It would be worthwhile to highlight that as per the provisions of Section 171(1) of CGST Act, 2017 benefit of input tax credit shall be passed on by the supplier to the recipient by way of commensurate reduction in prices. The moot point which the article tries to raise that can such condition be casted upon the supplier through Section 171 of CGST Act, 2017 post-entitlement of ITC when Section 16(2) does not put any such restriction at the time of entitlement of ITC.
Statement of Object and reasons of CGST Bill, 2017-
It would be worthwhile to highlight the Statement of Objects and reasons of CGST Bill, 2017 provided that
2. The present tax system on goods and services is facing certain difficulties as under—
(i) there is cascading of taxes as taxes levied by the Central Government are not available as set off against the taxes being levied by the State Governments;..
It further provided that
It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of goods and services tax that would incentivise tax compliance by taxpayers.
Thus, there was an intent to remove the cascading effect and reduce the cost of production and inflation in the economy thereby making India Trade and Industry more competitive domestically as well as internationally. However, intent to remove the cascading effect is not equivalent to passing on the commensurate benefit to the customer.
Discussion on Anti-profiteering Measure in GST as per Agenda to 8th GST Council Meeting for Model GST Law released in November 2016
The Secretary to the Council observed that the requirement for passing the benefit of ITC to the consumers was only in the transitional provision in Section 169(1)(ii) and that it would be advisable to mandate the requirement of passing the benefit of duty reduction to the consumer in the relevant provisions other than the transitional provisions. The Council agreed to this suggestion.
Thus there was a broad consensus that similar to the requirement for passing the benefit of ITC to the consumers being incorporated in other sections of the statute similar to the one being incorporated in Section 169(1)(ii) (similar to the one incorporated in proviso to Section 140(3) in CGST Act, 2017). The relevant provision of Section 169(1)(ii) of Model GST Law is being reproduced herewith-
169. Credit of eligible duties and taxes in respect of inputs held in stock to be allowed in certain situations
(1) A registered taxable person, who was not liable to be registered under the earlier law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated 20.06.2012 or a first stage dealer or a second stage dealer or a registered importer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties and taxes in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions:..
(ii) the said taxable person passes on the benefit of such credit by way of reduced prices to the recipient;
Relevant provision of Proviso to Section 140(3) is being reproduced herewith
Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.
It would be apt to highlight that a condition has been attached with the entitlement and availment of transitional credit wherein the credit is subject to fulfilment of condition as has been provided under section 169(1)(ii) of the model GST Law/proviso to Section 140(3). However, no such condition was inserted in any other provision of the Statute (and more so in Section 16(2) of CGST Act, 2017 which provides for entitlement of Input Tax Credit) except Proviso to Section 140(3).
Section 16(2) of CGST Act, 2017-Entitlement of Input Tax Credit
Section 16 and specifically Section 16(2) provides for entitlement of Input Tax Credit for an unregistered person. The section provides the condition which have to be fulfilled by a registered person for being entitled to input tax credit and subject to conditions being fulfilled, input tax credit can be availed by the registered person. Once being entitled on fulfilling the conditions, Input Tax Credit becomes a vested right merely from being a benefit or a concession.
Section 16(2) and Section 171-Which trumps the other
Section 171 seek to mandate the registered person to pass on the benefit of Input Tax credit availed to another person. It would be apt to highlight that the condition to pass on the credit is not attached with section 16(2) which speaks about the entitlement of credit and entitlement of input tax credit is also not subject to passing the same to the recipient as is the case with transitional credit under proviso to Section 140(3) in CGST Act, 2017 or provision of Section 169(1)(ii) of the model GST Law. Section 16(2) and Section 171 works in different spheres and whereas Section 16(2) entitles a person to Input Tax credit and on the other hand Section 171 provides for passing on the benefit of input tax credit availed.
Leaving aside the controversy of Article 246A vis-a-vis Section 171, the moot question is can a provision of a statute provide that the benefit of input tax credit availed be passed on to another person when the registered person has become entitled to such credit subsequent to fulfilment of condition and it has become its vested right and passing of the benefit of Input Tax Credit was not a pre-condition for entitlement of Input Tax Credit under Section 16(2). Whether it means taking away the right when the taxpayer became entitled to the Input Tax Credit to the exclusion of others. Section 171 seems to be taking away the vested right of the taxpayer and might be seen vis-a-vis Article 14 and Article 300A of Constitution of India.