Eligibility of service tax credit not distributed by Input Service Distributor till June 30, 2017

This Outlook is to apprise you regarding an issue being faced by taxpayers who were registered as Input Service Distributor (‘ISD’) under Service Tax law but could not distribute full credit till June 30, 2017.

Background

Under erstwhile law, head offices, branch offices or even factories of taxpayers (both manufacturers and service providers) took ISD registration to distribute Cenvat credit of service tax on input services to respective units.

During transition to GST, several ISDs could not distribute credit on invoices received by them either before or after the transition date i.e. June 30, 2017. Resultantly, there was an undistributed credit lying with ISD as on June 30, 2017 which was also reflected in the last return filed by them. 

Legal Provisions

Section 140(1) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) provides that every person who was registered under the erstwhile tax regime shall be entitled to take input tax credit of eligible duties, subject to certain conditions. One of the conditions under Section 140(1) of the CGST Act is that such credit should be available under the CGST Act.

Section 140(7) of the CGST Act starts with a non-obstante clause and provides that ITC on services received by an ISD prior to July 1, 2017 (‘appointed day’), shall be eligible for distribution even if invoices relating to such services are received on or after the appointed day.

For availing benefit under both the provisions referred above, the taxpayers were required to file Form GST TRAN-1. Column 5(a) was relevant for Section 140(1) whereas Column 7(b) was relevant for Section 140(7) of the CGST Act.

Option with taxpayers

Basis the above provisions, a taxpayer had following options regarding undistributed credit lying at ISD as on June 30, 2017:

Option-1: Avail option under Section 140(7) of the CGST Act and fill Column 7(b) of Form GST TRAN-1 under ISD registration obtained under GST law. Thereafter, such credit can be distributed under the ISD registration obtained under GST law.

It is notable that Section 140(7) of the CGST Act uses the expression ‘even if’. This expression clearly indicates that credit pertaining to invoices received before appointed date shall also be allowed to be distributed by ISD.

Option-2: Avail benefit under Section 140(1) of the CGST Act and fill Column 5(a) of Form GST TRAN-1 in normal registration obtained under GST law.

It is notable that Section 140(1) of the CGST Act is not applicable for ISD registration obtained under GST law since ISD is not eligible to avail credit under GST law. Hence, Form GST TRAN-1 needs to be filed under normal registration under this option.

In several cases, the taxpayers filled the details in incorrect Table [Table 5 while claiming benefit of 140(7) or vice-versa].

Dispute by department

The GST department is taking a view that there is no provision under the GST law to transition the undistributed credit lying with ISD as on June 30, 2017. This contention is on the premise that since ISD registration was not migrated under GST law (like manufacturer or service provider), the balance of credit lying with ISD should lapse.

NITYA Comments:

The view taken by the department seems incorrect. Section 140(7) of the CGST Act specifically allows distribution of credit on invoices received by ISD before or after the appointed date. Thus, undistributed credit lying with ISD could be distributed post introduction of GST under this provision. Therefore, the CGST Act does not bar transition of undistributed credit lying with ISD to GST regime. In fact, the intent of the legislature (as evident from the above statutory provisions) is to allow such transition.

Further, the objection of the department that ISD registration was not migrated in GST regime is not relevant since this is not a condition under Section 140(1) of the CGST Act. The provision allows carry forward of closing balance of credit and is applicable to ISD as well.

Further, transition of credit should not be objected even if taxpayer filled details in incorrect Table of Form GST TRAN-1. The entitlement to ITC is vested right of a registered person which should not be taken away on account of any procedural error like this.

Considering the revenue’s stand on the issue, it seems that this issue is likely to go into litigation. The taxpayers can expect a legal battle before the issue eventually gets settled in their favour.