Contributed by Karan Anand

Introduction

Input Tax Credit (“ITC”) is defined under Section 2(63) of the CGST Act. Under the GST system, businesses can claim ITC, which allows them to offset the taxes paid on purchases of goods and services used for business purposes. This credit can then be applied to reduce their tax liability when they sell their own goods or services. This mechanism helps prevent the cascading effect of taxes, which would otherwise increase consumer costs by adding more taxes at each stage of production or distribution.

The ongoing debate over the nature of Input Tax Credit (ITC) – whether it is a fundamental right or a concession bestowed by authorities – persists, leaving both tax authorities and taxpayers in a state of perpetual uncertainty. This ambiguity has fuelled a series of litigations, contributing to the prevailing confusion. Notably, the recent decision by the Patna High Court in favour of the council, affirming ITC as a concession, further adds to the complexity of the issue. In light of this, this article endeavours to delve into the essence of ITC by meticulously analysing the pertinent sections of the act and evaluating the arguments put forth by various stakeholders.

Relevant Sections

Section 16(4) of the CGST Act, 2017 establishes a time-based restriction on the entitlement of input tax credit (ITC) for registered entities, stipulating a definitive deadline following the due date for return submission. This statutory provision effectively delineates the scope of ITC by imposing a time bound limitation, necessitating businesses to strictly adhere to a prescribed timeframe for the procurement of this credit.

The restriction delineated by Section 16(4) implicitly conveys that the right to ITC is not inherently absolute but rather constitutes a concession bestowed by governmental authority. This proposition signifies that businesses possess the entitlement to claim ITC solely within the delimited timeframe enshrined by legislation, with any claims made subsequent to the specified deadline deemed ineligible for credit.

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Similarly, Section 140 of the CGST Act allows businesses to claim transitional credit for taxes paid on inputs or goods they held in stock before GST was implemented. However, it also sets a time limit for claiming this transitional credit, indicating that even under transitional provisions, Input Tax Credit (ITC) is subject to specific restrictions and time constraints.

The Circular issued by the Central Board of Indirect Taxes and Customs (CBIC) on June 22, 2020, further clarifies these provisions. It emphasizes that the time limits specified in Rule 117A of the CGST Rules, 2017, for transitional credit are reasonable and obligatory. Additionally, the Circular confirms that claiming ITC under Section 140(1) is considered a concession rather than an inherent right.

Although the Circular doesn’t explicitly state whether Section 16(4) provides a right or a concession, the similarity in the time limits for claiming ITC under both Section 16(4) and Section 140(1) implies that claims under Section 16(4) are also concessions granted by the government. Overall, these sections and the associated Circular shed light on the regulatory framework governing the availability of input tax credit under GST, emphasizing the significance of time limits and government concessions in determining ITC entitlement for businesses.

Difference between Right and Concession

In this context, it becomes key to understand the difference between a right and a concession.  A concession is granted as a favour to the taxpayer by the authority or the government. It cannot be enforced and its grant remains contingent on the authority. Conversely a right is an interest or a privilege which is not only accepted but protected by law. It is an irrevocable part of one’s person that the law must protected and upheld.

 In context of tax law, rights may be derived from the statue and may be subject to the fulfilment of certain conditions,. Once the criterion for enforcement has been completed, a statutory authority cannot withhold its enforcement.

There are valid considerations when it comes to interpretation of ITC as a right or a concession, and arguments to be made for both sides.

Arguments for ITC as a Right

Upon a plain reading of the text of Section 16, it can be inferred from the word “shall”, that the provision confers upon the taxpayer, a legal right to claim ITC, provided the fulfilment of conditions in the section. Herein the difference between the words ‘may’ and ‘shall’ becomes crucial. Unlike ‘may’ the use of the word ‘shall’ in statutory provisions confers a right and an postulate a mandatory requirement.   This analysis is furthered by the fact that when it comes to tax statues, the rule of strict interpretation is applied. A strict interpretation means that the language of the law is construed narrowly, and any rights or obligations granted by the statute are interpreted strictly according to the specific wording of the statute itself. This approach can sometimes lead to outcomes that seem rigid or inflexible but serves the purpose of ensuring consistency and predictability in the application of tax laws. In this context strict reading of the section alludes to ITC being a right. 

A nuanced interpretation of ITC has also emerged and been deliberated by the courts, wherein characterizing ITC as a vested right within the GST framework implies that upon fulfilling statutory requirements, taxpayers possess a fixed entitlement to claim credit for taxes paid on inputs. This notion aligns with judicial interpretations, wherein courts have upheld ITC as akin to property rights, independent of procedural contingencies. The argument suggests that ITC accrues to taxpayers upon input tax payment, with compliance activating this pre-existing right, which assumes the character of property under constitutional protection. This perspective emphasizes ITC as more than a mere concession, underscoring its significance in safeguarding taxpayer entitlements within the GST framework.

Arguments for ITC as a Concession

There are also those who argue that ITC is a concession. This is due to the fact that ITC is not a right that lingers and has certain time period and conditions that must be fulfilled. While a right is not subject to time periods, concessions are. In this context, jurisprudence has moved away from the ideology of ITC as a right and emphasised on its characterisation as a concession. ITC is not a vested right as even though, it may arise upon the fulfilment of certain conditions, it is still subject to time limits and constrains within which it must be claimed. These time limits need to be strictly complied with in order to claim ITC.

This ideology is further reaffirmed by Rule 117 of Section 140, CGST Act, wherein registered persons must furnish a return within a prescribed time and manner. As such the power to make rules, regarding compliance is with the regulatory authority.  This same view has been taken in numerous cases by the courts and authorities.

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In ALD Automotive Pvt. Ltd. v. The Commercial Tax Officer, the Supreme Court emphasized that Input Tax Credit (ITC) is indeed a concession, which can only be utilized by adhering to the specified terms and conditions outlined in the statute. The Court asserted that the time limit for filing tax returns was obligatory rather than discretionary, as indicated by the use of the term ‘Shall’ in Section 19(11) of the TNVAT Act. By extension, it can be argued that the time limits outlined in Section 16(4), Section 140(1) of the CGST Act, 2017, and Rule 117(1A) of the CGST Rules should also be interpreted as mandatory.

Likewise, in the case of PR Mani Electronics v. Union of India, the Madras High Court addressed the time limit stipulated in Section 140(1) of the CGST Act, 2017, and Rule 117(1A) of the CGST Rules, pertaining to availing Transitional ITC. The court recognized the necessity for a finite time limit in Section 140(1), highlighting that ITC is considered a concession rather than an inherent right. The court concluded that construing the time limit as directory would negatively impact the government’s revenue interests, thus emphasizing the mandatory nature of the time limit.

Similarly, in Jayam and Company v. Assistant Commissioner, the Supreme Court reaffirmed that ITC is granted as a concession by the legislature and can only be availed of by fulfilling the prescribed conditions. The Court underscored the well-established principle that strict compliance with the conditions is necessary whenever a concession is provided by statute or notification.

Cannon of Certainty: Retrospective Changes in ITC

The court has taken the view in multiple cases that ITC is a concession. The cannon of certainty in taxation is an important concept wherein, there must be certainty in the taxation regime in order to ensure compliance. While the court recognised the ITC to be a concession and not a right, they also imposed certain limitations on the right of the authorities to make changes to the scheme of implementation of ITC.

The court held in the case of Jayam and Company v. Assistant Commissioner that

“This is clearly a provision which is made for the first time to the detriment of the dealers. Such a provision, therefore, cannot have retrospective effect.”

Thus, while authorities can prescribe conditions and stipulate timelines, they must be done in a manner, which is not arbitrary. The authorities themselves must function within the larger scheme of the larger scheme of the legal framework, ensuring that amendments or regulations concerning Input Tax Credit (ITC) are implemented with due consideration to fairness, non-arbitrariness, and adherence to established legal principles.

Conclusion

Therefore, considering the arguments and the courts perspectives in various cases, it is apparent that the ITC is a concession and not a right. The imposition of time limits and regulatory constraints on Input Tax Credit (ITC) under the GST framework underscores its classification as a concession rather than an absolute right. Time periods play a crucial role in delineating the boundaries within which businesses can claim ITC, with statutes like Section 16(4) and Section 140 establishing definitive deadlines for availing credit.

These temporal constraints empower legislative bodies to regulate access to ITC, ensuring compliance with specified conditions and preventing potential misuse. Amendments to legislation and administrative guidelines further reinforce the discretionary nature of ITC, allowing authorities to modify time limits and eligibility criteria to align with evolving fiscal objectives. Considering the same, ITC is a concession rather than a right.