GST Updates

Section 171 vis-a-vis 54 of CGST Act: Whether by denying refund to the Suppliers U/Sec 54 of CGST Act, isn’t government carrying out Charity through provisions of Section 171 of CGST Act at the expenses of the supplier?

Section 171 vis-a-vis 54 of CGST Act: Whether by denying refund to the Suppliers U/Sec 54 of CGST Act, isn’t government carrying out Charity through provisions of Section 171 of CGST Act at the expenses of the supplier ?

 

When one talks about litigations in GST, one provisions which has been gaining more and more mentions day by day is Section 171 of CGST Act, 2017. The bone of contention being Passing of the benefit of Input Tax Credit. All three major players in GST i.e. Consumer, Registered persons and Government find themselves at crossroads with no definite solution in sight in the very near future.

 

There are cases where Industries have high balance of unutilized Input Tax Credit and the Government has denied refund citing reasons of the provisions of Section 54 of CGST Act, 2017. The article discusses applicability of provisions of Section 171 of CGST Act, 2017 at the time of availment of Input Tax Credit, case where a supplier is unable to utilize credit against the liability, subsequent denial of refund by the government of unutilized ITC and whether denial by the government of the unutilized ITC is carrying out charity at the expenses of supplier.

 

a) Stage of Claim of Input Tax Credit to be used for quantifying the amount of benefit to be passed on to the recipient: It is the Input Tax Credit availed or Input Tax Credit utilized

The issue now arises is which stage of claim of input tax credit would be used for quantifying the benefit to be passed on to the recipient. Would it be the Input Tax Credit availed or Input Tax Credit Utilized.  Meaning of the Word “ITC Availed” has been clarified vide Circular No. 79/53/2018 Dated 31st December 2018 wherein it has been clarified that Input tax credit can be said to have been “availed‟ when it is entered into the electronic credit ledger of the registered person. Under the current dispensation, this happens when the said taxable person files his/her monthly return in FORM GSTR-3B.” Further Input Tax Credit is said to be utilized when the liability is set off against the input tax credit availed.

Therefore, Balance of input Tax Credit lying in the Credit Ledger is “Input Tax Credit availed” and when Input Tax Credit is set off against the liability, it is set to be utilized to the extent it is set off against the liability. Therefore, what we can say is

  1. Excess Balance in Electronic Credit Ledger: Input Tax Credit availed but not utilized
  2. Input Tax Credit used for setting off the liability: Input Tax Credit availed and utilized
  3. Input Tax Credit not credited in Electronic Credit Ledger: Input Tax Credit neither availed and not utilized

Let’s analyses Section 171(1) and 171(2) and see what inferences can be drawn from the same. On one hand Section 171(1) provides that benefit of input tax credit should have been passed on the recipient by way of commensurate reduction in the prices and on the other hand Section 171(2) provides for that the authority shall examine that whether benefits of the input tax credit availed have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

Thus, as can be seen that whereas Section 171(1) reveals little about the stage of claim of Input Tax Credit to be used for quantifying the amount of benefit to be passed on to the recipient. However, Section 171(2) provides that benefit of input Tax Credit availed has to be passed on to the recipients.

Therefore, on a conjoint reading of both Section 171(1) and 171(2), it can be concluded that Section 171(1) provides for the benefit of input tax credit availed should have been passed on the recipient by way of commensurate reduction in the prices and Section 171(2) provides for that the authority shall examine that whether such benefits of the input tax credit availed have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

Hence, benefit to be passed on to buyers would be equal to Input Tax Credit availed rather than Input Tax Credit Utilized.

Supposedly, value of a product of “A Ltd” excluding taxes is Rs 800 and Taxes on Inputs are Rs 150 and his output liability is Rs 100. Therefore, whereas Input Tax Credit availed is Rs 150 but utilized is only Rs 100. Now Section 171 requires that benefit of Input Tax credit availed should be passed on by way of reduced prices to the recipients. Thus, a person is required to pass on the benefit of Rs 150 to the Consumers on the availment of Input Tax Credit and charge Rs 900 as selling price i.e. Rs 800 and Tax of Rs 100.

 

 b) Input Tax Credit availed is more than the Input Tax Credit utilized. Supplier passes on the benefit of Input Tax credit availed to the buyer but is unable to utilize the credit and is left with a balance of Unutilized Input Tax Credit. Refund of unutilized Input Tax Credit denied to the Supplier under Section 54. Whether such denial is correct when read with provisions of Section 171 of CGST Act, 2017

 

  • Input Tax Credit is in the nature of concession granted by the Statute:

It is an admitted fact that concession of ITC is granted by the government as held by Hon’ble Rajasthan High Court in the Matter of Panwar Trading Corporation V/s State of Rajasthan

“The availment of ITC is creature of Statute. The concession of ITC is granted by the State Government so that the beneficiaries of the concession are not required to pay the tax or duty which they are otherwise liable to pay under Rajasthan VAT Act.

 

  • With insertion of Provisions of Section 171, availment of Input Tax Credit is a benefit being claimed as a custodian of the Government for the benefit to be passed on to the consumer with commensurate reduction in the prices:

With provisions of Anti-Profiteering been inserted in the statue which were never present in any of the statute till date, it would mean availment of Input Tax Credit by a supplier is nothing but a benefit availed as a custodian wherein it has to be passed on to the consumer.

 

  • Provisions of Section 171 require the supplier to pass on the benefit on availment and not on utilization

As has been discussed earlier, provisions of Section 171 require a supplier to pass on the benefit to recipients with commensurate reduction in the price equivalent to the ITC availed rather than ITC utilized. Therefore, if a supplier has availed a credit of Rs 150 in the return, he has to pass on the benefit of Rs 150 to the consumers with commensurate reduction in the price, irrespective of the fact that he is able to utilize only Rs 100 against its liability.

 

  • Denial of Refund of Input Tax Credit, benefit of which has been passed on availment but which never could be utilized by the supplier

Now if such person does not passes on benefit of reduced prices equal to Input Tax Credit availed, he would be charged under Section 171 but at the same time he also knows that his supplies have an inverted duty structure wherein there would always be a case wherein input taxes are going to be more than the output taxes and if he continues passing to the consumers equal to the availment of Input Tax Credit, he would be left with a balance of unutilized Input Tax Credit which would be adding to the cost of the product.

 

  • Isn’t denial of refund of ITC which has been availed but remains unutilized and benefit of which has been passed to customers is carrying out charity by the Government at the expense of the supplier

When a supplier is obligated under the law to pass on the benefit to consumer merely on availment of Input Tax credit and not on utilization of ITC, moot question is whether government can deny refund of unutilised Input Tax Credit which has been passed on as a benefit by way of reduction in selling price to the recipients as a mandate due to the provisions of the law.

Isn’t Government by denying refund is indulging itself into a practice wherein it is carrying out charity at the expense of the suppliers because suppliers are obligated under the law to pass on the benefit of ITC to the consumers on availment but they are left with excess ITC being untuilized as a part of their cost on being denied their share of the refund.

Government cannot just shy away by denying refund of Input Tax Credit which has been passed on as a benefit to the customer stating that it’s a benefit being provided to the supplier to reduce the cost of the goods. Once such Input Tax Credit has been passed on as a benefit to the consumer under a provision of law and there is an inverted duty structure which does not allows the supplier to recover it from the customers, isn’t the government liable to grant the refund of the same.

Either the Government should withdraw itself from the process of Anti-Profiteering and let the business decide for themselves but if the government itself choses to be the regulator and asks the businesses to pass on the benefit to the customers on availment, then it cannot deny refund and retain the revenue which after benefit being passed on the consumer now rightfully belongs to the supplier.

c) Conclusion-In present scenario, either government should either

  1. Change the benchmarking of Anti-Profiteering from availment of Input Tax credit to utilisation of Input Tax Credit, or
  2. Allow refund of unutilized Input Tax Credit, or
  3. Completely do away with the provisions of anti-profiteering wherein they are forcing suppliers to pass on the benefit of Input Tax Credit availed.
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