Ed.Cess, SHE Cess and KKC cannot be transited to GST

[Alkesh Jani]

Recently in  ASSISTANT COMMISSIONER OF CGST AND CENTRAL EXCISE, COMMISSIONER CGST AND CENTRAL EXCISE, UNION OF INDIA, CENTRAL BOARD OF EXCISE AND CUSTOMS VERSUS SUTHERLAND GLOBAL SERVICES PRIVATE LIMITED, GOVERNMENT OF TAMIL NADU, THE CHAIRMAN GSTN [2020 (10) TMI 804 - MADRAS HIGH COURT]  judgement pronounced on 16.10.2020, passed by Division Bench of Madras High Court, regarding transition of Education Cess, Secondary and Higher Secondary Education Cess and Krishi Kalyan Cess. The Hon’ble Court in its 135 pages of judgement held that “the Assessee was not entitled to carry forward and set off of unutilised Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess against the GST Output Liability with reference to Section 140 of the CGST Act, 2017”.

2.       With due respect to judgement passed, some point has arisen in my mind and wish to share with you all. The firstly in Indirect tax regime, the tax is to be borne by the ultimate user (consumer), if the credit is lying unutilised, this means that the manufacturer or provider of service is the ultimate user of the goods or services and this might go against the spirit of the Indirect tax. The Order also mentions of the decision of Hon’ble Supreme Court in the case of Union of India Versus Nitdip Textile Processors (P.) Ltd. - 2011 (11) TMI 1 - Supreme Court

where Apex court observed following:-

“32.3.Duty, direct taxes and indirect taxes - The word "duty" means an indirect tax imposed on the importation or consumption of goods. "Customs" are duties charged upon commodities on their being imported into or exported from a country. The expression direct taxes includes those assessed upon the property, person, business, income, etc., of those who are to pay them, while indirect taxes are levied upon commodities before they reach the consumer and are paid by those upon whom they ultimately fall, not as taxes, but as part of the market price of the commodity, Union of India Versus Nitdip Textile Processors (P.) Ltd. - 2011 (11) TMI 1 - Supreme Court.”

3.       The court observed that cross utilization was not allowed in the pre-GST regime therefore, it cannot be said to be eligible duties. Here, I failed to understand that when Basic duty of Excise was allowed for the payment of Ed.Cess and SHE Cess, and same kind of restriction is in the present GST regime also, then how come restriction of cross utilization can be basis to hold that it is not eligible Duties.

The Tribunal in the case of  COMMISSIONER OF C. EX., SHILLONG VERSUS GODREJ CONSUMER PRODUCTS LTD. [2007 (4) TMI 551 - CESTAT, KOLKATA] observed as under

“ 4. Shri Ravindran, Ld. Advocate appearing for the Respondents states that there is no bar to such utilization of basic excise duty credit on payment of Education Cess and that the very same issue has been decided by Tribunal in the case of SUN PHARMACEUTICAL INDUSTRIES VERSUS COMMISSIONER OF C. EX., JAMMU 2006 (9) TMI 44 - CESTAT, NEW DELHI. He particularly refers to -

”A careful perusal of sub-Rule 7(b) makes it clear that the limitation placed in that sub-rule, is in regard to the utilization of Cenvat credit obtained through education cess paid on inputs. That sub-rule has no application at all in regard to utilization of credit of “basic excise duty”. Provision relating to utilization of basic excise duty credit is to be found in sub-rule (4) of Rule 3 Cenvat Credit Rules. That sub-rule places no limitation at all on utilization of the basic excise duty credit. Therefore, the finding in the original order that sub-Rule 7(b) was attracted to the present case is not sustainable”.

5. In view of the cited decision and also in view of the fact that Rule 3(4) of the Cenvat Credit Rules, 2004 allows Cenvat credit to be utilized for payment of any duty of excise on the final product and there is no bar for utilizing the same for payment of Education Cess, which is a kind of Excise Duty, the contention of the Department cannot be accepted. I also find that Rule 7(b) of the Cenvat Credit Rules, 2004 restricts education cess credit to be utilized for paying education cess. The said rule does not put any restriction of utilization of the Basic Duty Credit.”

          Therefore, the credit cane be held as “eligible” or ineligible” as per the provisions governing it and not as per manner of utilization of credit, as utilization of the credit can be done only when the said credit is an eligible credit.

4.       Further, when Ed.Cess and SHE Cess were introduced in the year 2004, the explanatory note states that

“                                      EXPLANATORY NOTES (EXCISE)

1.0 Education Cess

1.1 An education cess is being levied, as duty of excise, on excisable goods manufactured in India. It shall be chargeable @2% on aggregate duties of excise leviable on such goods (bill entries refer)

1.2     The credit of cess paid on inputs, except on motor spirit, high speed diesel (HSD) and light diesel oil (LDO), and capital goods will be available as credit, for payment of cess on final product (Notification Nos.12/ 2004-CE(NT) refers). In case of the imported goods, the amount of additional duty of customs (CVD) paid under section 3 of customs tariff Act, equivalent to the cess leviable on like indigenously manufactured product, will be eligible to be taken as credit.

1.3     The credit taken (of cess) can be utilized only for the payment of cess on final product  and not for payment of any other duty of excise.” 

Therefore, Ed.Cess is eligible Excise duty, as per TRU. If so, how come now it is declared as different from excise duty. If it was so, we got so many judgement where excise duty was refunded along with Ed.Cess and SHE Cess, even after the implementation of GST. If department did not dispute the refund of Ed.Cess than how come now disputing the transition of credit. If the Cess are distinct from the duty then Act which levies the cess should also have provision of refund of cess. Even in GST regime we got circular regarding refund of Cess (under GST (compensation to States) Act. Further, mentioning of Ed.Cess in explanation will be against the doctrine of promissory estoppel.

5.       At Para 35 the High Court observed that “We may point out here itself that for example, National Calamity Contingent Duty imposed in Section 136 of the Finance Act, 2001, though named it as duty was, in fact, a Cess and that fund was created to meet expenditure to manage any national calamity. But, set off thereof has been specifically allowed by the Legislature possibly because that levy imposed under the Finance Act, 2001 continued even after GST Regime was in force with effect from 01.07.2017.” Here, the observation of the court seems to be on assumption basis by using the word “Possibly”.

6.       At Para 38 it was observed that “ The "taking" of the input credit in respect of Education Cess and Secondary and Higher Education Cess in the Electronic Ledger after 2015, after the levy of Cess itself ceased and stopped, does not even permit it to be called an input CENVAT Credit and therefore, mere such accounting entry will not give any vested right to the Assessee to claim such transition and set off against such Output GST Liability”. The observation of the court concluded that Cess ceased and stopped. In this regards, If we peruse Notification No.14 and 15 /Central Excise both dated 1^st March-2015, which clearly spells that both Ed.Cess and SHE Cess is hereby “Exempt” from levy. Do “Exemption” means Ceased or stopped. The Circular 183/2015 dated 10.04.2015, states that

“3. In this regard your attention is invited to clause 106 of the Finance Bill, 2015 and paragraph 3 of JS (TRU-II) D.O. letter, which is reproduced below:-

"3. Service Tax Rate:

3.1 The rate of Service Tax is being increased from 12% plus Education Cesses to 14%. The 'Education Cess' and 'Secondary and Higher Education Cess' shall be subsumed in the revised rate of Service Tax. Thus, the effective increase in Service Tax rate will be from the existing rate of 12.36% (inclusive of cesses) to 14%, subsuming the cesses.

3.2 In this context, an amendment is being made in section 66B of the Finance Act, 1994. Further, it has been provided vide clauses 179 and 187 respectively of the Finance Bill, 2015 that sections 95 of the Finance Act, 2004 and 140 of the Finance Act, 2007, levying Education Cess and Secondary and Higher Education Cess on taxable services shall cease to have effect from a date to be notified by the Government.”

From the above, it is very clear that Ed.Cess and SHE Cess are subsumed therefore, whatever the accounting entry says it is now in the form of basic duty or Tax.

7.       The Section 140 of CGST Act,2017 was amended and CENVAT credit of  “Eligible Duties” was inserted. The legislature in his wisdom has rightly amended from CENVAT credit of “eligible Duties” and specifically restricting Cess is also rightly mentioned because the Ed.Cess and SHE Cess are subsumed to the basic duty and if any cess for example “Swachh Bharat Cess, Sugar Cess” for which credit was not available cannot be carry forward in the GST regime.

8.       The observation made by the Hon’ble High Court that as the Ed.Cess and SHE Cess was not continued on implementation of GST. In this regards, if we peruse Notification 46/2017-Cus dated 30^th June, 2017, for re-importation of goods Excise duty is to be leviable and there are B/E where Basic duty along with Ed.Cess and SHE Cess was paid. Therefore, it can be said that the Ed.Cess and SHE Cess continued even after implementation of GST.

9.       In nutshell, it can be said that as per Explanation of TRU in the year 2004, Ed.Cess is eligible duty. The Ed.Cess and SHE Cess were subsumed as per Circular 183/2015 dated 10.04.2015 and restriction of cross utilization cannot be base to held the credit as ineligible. The Ed.Cess and SHE Cess also continued even after the implementation of GST.

10.     The intention for raising this point is that if the Hon’ble Court may have discussed the above point in their Judgement, I think the issue might have attended it is finality.

I request the readers to offer their insight, whether in favour or otherwise, and any point which is not the part of this article may please be commented. If I am mistaken anywhere, please ignore it with broad heart. I am heartly and ethically bound to thanks Shri Kasturiji Shethiji for extending his expert comments.

Thanks