Recovery Of Inadmissible Pre GST CENVAT Credit Must Proceed Under Earlier Tax Laws: GSTAT Thane

The Goods and Services Tax Appellate Tribunal (GSTAT), Thane Bench, has recently clarified that GST authorities cannot use Section 74 of the Central Goods and Services Tax (CGST) Act to question tax credits that businesses earned before GST came into force and later carried forward into the GST system.

Section 74 allows tax authorities to recover tax where they allege fraud, suppression of facts or wilful misstatement. The tribunal held that this provision cannot be used to determine whether tax credit earned under the old indirect tax regime was valid.

Referring to Sections 142(6)(a) and 174(2)(e) of the CGST Act, the tribunal observed, "From the above-cited provisions it is clear that recovery proceedings related to inadmissible credit under erstwhile laws can be initiated only under the provisions of the erstwhile laws, even after enactment of the CGST Act."

It added that the CGST Act does not empower GST authorities to decide the admissibility of tax credit earned before GST came into force.

A coram of Judicial Member Ramesh Nair and Technical Member Prallhad S. Paranjape allowed Tata Unistore Limited's appeal. It set aside the tax demand, interest, and penalty imposed by the department.

Tata Unistore Limited operates the TataCliQ e-commerce platform. Before GST was introduced in July 2017, it had accumulated tax credits under the earlier indirect tax system.

When GST replaced the earlier indirect tax regime, businesses were allowed to carry eligible tax credits into the new system by filing Form GST TRAN-1, the declaration used to transfer eligible pre-GST tax credits into GST. Tata Unistore carried forward its CENVAT credit, VAT credit, and Krishi Kalyan Cess (KKC) through this process.

The tax department later initiated proceedings under Section 74. It alleged that the company had failed to establish its entitlement to the tax credits because it had not produced sufficient supporting documents, including invoices.

The bench noted that the tax credits already formed part of the closing balance disclosed in returns filed under the Finance Act, 1994 and the Maharashtra VAT Act. It also recorded the department's admission that it had never challenged those credits under the earlier tax laws when they were originally claimed.

The tribunal relied on earlier rulings of the Jharkhand High Court in Usha Martin Ltd. and Steel Authority of India Ltd., as well as the Calcutta High Court's decision in Kunjal Synergies Pvt. Ltd. It held that disputes over tax credits earned before GST must be decided under the old tax laws. GST authorities cannot reopen those claims under the CGST Act simply because the credits were carried forward into the GST regime.

The tribunal also observed that, since the tax credits had never been disputed under the earlier regime, GST authorities were not expected to seek old invoices, CENVAT credit registers, or similar records years later to verify those claims.

It noted that the amount carried forward represented the closing balance in the company's tax credit account. Since that balance was derived from the opening balance, credit availed, and credit utilized, it could not realistically be matched to individual invoices.

The department had also denied the company's claim for transitional credit of Krishi Kalyan Cess. On this issue, the bench followed the Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. v. Union of India. It held that the company could not be denied credit for the cess it had carried forward into GST.

The tribunal observed that the amendments concerning Explanations 1 and 2 to Section 140 of the CGST Act had not been operationalised. These explanations define what kinds of pre-GST taxes and duties can be carried forward as GST credit.

It also noted that the department had challenged the Bombay High Court's ruling before the Supreme Court. However, since there was no stay on that judgment, the bench observed that it continued to remain binding.

It observed that the company had furnished all the details required to claim credit on stock held as on June 30, 2017. The authorities had not recorded any specific reason for denying that credit or produced material to justify its rejection.

Holding that the proceedings initiated under the CGST Act were without jurisdiction, the tribunal concluded that Tata Unistore was entitled to the entire tax credit it had carried forward, including VAT credit and Krishi Kalyan Cess. It accordingly set aside the impugned order with consequential relief.

For Appellant: Advocate Prasad Paranjape,

For Respondent:G. N. Jha, Assistant Commissioner, Authorised Representative.