Whether the Transitional credit for Krishi Kalyan Cess be allowed under the GST regime?
Position in respect to earlier law:
How Krishi Kalyan Cess credit transition qualifies under Cenvat credit?
CENVAT Credit Rules, 2004
Under Rule 3(1a) of the Rules, 2004 states that “a provider of output service shall be allowed to take CENVAT credit of the Krishi Kalyan Cess on taxable services leviable under section 161 of the Finance Act, 2016”.
[Added through Notification No. 28/2016 - Central Excise (N.T.), the 26th May, 2016 allow credit to Krishi Kalyan Cess]
· Utilization of Krishi Kalyan Cess was also restricted as the same notification prescribed under 3 (7) (d) says that “Cenvat credit in respect of Krishi Kalyan Cess on taxable services leviable under section 161 of the Finance Act, 2016 (28 of 2016) shall be utilised only towards payment of Krishi Kalyan Cess on taxable services leviable under section 161 of the Finance Act, 2016”.
From the above provisions, following inference is drawn:
1. Notification No. 28/2016- Central Excise (N.T.) allows CENVAT credit of Krishi Kalyan Cess paid on input services to a service provider. The notification further provides that only CENVAT credit of Krishi Kalyan Cess paid on input services can be utilized only for payment of Krishi Kalyan Cess on output services.
2. Krishi Kalyan Cess qualifies as CENVAT Credit that could be carried forward in the returns under existing law.
3. Cenvat credit or Krishi Kalyan Cess was available to service providers only.
Recent issues raised by department
- The GST department is stating that Krishi Kalyan Cess shall not be available for transition as the said credits are not covered within the meaning of the transitional provisions and hence credit in respect of the same shall not be allowed to be transferred to the GST regime.
Before coming to the above argument, it is important to analyse the present provisions of the GST Law.
Position in respect to present law:
? How is the ‘existing law’ defined under the GST?
· The term existing law has been defined under Section 2 (48) of CGST Act, as any law, notification, order, rule or regulation relating to levy and collection of duty or tax on goods or services or both passed or made before the commencement of this Act by Parliament or any Authority or person having the power to make such law, notification, order, rule or regulation;
· On reading of the above provision, it is understood that the ambit of the definition of ‘existing law’ is wide. Cess is also a tax earmarked for a particular purpose by the government and hence all relevant acts levying cesses should also be covered under ‘existing law’.
· Cess i.e. Krishi Kalyan Cess as notified vide Section 161 of the Finance Act, 2016 shall come within the ambit of ‘existing law’ as defined under the section 2 (48) of CGST Act, 2017.
? Transitional arrangements for Input Tax Credit
· The explanation to section 142 of the CGST Act provides that for the purpose of this chapter (transitional provision), the expression “Central Value added tax (CENVAT) Credit” shall have the same meaning as assigned in the Central Excise Act, 1944 or the rules made thereunder.
· Section 142 CGST Act, 2017 and Rule 3 of CENVAT Credit Rules, 2004 provides a list of various taxes, duties credit of which would be allowed as ‘CENVAT Credit’.
· Under section 140 (1) of the CGST Act, 2017, a registered person is entitled to take in his electronic credit ledger the amount of Cenvat credit available on the ending day immediately preceding the appointed day furnished under the existing law. The section further entails that a registered person would not be allowed to take credit in the following circumstances:
(i) Where the said amount of credit is not admissible as input tax credit under this Act; or
(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or
(iii) Where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government
On analysing the above provision, it is imperative that one of the restrictions placed in section 140(1) is that the transfer of credit shall not be available if the said amount of credit is not admissible as input tax credit under the GST law.
· It is equally pertinent to note that no restriction or inadmissibility per se has been placed in the transitional provisions restricting the availability of Krishi Kalyan Cess.
It is clear that for transition of credits the following conditions should be met:
(i) The credits should quality as CENVAT credit carried forward in the return.
(ii) CENVAT credit should be captured in the return furnished ending on the day preceding appointed day.
(iii) The return should be furnished under existing law.
An explanation in respect to section 140 defines the terms ‘eligible duties’ and ‘eligible duties and taxes’ respectively.
The definition of ‘eligible duties’ in Explanation 1 is only for purpose of specific sub-sections namely for (3) (4) and (6) and not for sub-section (1) which allows for transition of CENVAT credit.
The extract of the provision is provided below:
Explanation 1.—For the purposes of sub-sections (3), (4) and (6), the expression “eligible duties” means––
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;
(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985; (vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and
(vi) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001,
in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.
Similarly, the definition of ‘Eligible Duties & taxes’ in Explanation 2 are only for purpose of sub-section 5 not for sub-section (1).
The extract of the provision is provided below:
Explanation 2.—For the purposes of sub-section (5), the expression “eligible duties and taxes” means––
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975;
(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;
(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985;
(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001; and
(viii) the service tax leviable under section 66B of the Finance Act, 1994, in respect of inputs and input services received on or after the appointed day.
From the above citied provisions, following inference are drawn:
On going through the transitional provisions, it is stated that the meaning of the term ‘eligible duties’ is provided for transferring the transitional credit in respect of stocks covered u/s 140 (Explanation 1) whereas ‘Eligible Duties & taxes’ in Explanation 2 are only for purpose of sub-section 140(5) whereas no restriction to transition of Krishi Kalyan Cess is provided anywhere in the Act.
- Krishi Kalyan Cess qualifies as CENVAT credit in the present regime and the same shall be allowed by the department to be carried forward by the companies under TRAN 1.
- Even if these phrases (Explanations 1&2) do not include Krishi Kalyan Cess, this cannot restrict the carry forward of CENVAT credit allowed under sub section 140 (1) as there is no restriction provided by the law.
CONCLUSION
Therefore in view of above, there is nothing in Section 140 (1) or anywhere else in CGST Act blocking the carry forward of CENVAT credit in respect of Krishi Kalyan Cess into the GST Regime.