation of statutes, when two provisions of a legal text seem to conflict, they should be interpreted in such a way so that each provision has a separate effect and neither is redundant or nullified.
In this context, it can be said that the documentary evidence required to avail ITC of tax paid under RCM is a self-invoice subject to payment of tax. Likewise, the time limit for computing the period of limitation for availment of ITC of tax paid under RCM shall also be construed from the date of self-invoice, subject to payment of tax, i.e., the date of payment of tax, assuming that the self-invoice was raised at the time of supply or date of payment of tax.
Any other interpretation would make Section 16(2) redundant.
Example: Suppose a person has received legal services in the FY 2018-19. He failed to discharge GST under RCM during the year. Hence, as per Section 16(2), the condition for availment of ITC has not been met. Can Section 16(4) impose the restriction for availment of ITC when it was not eligible at all in the first place? The restriction of Section 16(4) would trigger only when the conditions for availment of ITC have been duly met i.e. the period of limitation under section 16(4) shall be computed from the date of self-invoice, subject to payment of tax. Until and unless the tax is duly paid to the Government under RCM, can the recipient claim ITC by-passing the embargo created by Section 16(2), in order to comply with Section 16(4)? The answer is, ‘no’.
Hence, by harmonious reading of the two sections, it is clear that availment of ITC of tax paid under RCM is subject to payment of tax and availment of ITC cannot be time-barred until and unless tax is paid under RCM.
In other words, it can be said that the term ‘invoice’ used in Section 16(4) has to be read as ‘invoice under section 31(3)(f), subject to payment of tax’ for the purpose of ascertaining the period of limitation for availment of ITC of tax paid under RCM.
In all such cases where the Department raises a demand for tax to be paid under RCM, the recipient may claim ITC of the same after payment, on the basis of the above analysis.
However, an argument may be made in cases where the supply is received from a registered person. In such cases, availment of credit beyond the period stipulated under section 16(4) would be litigative inasmuch as the provisions for self-invoice cover cases wherein the supplier is unregistered.
Framework under the Erstwhile Regime
The current GST regime draws its origin from the erstwhile regime of indirect taxes, one of which was service tax. Hence, it is relevant to refer to the analogous provisions of service tax.
Rule 4(7) of the CENVAT Credit Rules state:
“The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received.
Provided that in respect of input service where whole or part of the service tax is liable to be paid by the recipient of service, credit of service tax payable by the service recipient shall be allowed after such service tax is paid.”
Further, Rule 9 provides for the documentary evidence required in order to claim the credit. Rule 9(1)(e) of the Rules state:
“A challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax.”
These provisions reveal that the only requirement for availing CENVAT credit under RCM basis under the service tax law was the furnishing of challan along with payment of tax by the recipient of service. The condition precedent of payment of tax remains the same.
CENVAT credit was an indefeasible right which could be claimed by the taxpayer on payment of the requisite tax and furnishing of challan. There was no time limit barring the availability of credit. Applying this analogy also leads us to infer that there seems to be no rationale to restrict the claim only to the subsequent year. Additionally, disallowing such credit defeats the whole purpose with which the legislature had allowed the credit i.e. to remove the cascading effects of taxation.
ITC as a Statutory Right
There have been various instances where the courts have come to the conclusion that a substantive right such as ITC cannot be taken away merely because of procedural defect.
Whether ITC is a vested right or not, has often been a question of debate. In Kirloskar Electric Co. Ltd. v. State of Karnataka [2018 SCC OnLine Kar 2301], the Karnataka High Court was of the view that credit, being an indefeasible right, cannot be taken away by prescribing a time limit if all the other conditions have been met. Further, in Siddharth Enterprises v. Nodal Officer [2019 SCC OnLine Guj 3711], the Gujarat High Court held that CENVAT credit of erstwhile regime is property under Article 300A of the Indian Constitution. A similar analogy can also be applied to the current ITC under the GST regime.
Revenue Neutrality
The concept of revenue neutrality is based on the premise that no loss would be suffered by the Revenue in case of omission of an act required by an assessee. To exemplify, in the case of Piramal Healthcare Limited [2015 (5) TMI 211 – CESTAT Delhi], the assessee inadvertently omitted the payment of tax under RCM basis. CESTAT upheld the contention of assessee of revenue neutrality and stated that such amount would anyways be available to the assessee in form of CENVAT credit. Applying this analogy to the concerned issue also reveals that any tax due under RCM basis would be available to the assessee in the form of ITC if the tax liability was discharged on time.
Conclusion
The above discussion reveals that in cases where GST paid under RCM is at a later stage, assessee should be allowed to claim ITC in respect of such tax. Though such cases have not yet reached higher levels of courts, it is expected that litigation would soon arise on the issue. Considering the previous views of the Supreme Court and High Courts on the issue of claim of ITC, it is hopeful that the bonafide claims would be allowed by the judiciary, if not by the Department.
Post published in newsletter of VIPCA – Vol. I/2022-23 (Click here to read)
Author: CA Manish Raj Dhandharia