Failure to put a workable system before GST implementation reflects poorly on concerns shown to trade by Authorities, Delhi HC

The Delhi High Court has recently observed the Authorities' failure to put a workable system in place before rolling out the GST tax regime in July 2017, reflected poorly on their concerns with respect to the difficulties faced by trade across the country.

It said,

“The business activity in the country could not be expected to come to a standstill, only to await the Respondents making the GST system workable. The failure of the Respondents in first putting a workable system in place, before implementing the GST regime, reflects poorly on the concern that the Respondents have shown to the difficulties that the trade faced throughout the length and breadth of the country.”

The observations form part of a judgment passed by a Division Bench of Justice Vipin Sanghi and Justice Rekha Palli in a case concerning non-utilization of a trader's Input Tax Credit after the introduction of the GST regime due to the unavailability of the relevant Form on the GST Portal.

The trader (petitioner) carried out the business of sale and purchase of mobile phones.

It was the petitioner’s claim that when it migrated to the GST system of taxation, it was entitled to carry forward its electronic ledger account of unutilized Input Tax Credit (ITC) in terms of Section 140 of the CGST Act, 2017. The Petitioner claimed that as on June 2017, it was entitled to CGST Credit of Rs. 3,13,06,050.

It was pointed out that in terms of Rule 117 of the CGST Rules, this credit could be submitted in Form GST TRAN-1 within ninety days of the appointed date and consequently, the last date for submission of Form GST TRAN-1 for the petitioner was September 28, 2017.

However, the said Form was not made available on the GST web portal upto August 25, 2017 anddue to this lapse on the part of the GST Authorities, the petitioner submitted that it could not upload its Form GST TRAN-1 either in the month of July 2017, or for most part of month of August 2017.

Since the business activity of the petitioner continued, it was constrained to deposit tax in cash to the tune of Rs. 1,37,37,029 even when it was entitled to CGST credit of Rs.3,13,06,050.

The petitioner thus argued that it was due to the inaction of the GST Authorities and their failure to allow smooth migration of the credit that it could not use and exploit the Input Tax Credit for the months of July and August, 2017 and was forced to shell out an additional amount.

The GST Authorities, on the other hand, submitted that the petitioner uploaded the Form GST TRAN-1 only in the month of December 2017, even though it was possible to upload the same from August 28, 2017 onwards.

It was argued that under the GST regime, there was no provision for grant of refund of the accumulated ITC.

The GST Authorities further submitted that as a result of the petitioner paying the tax of Rs. 1,37,37,029, it had earned ITC for the equivalent amount which was lying credited in its ITC ledger from November 2017 onwards, and it was open to the petitioner to utilize the same in future.

However, for the months of July and August, 2017, since there was no unutilized credit lying in the ledger account of the Petitioner, there was no question of granting any refund to the Petitioner, it was added.

After hearing the parties, the Court opined that the petitioner could not be made to suffer on account of failure on the part of the GST Authorities in devising smooth transition to GST regime w.e.f. July 01, 2017 from the erstwhile indirect taxation structure.

The Court noted that being an exporter under the GST regime, the petitioner was entitled to undertake zero rated supplies.

Since its unutilized Input Tax Credit of Rs. 3,13,06,050 was not reflected in its ITC ledger as on July 1, 2017, the petitioner could not utilize which resulted in the Petitioner shelling out Rs. 1,37,37,029 in cash, it added.

The Court thus observed that the payment of Rs 1,37,37,029 would not have been required, had the GST Authorities taken care to ensure that the Petitioner was able to utilize its accumulated Input Tax Credit.

Stressing that Form GST TRAN-1 was made available on the portal only from August 25, 2017 when the system was rolled out on July 1, 2017, the Court remarked that the business activity in the country could not be expected to come to a standstill, only to await the GST system being workable.

It added that the failure to put a workable system before GST implementation reflected poorly on concerns shown to trade by the Authorities.

The Court thus held that the rights of the parties cannot be subjugated to the poor and inefficient software systems adopted by the Authorities who have still not remedied their omissions and failures by taking corrective steps.

In view of the above, the Court rejected the GST Authorities' stand that no refund could be granted because the system did not reflect any credit lying in the ITC ledger of the Petitioner for the months of July and August, 2017.

Calling the stance “hyper technical objections”, the Court remarked,

“If that is so, it is entirely the Respondents making. In fact, to permit the Respondents to get away with such an argument would be putting premium on inefficiency. We therefore, reject the submission.”

The Court thus concluded that the Petitioner’s claim for refund of cash deposit to the tune of Rs 1,37,37,029 could not be denied to him and it ordered,

“..we direct the Respondents to refund the amount Rs. 1,37,37,029/- to the Petitioner within four week from today. While making the refunds, it shall be open to the Respondents to debit the Petitioner’s ITC ledger by the same amount. This is also agreeable to the Petitioner.”

So far as the refund of the remaining amount was concerned, the Court directed the GST Authorities to pass a reasoned order on the same within four weeks.

The petitioner was represented by Advocates Ruchir Bhatia and Rakesh Kumar.

The Respodents were represented by Senior Standing Counsel Harpreet Singh, Amit Bansal with Advocates Arunesh Sharma, Suhani Mathur, Aman Rewaria, Vipasha Mishra.

Read the Judgement: