Taxpayers denied pre-GST tax credits; govt amends law

The relief given by the Delhi High Court to GST taxpayers on the matter of pending transitional credit has been taken away by the government through a retrospective amendment in the GST law.

The amendment, which imposes a restriction on the time limit to claim transitional credit, is being notified by the government from 18 May 2020. The amendment comes into effect from 1 July 2017.

The Delhi High Court in an order passed on 5 May 2020 had allowed all taxpayers to claim transitional credit accumulated before the implementation of GST by 30 June 2020.

It was a significant judgment as it extended the period for claiming input credit from 90 days to 3 years and also allowed all taxpayers to take benefits of the order. The HC verdict, if also upheld by the Supreme Court, could have meant a huge revenue loss to the Central government.

The High Court verdict was on the premise that Section 140 of CGST Act did not prescribe the time limit but only manner through which the Rules were to be made and credit could have been claimed.  Accordingly, Rule 117 which prescribed the time limit was not basis any empowerment of the Act.  The Delhi High Court in case of Brand Equities allowed the assesse to claim the transitional credit stating that the rule is directory in nature and not mandatory as the period for filing Tran-1 (form for claiming transitional credit) is not considered by the legislature.

But now the government by amending the Section 140 of the CGST Act has fixed this loophole, thus nullifying the High Court order. This means many taxpayers will now have to litigate separately to avail any credit disallowed due to technical glitches or errors.

"This ruling would have given nightmares to the bureaucracy, who immediately jumped to save the dried up national coffers by notifying the retroactive amendments brought in by Finance Act, 2020 to cure this defect. The significance of the Delhi High Court ruling goes for a toss in light of the changes made in tax laws from a retrospective date," says Rajat Mohan, partner, AMRG & Associates.

With this amendment in hand, the government can now successfully challenge the high court decision in Supreme Court.

Jigar Doshi, Founding Partner, of tax service firm TMSL, says: "Through this amendment, the said case per se gets nullified and we are more than sure that the government will move Supreme Court against the ruling and win over the appeal."

But Abhishek A Rastogi, Partner at Khaitan & Co, who argued the lead petition on this issue in Delhi High Court says that the amendment has come after the decision of the Delhi High Court and this retrospective amendment needs to be challenged at appropriate time.

He says that this amendment will have to test the constitutional validity as any retrospective amendment after the court order needs to pass various tests.

Rajat Bose, partner, Shardul Amarchand Mangaldas & Co, points out the fact that a retrospective amendment to Section 140 was proposed in the Finance Bill 2020 was never discussed in the Brand Equity case.

"Now that the amendment has been notified, it will be interesting to see how the Supreme Court deals with the Special Leave Petition against the Delhi HC judgement, if and when such a petition is filed by the department," says Rajat Bose.

This amendment also creates a stonewall for assessees who were contemplating transitioning of erstwhile credits in light of the Brand Equity judgment.

However, Abhishek Rastogi of Khaitan & Co. believes that since there is no stay on the Delhi High Court order, the taxpayers who have taken the benefit of the court's order before the date of the notification are in clear safe zone.

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