Amendment in Section 140(7) of the CGST Act: Transitional Credit for Input Service Distributors

The 53rd GST Council meeting, held recently proposed retrospective amendment to Section 140(7) of the Central Goods and Services Tax (CGST) Act, 2017. This amendment, effective from July 1, 2017, seeks to address the issue of transitional credit for Input Service Distributors (ISD) concerning invoices for services provided before the appointed date and also received by ISD before the appointed date. There was a gap in the GST provisions as Section 140(7) only addressed case where the invoices were received by the ISD on or after the appointment date. This lead to the assessee covered in the first situation  being unable to transition the credit due to them from the previous regime.

Background: Understanding Transitional Credit

The GST law allowed Input Service Distributors (ISDs) to distribute pre-GST Input Tax Credit (ITC) for services received before July 1, 2017, even if invoices were received after. However, no mechanism existed for transitional credit on pre-GST services invoiced to ISDs post-implementation.  The Bombay High Court in Siemens Healthcare Pvt. Ltd. in Writ Petition No. 986 of 2019 ruled that legitimate pre-GST ITC should not lapse due to procedural gaps. The matter was adjourned for a recommendation from the GST Council. The Gujarat High Court also adjourned a similar case in Samsung India Electronics (P.) Ltd. [2024] 162 taxmann.com 321 (Gujarat). To address confusion and the issue of multiple litigation, the GST Council has now recommended a retrospective amendment to Section 140(7) to allow transitional credit for invoices related to services provided before the appointed day (01.07.2017) and received by ISD before that date.

Section 140(7) of the CGST Act: The Original Provision

Section 140(7) deals with the transition of input tax credit for Input Service Distributors. An ISD is an office of the supplier of goods and/or services that receives tax invoices towards the receipt of input services and distributes the credit of central tax, integrated tax, state tax, or union territory tax paid on said services to a supplier of taxable goods and/or services having the same PAN. The original provision allowed ISDs to claim credit for services received under the pre-GST regime, provided the invoices were received before the appointed date and the corresponding credit was admissible under the existing law.

The Amendment: Addressing an Overlooked Issue

The proposed amendment to Section 140(7) is significant for several reasons:

1. Eliminating Ambiguity: The original provision did not explicitly mention such invoices, leading to varying interpretations and legal disputes. The amendment seeks to eliminate this ambiguity, providing a clear legal basis for claiming such transitional credit.
    
2. Ensuring Fairness: Businesses that legitimately received invoices for pre-GST services but were unable to claim transitional credit due to the law's interpretational gap can now rightfully claim their due credits. This ensures fairness and prevents undue financial strain on businesses.
3. Facilitating Compliance: Clear provisions reduce the compliance burden on businesses and tax authorities alike. With a retrospective amendment, businesses can align their past records with the clarified law, ensuring smoother compliance and audit processes.

Implications of the Retrospective Amendment

The retrospective nature of the amendment, effective from July 1, 2017, has several implications:

1. Reopening of Past Records: Businesses may need to revisit and revise their past GST returns to claim the transitional credit. This could involve significant administrative effort but will ultimately benefit businesses by allowing them to utilize their rightful credits.
2. Legal Disputes: Ongoing legal disputes and litigations regarding transitional credits may see resolutions based on the clarified provisions. This could reduce the burden on the judiciary and provide relief to affected businesses.
3. Financial Impact: Businesses that were unable to claim transitional credit earlier will see a positive financial impact as they can now adjust this credit against their GST liabilities, improving cash flow and reducing tax outgo.

Conclusion

The proposed amendment will ensure smoother compliance by providing a clear legal basis for claiming transitional credit for pre-GST services invoices received by ISDs. ISDs across various sectors that had received services before the appointed day but had not received the corresponding invoices by that date will benefit. The transitional credit can significantly improve their cash flow and reduce tax burdens. On one hand, where the burden of litigation will come down, Tax authorities will need to process additional claims for transitional credit. Moreover, Only Input Service Distributors (ISDs) are eligible to claim the transitional credit under this amendment. Entities that are not registered as ISDs cannot benefit from this provision. The notification specifically applies to invoices related to services provided before the appointed day but received by ISD before that date. Invoices received by ISD on or after 01.07.2017 are not covered.