KRISHI KALYAN CESS: ITC IN GST NOT ALLOWED

[Dr. Sanjiv Agarwal]

Under section 16 the GST law, during the transition from pre-GST regime to GST regime w.e.f. 1.7.2017, earlier tax credits are allowed to be carried forward in GST regime and benefit could be availed subject to transitional provisions as contained in section 140 of the GST law.

While there are doubts amongst taxpayers as to whether Cenvat Credit of Cesses (e.g., Krishi Kalyan Cess, Swachh Bharat Cess etc) paid under pre-GST regime would be allowed to be carried forward and availed in the GST regime like other taxes or duties, assessees have resorted to advance ruling under section 97 of the GST law from Authority of Advance Rulings (AAR) constituted under section 96 of the said law.

The background of this case is that  KKC was levied as per section 161 of the Finance Act, 2016. Section 161(5) of the Finance Act specified that for levy and collection of KKC, Chapter V of Finance Act, 1994 (Service Tax) will be applicable. Entry 92C of Union List I of Indian Constitution empowered legislature to levy service tax, as provided under Chapter V of Finance Act, 1994. 101st amendment of Constitution deleted Entry 92C of Union List 1, in view of implementation of Goods and Service Tax. It implies that like service tax, KKC is also subsumed in Goods and Service Tax. In other words, CGST liability as accrued under CGST Act, 2017 contains liability on account of KKC as well. Cenvat Credit Rules, 2004 (CCR) provides KKC liability could be set off with KKC credit only. CGST liability subsumed KKC liability in view of 101st amendment of Constitution. It was claimed that migrated KKC credit will be admissible to set off with CGST liability.

Section 140(1) of CGST Act, 2017 allows a registered person to carry forward the Cenvat credit as captured in return for the period ended June 30, 2017 to electronic credit ledger provided the said credit is admissible under the Act. Cenvat Credit Rules has recognized KKC as Cenvat credit and Section 16 and Section 17 of the Act, which determines admissibility of input tax credit puts no restriction in admission of KKC as Cenvat credit under the aforesaid provision of the Act.

According to one such advance ruling in the matter of Kansai Nerolac Paints Ltd. (2018) 12 GSTL 526 (AAR-Maharashtra); (2018) 5 TMI 458 (AAR-Maharashtra);  in the pre-GST regime, the assessee was registered as Input Service Distributor (ISD) for its Head Office to distribute eligible credit to its respective manufacturing units. The assessee wanted to carry forward the accumulated credit of Krishi Kalyan Cess (KKC)appeared in service tax return on June 30, 2017 to the electronic credit ledger under the GST Act. In the post-GST regime, neither there is specific restriction in law regarding admissibility of KKC nor there is any specific provision regarding admissibility of KKC as input tax credit.  It filed the application for Advance Ruling regarding admissibility of KKC as input tax credit under the GST Act.  

The Authority for Advance Ruling held that the taxable person is allowed to carried forward the credit to the extent admissible as Input tax credit under GST as per the transitional provisions. But the definition of Input Tax under GST does not include any cess. Further, the KKC credit could be utilized only with KKC liability but there was no levy of KKC under GST. Therefore, KKC credit will not be considered as admissible input tax credit. Hence, the ITC of KKC could not be carried forward under GST. Thus, accumulated credit by way of Krishi Kalyan Cess (KKC) as appeared in the Service Tax return of Input Service Distributor (ISD) on June 30, 2017 which is carried forward in the electronic credit ledger maintained by the company under CGST Act, 2017, will not be considered as admissible input tax-credit.

AAR ruling relied upon two things-one, Delhi high court in Cellular Operators Association of India v. Union of India [WP (Civil) 7837 of 2016] [ 2018 (2) TMI 1264 - DELHI HIGH COURT ] case denied cross utilisation of unutilized education cases against excise duty and service tax liability as these cesses had not been subsumed and there was no provision in law to cross utilize the unutilized education cesses with excise duty and service tax. Secondly, one of the response given by CBEC in its FAQ’s had negated the assessee’s claim. (which does not have any legal binding).

Being aggrieved, the applicant preferred an appeal u/s 100 of the GST law before Appellate Authority for Advance Ruling (AAAR) which approved the aforementioned ruling of AAR by passing an order u/s 101 of the GST law.

The AAAR examined the erstwhile Cenvat Credit Rules, 2004 and formed a view that KKC could be utilized towards payment of KKC only. The KKC cannot be adjusted or cross utilized against the payment of excise duty or service tax. It was made expressly clear that Cenvat credit of input duty specified in the rule 3 i.e. excise duty, additional excise duty cannot be utilized for payment of KKC. Similarly the Cenvat credit in respect of KKC could not be utilized for payment of excise duty or service tax. It could be utilized only for payment of KKC. Thus, the Cenvat rules made an exception in respect of credit of KKC.

In Cellular Operators case, it was observed by the Delhi High Court that " It is no doubt true that the two cesses, in the present case, were in the nature of taxes and not fee, but it would be incorrect and improper to treat the two cesses as excise duty or service tax. They were specific cesses for the objective and purpose specified………" and further observed that that EC and SHE did not subsume in the excise duty or service tax accordingly dismissed the said writ petition . Noticeably the two cesses and the excise duty and service tax was always treated as different and separate and cross utilization was never permitted. Thus, the Delhi High Court judgment made it clear that cess and duty are separate levies and cannot be equated. In the present case KKC cannot be treated as excise duty or service tax. It is to be utilized for payment of KKC only.

Based on these facts, AAAR confirmed the AAR order and held that the accumulated credit by way of Krishi Kalyan Cess (KKC) as appeared in the Service tax return of Input Service Distributor (ISD) on June 30, 2017 which is carried forward in the electronic credit ledger maintained by the Appellant under CGST Act 2017, shall not be allowed to be taken as admissible input tax credit.

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