GST: Delhi High Court Allows Taxpayers To Claim Transitional Credit

Businesses that have filed or attempted to file their TRAN-1 from July 1, 2017, the date of introduction of the goods and service tax regime, can claim their transitional credit, the Delhi High Court has ruled.

A division bench comprising Justice Sanjeev Narula and Justice Vipin Sanghi observed that the time limits for transitioning of Cenvat credit into GST are “directory” in nature. These rules, the court said, cannot result in the forfeiture of a taxpayer's right to transition the credit.

When the goods and services tax was introduced in June 2017, it had allowed taxpayers to carry forward accumulated tax credits under the erstwhile indirect tax laws like value added tax and service tax. The transition, however, has been riddled with technical glitches in the GST portal which prevented many taxpayers from completing their filing.

Courts in India have given differing judgments on transition of input tax credit. The Bombay High Court recently restricted taxpayer's ability to claim credit on account of its failure to file TRAN-1—the form introduced to carry forward tax credit into the GST regime. On the other hand, high courts of Haryana, Calcutta, Delhi, Karnataka and Madras have dismissed such restrictions on taxpayers.

The decision of the Delhi High Court has given due credence to the plight of the taxpayers who have migrated from the erstwhile regime and have faced substantial difficulties in filing of TRAN-1 due to various issues, Ritesh Kanodia, partner at Dhruva Advisors, told BloombergQuint.

Four petitioners moved the Delhi High Court challenging the tax department's move to not allow transition of their accumulated tax credit.

Broadly, the taxpayers argued:

• Failure to file form TRAN-1 was due to reasons like multiple group entities, technical glitches in the GST portal, inadvertent errors or omissions in the form or lack of response from tax authorities.
• Accumulated tax credit is a ‘property' and vested right which is guaranteed under the Indian Constitution. As such, it cannot be taken away through CGST Rules which are subordinate in nature.
• GST systems continue to operate in a “trial and error” phase. Taxpayers have been suffering due to glitches preventing them from filing TRAN-1.

To this, the GST department contended that:

• Courts have provided relief only if the delay in filing TRAN-1 can be attributed to a technical glitch in the GST portal. However, in the present case, the delay by taxpayers was due to their own technical difficulties. The companies followed a “casual approach”.
• The rules are issued under the Central Goods and Services Tax Act in accordance with the intention of the government.

The High Court dismissed the government's arguments and ruled:

• Several taxpayers could not file TRAN-1 due to issues like low bandwidth and other issues in the GST portal. Several extensions reflect that the government was aware of such issues.
• Input tax credit accumulated prior to July 2017 is a vested right of the taxpayer. As such, the time limit prescribed under CGST Rules cannot take it away.
• Transitory provisions were introduced for smooth transition into the GST regime. The Act does not prescribe any consequence for delay in filing the forms. Accordingly, the provisions are “directory” and not mandatory in nature.
• Period of three years provided under the Limitation Act will be the maximum time for availing the credit as the CGST Act is silent about any particular timeline.

Tax Experts Welcome Ruling

The judgment is a welcome ruling and can potentially have a wider impact as the court has explicitly mentioned that it will apply to similarly situated businesses, Abhishek Jain, partner at Ernst and Young, told BloombergQuint. “Businesses will have to quickly evaluate the potential options to recoup the non-transitioned credits as the court has given a limited time for seeking the benefits.”

Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., agreed, but pointed to the differing stance taken by the high courts. “This judgment has created even more confusion as far as transitioning of input credit is concerned as there are contrary rulings on the same issue by Bombay and Gujarat High Courts.”

“The government has retrospectively amended the CGST Act to plug the loophole in the law relating to time-limit for transitioning of input credit which may also be a stonewall for the assessees who wish to take advantage of this decision,” he said. “Thus, it is likely that the decision is challenged by the government before the Supreme Court.”

While the ruling provides immediate relief to taxpayers, the final outcome will depend on future decisions.

Kanodia explained that the voluminous litigation being contested by taxpayers across the country will be put to rest if the high court's decision sustains a challenge in the Supreme Court.

Considering the amount of litigation and the Covid-19 situation, it's critical that the provisions are amended to specifically allow such credits after verification, Kanodia said. Such an amendment can also help improve cash flows for businesses badly affected by the outbreak, he said.