Eligibility of transitional credit of various cesses

by | Apr 18, 2019

It is a well settled proposition that Parliament’s right to tax is unfettered and it can exercise this right even retrospectively. However, for a vested right like cenvat credit being legitimately enjoyed by a taxpayer, exercise of such retrospective power has always been questioned.

In this update, we will be discussing the implications and legality of retrospective amendment in Section 140 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) being brought in by Central Goods and Services Tax (Amendment) Act, 2018 (‘CGST Amendment Act’). This amendment has been intended to disentitle carry forward of Cenvat credit of cesses like education cess, Krishi Kalyan Cess (KKC) etc.

  1. Snapshot of amendments in CGST Act

Following relevant amendments have been made in Section 140 of the CGST Act w.e.f. July 1, 2017 (‘appointed day’):

S. No.




In Section 140(1), after the words ‘CENVAT credit’, the words ‘of eligible duties’ have been inserted

Section 140(1) deals with carry forward of closing balance of Cenvat credit. Various cesses used to qualify for Cenvat credit under the Cenvat Credit Rules, 2004.


The amended Section provides for carry forward of ‘Cenvat credit of eligible duties’.



Scope of Explanation 1 expanded to cover Section 140(1)



Explanation 1 defines ‘eligible duties’ in respect of inputs held on appointed day and Explanation 2 defines ‘eligible duties and taxes’ in respect of input or input services received on or after appointed day respectively.


Interestingly, none of the above Explanations deal with ‘eligible duties’ and ‘eligible duties and taxes’ in context of carry forward of closing balance of credit.



Scope of Explanation 2 expanded to cover Section 140(1)


Explanation 3 has been inserted to clarify the scope of expression ‘eligible duties and taxes

It is pertinent to note that Explanation 3 clarifies scope of ‘eligible duties and taxes’ which is used only in Section 140(5) of the CGST Act. The amended Section 140(1) uses the expression ‘eligible duties’ which is not dealt in Explanation 3.



Note: As discussed in our update dated February 4, 2019, Notification No.2/2019-Central Tax dated February 1, 2019 did not notify amendments made in Explanation 1 and 2 to Section 140 of the CGST Act. In our view, these provisions came into force from July 1, 2017 as soon as the CGST Amendment Act received presidential assent. Therefore, the Notification is ineffective to the extent it does not notify the said changes in the Amendment Act.

NITYA Comments:

  • As discussed above, even after the amendment, there is no meaning prescribed to ‘Cenvat credit of eligible duties’ in the CGST Act.
  • Firstly, in common parlance, the words ‘duty’ and ‘tax’ are synonyms. Hence, service tax shall be covered under the meaning of ‘Cenvat credit of eligible duties’.
  • Secondly, various cesses partake the character of the parent duty itself like education cess partakes the nature of excise duty, KKC partakes the nature of service tax etc. The Finance Acts vide which such Cesses were introduced, clearly treated them to be a ‘duty of excise’ or ‘service tax’. The same has also been upheld by the Supreme Court in many cases[1].
  • Thus, even after amendment in Section 140(1) of the CGST Act, CENVAT credit of various cesses will continue to be covered Section 140(1) and Cenvat credit of such cesses can be said to be rightly transitioned under Section 140(1) of the CGST Act.
  1. Legality of retrospective amendments denying Cenvat credit of cesses
  • On an independent note, it is pertinent to examine as to whether the legislature has the authority to retrospectively disallow carry forward of Cenvat credit of cesses.
  • It is pertinent to note the following points in the present context:
  • Cenvat credit is a vested right and therefore, indefeasible. Even though there was no avenue to utilize certain cesses (like education cess) at the time of transition to GST, no specific provision was introduced to impair the closing balance of credits.
  • Section 18 of The Taxation Laws (Amendment) Act, 2017 along with Section 174 of the CGST Act saves every right, benefit or privilege acquired or accrued on the appointed day.
  • Credit of such cesses was allowed to be transitioned to GST by virtue of Section 140(1) of the CGST Act.
  • Hence, it is clear that Cenvat credit of cesses was a vested right of the taxpayers which was allowed to be carried forward to GST. The next important question is whether Parliament can impair vested right of Cenvat credit retrospectively or not.
  • The Supreme Court in various cases had laid down following propositions in respect of retrospective amendment in taxing statutes:
  • Parliament has unlimited powers in the matter of taxation.
  • Parliament can levy a tax or impair a benefit prospectively as well as retrospectively.
  • Having said the same, a retrospective amendment should be tested on the grounds of discrimination, unreasonableness or arbitrariness.
  • Further, the Parliament has right to bring an amendment retrospectively to retain its original intent or to rectify an error. However, the amendment must explain such an intent clearly and rectify the error committed earlier.


NITYA Comments:

  • In the present case, there is no reasonable or rationale basis for disallowing credit of cesses which was originally allowed. Moreover, there is no clarification from the Parliament that amendment in Section 140 is to deny credit of cesses which it always intended to disallow. In fact, even after the amendment, such a purpose has not been reached.
  • Therefore, the retrospective amendment to Section 140 of the CGST Act may be challenged since it seems unreasonable and arbitrary and does not seek to rectify a drafting error of legislature.
  • The vires of retrospective amendment is already being challenged and pending in Telangana High Court and Karnataka High Court.


  • Conclusion

The issue of carry forward of Cenvat credit of various cesses to GST has always been under debate. However, credit of cesses being a vested right of a taxpayer, cannot be taken back from the taxpayer. The taxpayer can consider disputing such an issue with the department (if need arises) on the grounds discussed above.